1. expenses incurred but not yet paid.€ 2. a third …...12 student: _ 1. expenses...

12Student: ___________________________________________________________________________

1. ____ Expenses incurred but not yet paid.

2. ____ A third party liability.

3. ____ Accrues with passage of time.

4. ____ Contra liability.

5. ____ Due on demand.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accrued liabilitiesB. Advances from customersC. CallableD. Discount on notes payableE. Interest payableF. ProbableG. Sales tax payableH. Secured loanI. Short-term noteJ. Warranty liability 6. ____ Requires collateral.

7. ____ Most common temporary financing arrangement.

8. ____ Confirming event is likely to occur.

9. ____ A loss contingency accrued in the period of related sales.

10. ____ Liabilities when received.

11. Employers deduct CPP and EI premiums from employee wages.Ans: True False

12. Companies are not obligated to charge GST on goods and services.

True False Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accrued liabilitiesB. Advances from customersC. CallableD. Discount on notes payableE. Interest payableF. LikelihoodG. Sales tax payableH. Secured loanI. Short-term noteJ. Warranty liability 13. Warranty expense is recorded along with the related liability in the reporting period in which the product

under warranty is sold. True False

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

ended. True False

15. A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets

have been impaired and the amount of potential loss can be reasonably estimated. True False

16. A disclosure note is required for all material loss contingencies for which the probability of loss is

likely. True False

17. The cost of promotional offers should be recorded as expenses in the accounting period when the offers

are redeemed by customers. True False

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

True False 19. The concept of substance over form influences the classification of obligations expected to be

refinanced. True False

20. 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. True False

21. Amounts withheld from employees in connection with payroll often represent liabilities to third

parties. True False

22. Some liabilities are not contractual obligations and may not be payable in cash.

True False

23. Some liabilities are not contractual obligations and may not be payable in cash. True False

24. 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. True False

25. Amounts withheld from employees in connection with payroll often represent liabilities to third

parties. True False

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

True False 27. The concept of substance over form influences the classification of obligations expected to be

refinanced. True False

28. Warranty expense is recorded along with the related liability in the reporting period in which the product

under warranty is sold. True False

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

ended. True False

30. A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets

have been impaired and the amount of potential loss can be reasonably estimated. True False

31. A disclosure note is required for all material loss contingencies for which the probability of loss is

likely. True False

32. The cost of promotional offers should be recorded as expenses in the accounting period when the offers

are redeemed by customers. True False

33. Employers deduct CPP and EI premiums from employee wages.Ans:

True False 34. Companies are not obligated to charge GST on goods and services.

True False 35. ____ Liabilities when received.

36. ____ Confirming event is likely to occur.

37. ____ A loss contingency accrued in the period of related sales.

38. ____ Most common temporary financing arrangement.

39. ____ Requires collateral.

40. ____ Due on demand.

41. ____ Contra liability.

42. ____ A third party liability.

43. ____ Accrues with passage of time.


Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accounting liabilitiesB. Customer depositsC. Effective interestD. FactoringE. Gain contingenciesF. Interest paid on debtG. Noncommitted lines of creditH. Reasonably possibleI. Subsequent eventsJ. Unasserted claims 45. ____ Liabilities until refunded.

46. ____ Chance of occurrence of future event is high

47. ____ Face amount x rate x time.

48. ____ Not recorded until realized.

49. ____ Informal borrowing agreements.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accured liabilitiesB. Customer depositsC. Effective interestDVacationE. Gain contingenciesF. Interest paid on debtG. Noncommitted lines of creditH. Reasonably possibleI. Subsequent eventsJ. Unasserted claims 50. ____ Exceeds the stated rate on discounted notes.


52. ____ Paid future absences

53. ____ Evaluated for recognition only if an unfavorable outcome is likely

54. ____ Occur in the current year before prior year financial statements are issued.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accounts payableB. Commercial paperC. Committed lines of creditD. Current liabilitiesE. Disclosure notesF. Long-term liabilitiesG. Loss contingenciesH. Noninterest-bearing notesI. PremiumsJ. Usual valuation of long-term liabilities 55. ____ Type of promotional offer

56. ____ Often require compensating balance.

57. ____ Only formal credit instrument is the invoice.

58. ____ Effective interest higher than stated interest.

59. ____ Recorded if likely and amount is known or reasonably estimable.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.Terms:A. Accounts payableB. Commercial paperC. Committed lines of creditD. Current liabilitiesE. Disclosure notesF. Long-term liabilitiesG. Loss contingenciesH. Noninterest-bearing notesI. Pledging arrangementsJ. Usual valuation of long-term liabilities 60. ____ Present value of interest plus present value of principal.

61. ____ Required for contingencies.

