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Exam 13: Current Liabilities and Contingencies

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Question 1

True/False

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For a loss contingency to be accrued, the claim must have been made before the accounting period ended.

A) True
B) False

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Question 2

Multiple Choice

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M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2018, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 total vacation days available at December 31, 2018. M's employees earn an average of $150 per day. In its December 31, 2018, balance sheet, what amount of liability for compensated absences is M required to report?

A) $0.
B) $30,000.
C) $225,000.
D) $450,000.

E) A) and B)
F) A) and C)

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Question 3

Multiple Choice

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On April 31, 2018, Elkhorn Associates borrowed $10 million cash from Colonial Bank and issued a 5-month, noninterest-bearing note, priced to yield an effective interest rate of 10%. The stated discount rate on this loan is:

Oklahoma Oil Corp. paid interest of $785,000 during 2018, and the interest payable account decreased by $125,000. What was interest expense for the year?

a) What non-accounting factors are important before evaluating whether a pending lawsuit should be accrued as a liability and reflected in the financial statements? b) What accounting factors should be considered in determining whether a pending lawsuit should be accrued as a liability and reflected in the financial statements?

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2018 is as follows ($ in millions) : C What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2018, balance sheet?

Bencorp issues a $90,000, 6-month, noninterest-bearing note that the bank discounted at a 10% discount rate. Required: 1. Prepare the appropriate journal entry to record the issuance of the note. 2. Determine the effective interest rate.

A customer advance produces a liability that is satisfied when the product or service is provided.

Which of the following is not true about deferred revenue?

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

The following facts apply to TinyPart Toy Company's pending litigation as of December 31, 2018: a. TinyPart is defending against a lawsuit and believes there is a 51% chance it will lose in court. If it loses, TinyPart estimates that damages will be $100,000. b. TinyPart is defending against another lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of $30,000 to $50,000, with each amount in that range equally likely to occur. c. TinyPart is defending against another lawsuit that is identical to item (b), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $15,000 and $25,000. TinyPart's management believes the effects of time value of money on these amounts are material, but also believes the timing of these amounts is uncertain. d. TinyPart is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court. If TinyPart loses, it believes damages will fall somewhere in the range of $35,000 to $40,000, with each amount in that range equally likely to occur. -Indicate how TinyPart would disclose or account for the lawsuit described in part (c) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2018.

MullerB Company's employees earn vacation time at the rate of 1 hour per 40-hour work period. The vacation pay vests immediately, meaning an employee is entitled to the pay even if employment terminates. During 2018, total wages paid to employees equaled $808,000, including $8,000 for vacations actually taken in 2018, but not including vacations related to 2018 that will be taken in 2019. All vacations earned before 2018 were taken before January 1, 2018. No accrual entries have been made for the vacations. Required: Prepare the appropriate adjusting entry for vacations earned but not taken in 2018.

Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

Revenue is recognized upon sale of gift cards, rather than being deferred.

A quality-assurance warranty typically results in the seller:

In 2018, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,000,000 for the first year of the product's life and actual warranty expenditures were $29,000. Assume that all sales are on credit. Required: 1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2018. 2. What amount should Cap City report as a liability at December 31, 2018?

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?

On October 1, 2018, Home Builders Company issued to Carlton Bank a $600,000, 8-month, noninterest-bearing note. Interest was discounted by the bank at a 12% discount rate. Required: 1. Prepare the appropriate journal entry by Home Builders to record the issuance of the note. 2. Determine the effective interest rate. 3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Home Builders. 4. Prepare the appropriate journal entry on December 31, 2018, to accrue interest expense on the note described in requirement 3, for the 2018 financial statements.

Define and distinguish between current and noncurrent liabilities.