Question 1

This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted circuits have been sold) that depends on an uncertain future event (customer claims). The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2013, the period in which the products under warranty are sold.
2. 2013 Sales

Accepted Answer

The answer of This is a loss contingency. There may...

Question 2

Muller Corp. pays its employees monthly. The payroll information listed below is for January 2013, the first month of Muller's fiscal year.  Required:
Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the January 2013 pay period.

Accepted Answer

The answer of Muller Corp. pays its employees monthly. The...

Question 3

The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers.

Accepted Answer

A) True 
 B)False  False

Question 4

The following selected transactions relate to contingencies of Eastern Products Inc., which began operations in July 2013. Eastern's fiscal year ends on December 31. Financial statements are published in April 2014.
1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2013.
2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2013 and were recorded as warranty expense when incurred.
3. In December 2013, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.
4. In November 2013, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2014.
5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2013. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.
Required:
Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

Accepted Answer

The answer of The following selected transactions relate to contingencies...

Question 5

On September 1, 2013, Triton Entertainment borrowed $24 million cash to fund a new Fun Park. The loan was made by Nevada Bank under a noncommitted short-term line of credit arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity. Triton's fiscal period is the calendar year.
Required:
1. Prepare the journal entry for the issuance of the note by Triton.
2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2013.
3. Prepare the journal entry for the payment of the note at maturity.

Accepted Answer

The answer of On September 1, 2013, Triton Entertainment borrowed...

Question 6

What was General's coupon promotion expense in 2013?

Accepted Answer

A)  $30.0 million.
B)  $21.0 million.
C)  $13.5 million.
D)  $7.5 million.

Question 7

Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline's fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?

Accepted Answer

A)  In the "mezzanine" between current and noncurrent liabilities.
B)  Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances.
C)  As a noncurrent liability.
D)  As a current liability.

Question 8

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:

Accepted Answer

A)  Disclosed but not accrued as a liability.
B)  Disclosed and accrued as a liability.
C)  Accrued as liability but not disclosed.
D)  Neither accrued as a liability nor disclosed.

Question 9

Indicate (by number) the way each of the items listed below should be reported in a balance sheet at December 31, 2013.

Accepted Answer

The answer of Indicate (by number) the way each of...

Question 10

Accounting for costs of incentive programs for frequent customer purchases involves:

Accepted Answer

A)  Recording an expense and a liability each period.
B)  Recording a liability and a reduction of revenue each period.
C)  Recording an expense and an asset reduction each period.
D)  Recording an expense and revenue each period.

Question 11

What was General's coupon promotional expense in 2014?

Accepted Answer

A)  Zero, since all the expense should be reflected in 2013.
B)  $1.5 million.
C)  $7.5 million.
D)  $9.0 million.

Question 12

Which of the following is not a characteristic of a liability?

Accepted Answer

A)  It represents a probable, future sacrifice of economic benefits.
B)  It must be payable in cash.
C)  It arises from present obligations to other entities.
D)  It results from past transactions or events.

Question 13

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

Accepted Answer

A)  Higher working capital and a higher inventory turnover.
B)  Lower working capital and a higher current ratio.
C)  Higher working capital and a higher current ratio.
D)  Higher working capital and a lower debt to equity ratio.

Question 14

The main difference between accounting for rebate and cash discount coupons is:

Accepted Answer

A)  The latter is not treated as an expense.
B)  Only the former creates a contingent liability when issued.
C)  The expense for the latter is usually deferred until redemption of the coupon.
D)  There are no significant differences in accounting between the two.

Question 15

Which of the following may create employer liabilities in connection with their payrolls?

Accepted Answer

A)  Employee withholding taxes.
B)  Employee voluntary deductions.
C)  Employee fringe benefits.
D)  All of the above are correct.

Question 16

Mozart Music Co. began operations in December of 2013. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within three years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2013 as part of merchandise purchases having a total retail price of $750.
Required:
1. Determine the liability for gift certificates to be reported in the December 31, 2013, balance sheet.
2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2013? Show calculations.

Accepted Answer

The answer of Mozart Music Co. began operations in December...

Question 17

Which of the following generally is associated with accounts payable?

Accepted Answer

A)  Option a
B)  Option b
C)  Option c
D)  Option d

Question 18

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

Accepted Answer

A)  When the equipment is sold.
B)  When the repairs are performed.
C)  When payments are made to the service firm.
D)  Evenly over the life of the warranty.

Question 19

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:

Accepted Answer