62. ____ Payable with current assets.

63. ____ Short-term debt to be refinanced with long-term bonds payable.

64. ____ Avoids registration with its security regulators

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2009.Reporting MethodA. AssetL. LiabilityD. Disclosure note onlyN. Not reported

65. ____ An estimable gain that is contingent on a future event that appears exceedingly likely.

66. ____ A penalty assessment that likely will be asserted by the Canadian Environment Protection Act, in

which case a determinable payment is probable.

67. ____ Unassessed penalty with a reasonable likelihood of being asserted, in which case a determinable

payment can be estimated.

68. ____ An extremely likely loss due an event that occurred previously and whose amount is unknown but estimable.

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2009.Reporting MethodN. Not reportedC. Current liabilityL. Long-term liabilityD. Disclosure note only

69. Estimated warranty cost.

70. An estimable gain that is contingent on a future event that appears extremely likely to occur in three

months.

71. Unasserted assessment of penalty that likely will be asserted, in which case there would an estimatable

loss in six months.

72. Unasserted assessment of penalty with a likely chance of being asserted, in which case damages cannot

be estimated.

73. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months.


74. Customer advances.

75. Noncommitted line of credit.

76. Commercial paper.

77. Note due June 9, 2010.

78. Accounts payable.

79. Interest accrued on note, Dec. 31, 2009.

80. Short-term bank loan to be paid with proceeds of sale of common shares


81. Customer advances.

82. Noncommitted line of credit.

83. Commercial paper.

84. Note due June 9, 2010.

85. Accounts payable.

86. Long-term bonds that will be callable by the creditor in the upcoming year unless an existing violation is

not corrected (it is likely the violation will be corrected within the grace period).

87. Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.

88. Estimated warranty cost.

89. Interest accrued on note, Dec. 31, 2009.

90. Short-term bank loan to be paid with proceeds of sale of common shares.

91. An estimable gain that is contingent on a future event that appears

extremely likely to occur in three months.

92. Unasserted assessment of penalty that will likely be asserted, in which case there loss can be

estimated.

93. Unasserted assessment of penalty with a likely chance of being assertedbut loss cannot be reasonably

estimated.

94. A determinable loss from a past event that is contingent on a future event that appears extremely likely to

occur in three months.

95. The most common type of liability is: A. One that comes into existence due to a loss contingency.B. One that must be estimated.C. One that comes into existence due to a gain contingency.D. One to be paid in cash and for which the amount and timing are known.

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

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.

97. Which of the following is the best definition of a current liability?

A. An obligation payable within one year.B. An obligation payable within one year of the balance sheet date.C. An obligation payable within one year or within the normal operating cycle, whichever is longer.D. An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

98. Which of the following is not a liability?

A. An unused line of credit.B. Estimated income taxes.C. Sales tax collected from customers.D. Advances from customers.

99. 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: A. Matching.B. Consistency.C. Materiality.D. Conservatism.

100.The key accounting considerations relating to accounts payable are:

A. Determining their existence and ensuring that they are recorded in the appropriate accounting period.B.

Determining their present value and ensuring that they are recorded in the appropriate accounting period.

C. Determining their existence and determining the correct amount.D. Determining the present value of the principal and the amount of the interest.

101.Current liabilities normally are recorded at their:

A. Present value.B. Cost.C. Maturity amount.D. Expected value.

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

collection for a third party? A. Sales tax payable.B. Customer deposits.C. Employee insurance deductions.D. Federal income tax deductions.

103.Classifying liabilities as either current or long-term helps creditors assess:

A. Profitability.B. The relative risk of a firm's liabilities.C. The degree of a firm's liabilities.D. The amount of a firm's liabilities.

104.When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: A. A current liability.B. Revenue.C. Shareholders' equity.D. Paid-in capital.

105.When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

A. A decrease in cost of goods sold.B. An increase in current liabilities.C. An increase in accounts receivable.D. An increase in revenue.

106.Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2010.

At December 31, 2009, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2009, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2009, balance sheet, Branch should classify the notes as follows: A. $15,000,000 long-term and $3,000,000 current liabilities.B. $4,500,000 short-term and $13,500,000 current liabilities.C. $18,000,000 of current liabilities.D. $18,000,000 of long-term liabilities.

107.A discount on a noninterest-bearing note payable is classified in the balance sheet as:

A. An asset.B. A component of shareholders' equity.C. A contingent liability.D. A contra liability.

108.The rate of interest printed on the face of a note payable is called the:

A. Yield rate.B. Effective rate.C. Market rate.D. Stated rate.

109.The rate of interest that actually is incurred on a note payable is called the:

A. Face rate.B. Contract rate.C. Effective rate.D. Stated rate.

110.On October 31, 2009, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-

bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky's effective interest rate on this loan is: A. More than the stated discount rate of 8%.B. Less than the stated discount rate of 8%.C. Equal to the stated discount rate of 8%.D. Unrelated to the stated discount rate of 8%.

111.Jane's Donut Co. borrowed $200,000 on January 1, 2009, and signed a two-year note bearing interest at

12%. Interest is payable in full at maturity on January 1, 2011. In connection with this note, Jane's should report interest expense at December 31, 2009, in the amount of: A. $0.B. $24,000.C. $48,000.D. $50,880.

112.What is the effective interest rate on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000? A. 12.36%.B. 12.00%.C. 11.46%.D. 3.00%.

113.On September 1, 2009, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was

made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan is: A. 9.00%.B. 9.49%.C. 9.50%.D. 9.57%.

114.Universal Travel Inc. borrowed $500,000 on November 1, 2009, and signed a 12-month note bearing

interest at 6%. Interest is payable in full at maturity on October 31, 2010. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2009, in the amount of: A. $8,000.B. $30,000.C. $5,000.D. $25,000.

115.Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by Second

Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this loan is: A. 9.28%B. 9.49%C. 9.50%D. 9.57%

116.Oklahoma Oil Corp. paid interest of $785,000 during 2009, and the interest payable account decreased by

$125,000. What was interest expense for the year? A. $890,000.B. $660,000.C. $555,000.D. $785,000.

117.On June 1, 2009, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with

a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2009? A. $525,000.B. $300,000.C. $495,000.D. $475,000.

118.At times, businesses require advance payments from customers that will be applied to the purchase price

when goods are delivered or services provided. These customer advances represent: A. Liabilities until the product or service is provided.B. A component of shareholders' equity.C. Long-term assets until the product or service is provided.D. Revenue upon receipt of the advance payment.

119.M Corp. has an employee benefit plan for compensated absences that gives employees 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, 2009, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2009. M's employees earn an average of $150 per day. In its December 31, 2009, 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.

120.Which of the following generally is associated with accounts payable?

A. B. C. D.

121.B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation

days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2009, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2009. B's employees earn an average of $200 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is B required to report? A. $60,000.B. $84,000.C. $90,000.D. $144,000.

122.Lake Co. receives nonrefundable advance payments with special orders for containers

constructed to customer specifications. Related information for 2009 is as follows ($ in

millions): What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2009, balance sheet? A. $0.B. $80.C. $125.D. $170.

123.On January 1, 2009, G Corporation agreed to grant its employees two weeks vacation each year, with the

stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2009, G's employees each earned an average of $800 per week. 500 vacation weeks earned in 2009 were not taken during 2009. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2010. What is the amount of G's 2010 wages expense related to 2009 vacation time? A. $0B. $420,000C. $400,000D. $420,000

124.When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: A. A debit to a revenue and a credit to a liability account.B. A debit to a revenue and a credit to an asset account.C. A debit to an asset and a credit to a revenue account.D. A debit to a liability and a credit to a revenue account.

125.Clark's Chemical Company received customer deposits on returnable containers in the amount of

$100,000 during 2009. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture? A. $0.B. $2,000.C. $10,000.D. $14,400.

126.In May of 2009, Raymond Company became involved in a penalty dispute with the Canadian

Environmental Protectional Agency. At December 31, 2009, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2009 financial statements were issued, Raymond accepted an settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of: A. $770,000.B. $900,000.C. $970,000.D. $1,170,000.

127.Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during

2009. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits? A. $0.B. $7,500.C. $9,000.D. $45,000.

128.Which of the following is not a current liability?

A. Accounts payable.B. A note payable due in 2 years.C. Accrued interest payable.D. Sales tax payable.

129.Short-term obligations can be reported as long-term liabilities if:

A. The firm has a long-term line of credit.B. The firm has tentative plans to issue long-term bonds.C. The firm intends to and has the ability to refinance as long-term.D. The firm has the ability to refinance on a long-term basis.

130.Of the following, which typically would not be classified as a current liability?

A. Estimated liability from cash rebate program.B. A long-term note payable maturing within the coming year.C. Rent revenue received in advance.D. A six-month bank loan to be paid with the proceeds from the sale of common shares.

131.Large, highly rated firms sometimes sell commercial paper:

A. To borrow funds at a lower rate than through a bank.B. To earn a profit on the paper.C. To avoid paperwork.D. Because the interest rate is locked in by the Federal Reserve Board.

132.Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? A. The long-term debt is callable by the creditor.B. The creditor has the right to demand payment due to a contractual violation.C. The long-term debt matures within the upcoming year.D. All of these require the current classification.

133.A long-term liability should be reported as a current liability in a classified balance sheet if the long-term

debt A. is callable by the creditor.B. is secured by adequate collateral.C. will be refinanced with stock.D. will be refinanced with debt.

134.On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. L

borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2010. In February 2010, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet? A. $0B. $500,000C. $1,000,000D. $1,500,000

135.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: 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.

136.Footnote disclosure is required for material potential losses when the loss is likely to occur:

A. Only if the amount is known.B. Only if the amount is known or reasonably estimable.C. Unless the amount is not reasonably estimable.D. Even if the amount is not reasonably estimable.

137.Gain contingencies usually are recognized in a company's income statement when:

A. Realized.B. The amount can be reasonably estimated.C. The gain is reasonably possible and the amount can be reasonable estimated.D. The gain is probable and the amount can be reasonably estimated.

138.A company should accrue a loss contingency only if the likelihood that a liability has been incurred

is: A. More likely than not and the amount of the loss is known.B. At least reasonably possible and the amount of the loss is known.C. At least reasonably possible and the amount of the loss can be reasonably estimated.D. Likely and the amount of the loss can be reasonably estimated.

139.A contingent loss should be reported in a footnote to the financial statements rather than being accrued

if: A. The likelihood of a loss is unlikelyB. The incurrence of a loss is likely but amount cannot be estimated.C. The incurrence of a loss is likely and amount can be estimated.D. None of the above.

140.Which of the following is a contingency that should be accrued? A. The company is being sued and a loss is unlikely and reasonably estimable.B. The company deducts life insurance premiums from employees' paychecks.C. The company offers a two-year warranty and the expenses can be reasonably estimated.D. It is likely that the company will receive $100,000 in settlement of a lawsuit.

141.A loss contingency should be accrued in a company's financial statements only if the likelihood that a

liability has been incurred is: A. unlikely and the amount of the loss is known.B. not determinable and the amount of the loss is known.C. not determinable and the amount of the loss can be reasonably estimated.D. likely and the amount of the loss can be reasonably estimated.

142.Paul Company issues a product recall due to an apparently pre-existing and material defect discovered

after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is: A. To disclose it in a footnote.B. To accrue a long-term liability.C. To accrue the liability and explain it in a footnote.D. To do nothing relative to the contingency.

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

A. Employee withholding taxesB. Employee voluntary deductionsC. Employee fringe benefitsD. All of these are correct.

144.Accounting for costs of incentive programs for customer purchases:

A. Requires probability estimation.B. Follows the matching principle.C. Is a loss contingency situation.D. All of these are correct.

145.Providing a monetary rebate program for purchasing a product:

A. Is accounted for similarly to product warranties.B. Creates an expense for the seller in the period of sale.C. Creates a contingent liability for the seller at the time of sale.D. All of these are correct.

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

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 deferred until redemption of the coupon.D. There are no significant differences in accounting between the two.

147.Which of the following entail essentially the same accounting treatment?

A. Coupons for cash rebates and coupons for other premiums.B. Cents-off coupons and coupons for other premiums.C. Cents-off coupons and coupons for cash rebates.D. All of these are correct.

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

149.Orange Co. cannot 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 likely possible, a loss contingency should be A. Disclosed but not accrued as a liability.B. Disclosed and accrued as a liabilityC. Accrued as liability but not disclosed.D. Neither accrued as a liability nor disclosed.

150.Red 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 expropriation is likely, a loss contingency should be A. Disclosed but not accrued as a liability.B. Disclosed and accrued as a liabilityC. Accrued as liability but not disclosed.D. Neither accrued as a liability nor disclosed.

151.Z Co. filed suit against W, Inc. in 2009 seeking damages for patent infringement. At December 31,

2009, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2010. Z should report this award in its 2009 financial statements, issued in March, 2010 as A. A receivable and unearned revenue of $40 million.B. A receivable and revenue of $40 million.C. A disclosure of a gain contingency of $40 million.D.

A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

152.When a gain contingency is likley and the amount of gain can be reasonably estimated, the gain should

be: A. Reported in the income statement and disclosed.B. Offset against shareholders' equity.C. Disclosed, but not recognized in the income statement.D. Neither recognized in the income statement nor disclosed.

153.Which of the following is a contingency that would most likely require accrual?

A. Potential losses from extended warranties.B. Customer premium offers.C. Potential liability on a product where none have yet been sold.D. Sales tax payable.

154.The cost of customer premium offers should be charged to expense:

A. When the related product is sold.B. When the premium offer expires.C. Over the life cycle of the product to which the premium relates.D. When the premiums are claimed.

155.The accounting concept that requires recognition of a liability for customer premium offers is

A. Periodicity.B. Conservatism.C. Historical cost.D. The matching principle.

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

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.

157.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: 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.

158.Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in

exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement? A. $0.B. $400,000.C. $800,000.D. $1,200,000.

159.Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in

exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet? A. $0.B. $150,000.C. $300,000.D. $450,000.

160.At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The

warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is: A. $5.3 million.B. $7.2 million.C. $10.6 million.D. $27.0 million.

161.During 2009, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional

program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2009. At December 31, 2009, Deluxe should report a liability for unredeemed coupons of: A. $560,000.B. $1,050,000.C. $1,225,000.D. $1,750,000.

In 2009, Holyoak Inc. offers a $20 cash rebate coupon to customers who purchased one of its new line of products. Holyoak sold 10,000 of these products during the year. By year end of 2009, 7,600 of the rebates had been claimed, and 7,100 had been paid. Holyoak's historical experience with such rebates indicates that 85% of customers claim the rebates.

162.What is the expense that Holyoak should report for its promotional rebates in its 2009 income statement? A. $142,000B. $152,000C. $170,000D. $200,000

163.What is the rebate promotion liability that Holyoak should report in its December 31, 2009 balance sheet?

A. $20,000B. $28,000C. $18,000D. None of these is correct.

Always Late Airline (ALA) operates a frequent flyer program in which mileage credits are earned by its customers for traveling on the airline. Awards are issued to members at the 25,000 miles level, and all awards expire five years from the date earned. The airline's historical experience indicates that 80% of all travel awards will actually be redeemed.ALA accounts for its frequent flyer obligation on the accrual basis. ALA's liability for free travel at the beginning of 2009 was $28 million. The cost of free travel awards redeemed in 2009 was $19 million. The estimated cost of free travel earned for miles traveled in 2009 are $50 million. 164.What is the expense that ALA should report for its frequent flyer program in its 2009 income statement?

A. $40 millionB. $41 millionC. $50 millionD. $69 million

165.Assume the same facts as in question 142, except that $2 million in earned travel awards on ALA expired

during 2009. What is the expense that ALA should report for its frequent flyer program in its 2009 income statement? A. $38 millionB. $40 millionC. $42 millionD. None of these is correct.

166.Assume the same facts as in question 142. What is the frequent flyer program liability that ALA should

report in its December 31, 2009 balance sheet? A. $31 millionB. $40 millionC. $45 millionD. $49 million

167.In the current year, Hanna Company reported warranty expense of $190,000 and the warranty liability

account increased by $20,000. What were warranty expenditures during the year? A. $190,000.B. $170,000.C. $210,000D. $0.

168.Panther Co. had a warranty liability of $350,000 at the beginning of 2009, and $310,000 at end of 2009.

Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2009? A. $0.B. $1,960,000.C. $2,000,000.D. $2,040,000.

169.Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2008. In 2009, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2009 were $40 million. What was the balance in the warranty liability account as of December 31, 2009? A. $35,000.B. $425,000.C. $125,000.D. $480,000.

General Product Inc. shipped 100 million coupons in products it sold in 2009. The coupons are redeemable for thirty cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2010. There were 45 million coupons redeemed in 2009, and 30 million redeemed in 2010. 170.What was General's coupon liability as of December 31, 2009?

A. $7.5 million.B. $13.5 million.C. $16.5 million.D. $21.0 million.

171.What was General's coupon promotion expense in 2009?

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

172.What was General's coupon promotional expense in 2010?

A. Zero, since all the expense should be reflected in 2009.B. $1.5 million.C. $7.5 million.D. $9.0 million.

173.During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional

program. Each belt carried one coupon, which entitles the customer to a $4.00 cash rebate. L&M estimates that 70% of the coupons will be redeemed, even though only 500,000 coupons had been processed during the year. At December 31, L&M should report a liability for unredeemed coupons of: A. $700,000B. $800,000C. $1,000,000D. $2,800,000

174.BM Services sold $200,000 of goods and charged 5% GST to its customers. The company purchased

$100,000 of goods and paid the 5% on all purchases. What is the amount of the remittance to the federal government É A. 15,000B. 10,000C. 5,000D. 0

175.In 2009, 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 2009.2. What amount should Cap City report as a liability at December 31, 2009?

176.Albertson Corporation began a special promotion in July 2009 in an attempt to increase sales. A

coupon was placed in each box of product. Customers could send in 5 coupons for a free prize. Each prize cost Albertson Corporation $3.00. Albertson's management estimated that 80% of the coupons would be redeemed. For the six months ended December 31, 2009, the following information is

available: Required:What is the estimated liability for the premium offer at December 31, 2009?

177.On May 1, Lectric Industries issued 9-month notes in the amount of $60 million. Interest is payable at

maturity.Required:Determine the amount of interest expense that should be recorded in a year-end adjusting entry under

each of the following independent assumptions:

178.Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2009, to fund a geological survey. The loan was made by Quebec Banque under a short-term credit line. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year. Required:Prepare the journal entry for the issuance of the note by Ontario Resources. Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2009. Show calculations. Prepare the journal entry for the payment of the note at maturity. Show calculations.

179.Grossman Products began operations in 2009. The following selected transactions occurred from

September 2009 through March 2010. Grossman's fiscal year ends on December 31.2009:(a.) On September 5, Grossman opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.(b.) On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity.(c.) Grossman received $3,000 of refundable deposits in December for reusable containers.(d.) For the September through December period, sales totaled $5,000,000. The provincial sales tax rate is 4% and 75% of sales are subject to sales tax.(e.) Grossman recorded accrued interest.2010:(f.) Grossman paid the promissory note on the March 1 due date.(g.) Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months.Required:1. Prepare the appropriate journal entries for the 2009 transactions.2. Prepare the liability section of the balance sheet at December 31, 2009, based on the data supplied.3. Prepare the appropriate journal entries for the 2010 transactions.

180.A $90,000, 6-month, noninterest-bearing note is discounted at the bank 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.

181.On November 1, 2009, a $216,000, 9-month, noninterest-bearing note is discounted at the bank 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.3. Prepare the appropriate journal entry on December 31, 2009, to record interest on the note for the 2009 financial statements.4. Prepare the appropriate journal entry(s) on July 31, 2010, to record interest and the payment of the note.

182.On November 1, 2009, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note to the

bank. Interest was discounted at a 12% discount rate.Required:1. Prepare the appropriate journal entry by Ziegler 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 Ziegler.4. Prepare the appropriate journal entry on December 31, 2009, to accrue interest expense on the note described in 3. for the 2009 financial statements.

183.On October 1, 2009, Home Builders Company issued a $600,000, 8-month, noninterest-bearing note to

the bank. Interest was discounted 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, 2009, to accrue interest expense on the note described in 3. for the 2009 financial statements.

184.On September 1, 2009, 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, 2009.3. Prepare the journal entry for the payment of the note at maturity.

185.The following selected transactions relate to liabilities of Rose Dish Corporation. Rose's fiscal year ends

on December 31.Required:Prepare the appropriate journal entries through the maturity of each liability.2009:(a.) On September 5, Rose Dish opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.(b.) On October 1, Rose Dish borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity.(c.) Rose Dish received $3,000 of refundable deposits in December for reusable containers.(d.) For the September through December period, sales totaled $5,000,000. The provincial sales tax rate is 4% and 75% of sales are subject to sales tax.(e.) Rose Dish recorded accrued interest.2010:(f.) General paid the promissory note on the March 1 due date.(g.) Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months.

186.Stern Corporation borrowed $10 million cash on September 1, 2009, to provide additional working

capital for the year's production. Stern issued a 6-month, 10% promissory note to Second Provincial Bank. Interest on the note is payable at maturity. The firm uses the calendar year as the fiscal year.Required:Prepare all journal entries from issuance to maturity for Stern Corporation.

187.Hot Springs Marine borrowed $20 million cash on December 1, 2009, to provide working capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to Third Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm's fiscal period is the calendar year.Required:1. Prepare the journal entries to record (a) the issuance of the note by Hot Springs Marine and 2. Prepare the journal entries by the company to record all subsequent events related to the note through March 31, 2010.

188.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 2009, total wages paid to employees equaled $808,000, including $8,000 for vacations actually taken in 2009, but not including vacations related to 2009 that will be taken in 2010. All vacations earned before 2009 were taken before January 1, 2009. No accrual entries have been made for the vacations.Required:Prepare the appropriate adjusting entry for vacations earned but not taken in 2009.

189.Nora Limited issued a 700,000 10% note payable on May 1, 2010. The company`s fiscal year end is June

30. The note was paid in full on November 1Required:Prepare journal entries for the above transactions.

190.In its 2009 annual report to shareholders, Ank-Morpork Times Inc. included the following disclosure:REVENUE RECOGNITION•Advertising revenue is recognized when advertisements are published, broadcast or when placed on the Company's Web sites, net of provisions for estimated rebates, credit and rate adjustments and discounts.•Circulation revenue includes single copy and home-delivery subscription revenue. Single copy revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from home-delivery subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.•Other revenue is recognized when the related service or product has been delivered.Also, the following information on its current liabilities was included in its comparative balance

sheets: Required:Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home delivery subscriptions during fiscal year 2009, what amount of revenue did it recognize during 2009 from this source?

191.On June 30, 2009, Chu Industries issued 9-month notes in the amount of $700,000. Assume that interest

is payable at maturity in the following three independent cases:

Required:Determine the amount of interest expense that should be accrued in a year-end adjusting entry under each assumption:

192.Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2009, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2009, were $330,000. During 2009, $410,000 was refunded and deposits of $25,000 were forfeited.Required:1. Prepare the appropriate journal entries for the deposits received and returned during 2009.2. Determine the liability for refundable deposits to be reported in the December 31, 2009, balance sheet.

193.At December 31, 2009, Cordova Leather's liabilities include the following:

1. $15 million of noncallable 9% notes were issued for $15 million on August 31, 1975. The bonds mature on July 31, 2010. Sufficient cash is expected to be available to retire the bonds at maturity.2. $30 million of 8% notes were issued for $30 million on May 31, 1986. The bonds mature on May 31, 2015, but investors have the option of calling (demanding payment on) the notes on June 30, 2010. However, the call option is not expected to be exercised, given prevailing market conditions.3. $18 million of 10% notes are due on March 31, 2011. A debt covenant requires Cordova to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2009, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2010, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2010.Required:For each of the three liabilities, indicate the portion of the debt that can be excluded from classification as a current liability (that is, reported as a noncurrent liability). Explain.

194.In its 2009 annual report to shareholders, Border Airlines Inc. presented the following balance sheet

information about its liabilities: In addition, Border presented the following among its footnote disclosures:Maturities of long-term debt (including sinking fund requirements) for the next five years are:2005 - $421 million; 2006 - $212 million; 2007 - $273 million; 2008 - $1.0 billion; 2009 - $777 million.Required:Consider the appropriate classification of these long-term debt obligations. All other things being equal, what are the implications of the information above for Border's liquidity and solvency risk in 2009 and following?

195.Mozart Music Co. began operations in December of 2009. The company sold gift certificates during

December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within 3 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 2009 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, 2009, balance sheet.(2.) What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2009? Show calculations.

In its 2009 annual report to shareholders, the Goodday Chemical Company included the following footnote excerpts on CONTINGENCIES in its annual report to shareholders:At December 31, 2009, Goodday had recorded liabilities aggregating $66.5 million for anticipated costs related to various environmental matters, primarily the remediation of numerous waste disposal sites and certain properties sold by Goodday. These costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities and will be paid over several years. The amount of Goodday's ultimate liability in respect of these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute.At December 31, 2009, Goodday had recorded liabilities aggregating $218.7 million for potential product liability and other tort claims, including related legal fees expected to be incurred, presently asserted against Goodday. The amount recorded was determined on the basis of an assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and, where available, current trends.Goodday is a defendant in numerous lawsuits involving at December 31, 2009, approximately 63,000 claimants alleging various asbestos related personal injuries purported to result from exposure to asbestos in certain rubber coated products manufactured by Goodday in the past or in certain Goodday facilities. Typically, these lawsuits have been brought against multiple defendants in state and Federal courts. In the past, Goodday has disposed of approximately 22,000 cases by defending and obtaining the dismissal thereof or by entering into a settlement. Goodday has policies and coverage-in-place agreements with certain of its insurance carriers that cover a substantial portion of estimated indemnity payments and legal fees in respect of the pending claims. At December 31, 2009, Goodday has recorded an asset in the amount it expects to collect under the policies and coverage-in-place agreements with certain carriers related to its estimated asbestos liability. Goodday has also commenced discussions with certain of its excess coverage insurance carriers to establish arrangements in respect of their policies.Subject to the uncertainties referred to above, Goodday has concluded that in respect of any of the above described liabilities, it is not likely that it would incur a loss exceeding the amount recognized at December 31, 2009, with respect thereto which would be material relative to the consolidated financial position, results of operations, or liquidity of Goodday. 196.Required:

Briefly explain the authoritative basis on which the costs/obligations for environmental cleanup and product liability/tort claim matters were accrued in the financial statements.

197.Required:

What is the point of the last paragraph of the Goodday disclosure? Explain in terms of authoritative GAAP.

198.Required:Show the summary journal entry that Goodday recorded for the environmental cleanup and product liability/tort claim matters, described in the footnote disclosure.

199.The following selected transactions relate to contingencies of Eastern Products Inc. which began

operations in July, 2009. Eastern's fiscal year ends on December 31. Financial statements are published in April, 2010.1. 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 2009.2. 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 2009 and were recorded as warranty expense when incurred.3. In December, 2009, 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, 2009, 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 provincial authorities to pay $4.2 million in penalties on February 3, 2010.5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2009. The lawsuit is in final appeal and lawyers 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.

200.The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2009, and financial statements are published in March 2010.1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2009 transaction. At December 31, lawyers advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2010, judgment was rendered against Bowe-Whitney in the amount of $14 million plus interest, a total of $15.2 million. Bowe-Whitney does not plan to appeal the judgment.2. Since August of 2009, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2007, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.3. Bowe-Whitney is the defendant in a lawsuit filed in January 2010 in which Access Company seeks $20 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2009. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it likely possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $20 million asked for.4. At March 1, 2010, the Canadian Environmental Protection Agency is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is unlikely, but if an assessment is made, a settlement of up to $33 million is probable. Required:Prepare journal entries that should be recorded as a result of each of the above contingencies.

201.Concept 1 Office Products sells office electronics that carry a 60-day manufacturer's warranty. At the

time of purchase, customers are offered the opportunity to also buy a 1-year or 2-year extended warranty for an additional charge.Required:1. Does the sale of the extended warranty represent a loss contingency?2. Provide journal entries for the extended warranty sales and revenue recognition.

202.In its 2009 annual report to shareholders, Hyer Aviation Group Inc. included the following disclosure:On October 6, 2008, the company's subsidiary, Pyro Aeroplex, filed suit against Syntex, an unincorporated division of Bright American Corporation, for breach of contract and fraud with regard to the supply of deficient wire rope that is installed as aircraft flight control cables on WD-50 aircraft. The case, filed in the circuit court of Bell County, Arkansas, was brought to trial and on September 20, 2009, a jury returned with a verdict in favor of the company in the amount of $17.5 million. The Court, upon a post-judgment motion filed by Pyro, reduced the judgment to $4.5 million. Pyro has appealed that Order to the Supreme Court of Arkansas. The company believes the appeal is without merit and will continue to pursue final judgment on the Order. The company, pending appeal, has not recorded the $4.5 million favorable judgment.Required:What journal entries, if any, has Hyer recorded regarding this contingency. Explain its rationale.

203.Fusion, Inc. introduced a new line of circuits in 2009 that carry a four-year warranty against

manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Sales and actual warranty expenditures for the first year of selling

the product were: Required:1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2009.3. What amount should Fusion report as a liability at December 31, 2009?

204.Barone, Inc. is involved with several situations that possibly involve contingencies. Each is described below. Barone's fiscal year ends December 31, and the 2009 financial statements are issued on March 1, 2010.1. At March 1, 2010, the EPA is in the process of investigating possible chemical leaks at two of Barone's facilities, but has not proposed a deficiency assessment. Management feels an assessment is likely, and if an assessment is made an unfavorable settlement of $8 million is estimated.2. Barone is the plaintiff in a $33 million lawsuit filed against Faze Corp. for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Finley will prevail and be awarded $25 million.3. In July 2008, the Province of Ontario filed suit against Barone, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2010, Barone reached a settlement with provincial authorities. Based upon discussions with legal counsel, the Company feels it is likley that $13 million will be required to cover the cost of violations. Barone believes that the ultimate settlement of this claim will not have a material adverse effect on the company.4. Barone is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2010, judgment was rendered against Barone in the amount of $16 million plus interest, a total of $18 million. Barone plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.Required:1. Determine the appropriate means of reporting each situation. Explain your reasoning.

205.At the beginning of 2009, Scarlet Industries began offering a 3-year warranty on its products. The

warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2009 were $270 million. Thirteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred.Required:Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2009. Show calculations.

206.Yummy Rice Cereal offers an all-star bowl in exchange for 3 return box tops. Yummy Rice estimates that

30% will be redeemed. The bowls cost Yummy Rice $1 each. In 2009, 5,000,000 boxes of cereal were sold. By year-end 900,000 box tops had been redeemed.Required:Calculate the liability that Yummy Rice should report at December 31, 2009.

207.Sunnyvale Computer Company sells a line of computers that carry a 6-month warranty. Customers are offered the opportunity to buy a 2-year extended warranty for an additional charge. During 2009, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase.Required:Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2009.

208.Hardin Widget Manufacturing began operations in January 2009. Hardin sells widgets that carry a two-

year manufacturer's warranty against defects in workmanship. Hardin's management project that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2009 and 2010 are as follows:2009: Sold 200 widgets on account; incurred warranty expenditures of $300.2010: Sold 300 widgets on account; actual warranty expenditures were $500.Required:1. Prepare journal entries that summarize the sales and any aspects of the warranty for 2009.2. Prepare journal entries that summarize the sales and any aspects of the warranty for 2010.

209.Cracker Corporation began a special promotion in July 2009 in an attempt to increase sales. A coupon

was placed in each box of product. Customers could send in 5 coupons for a free prize. Each prize cost Cracker Corporation $2.00. Cracker's management estimated that 70% of the coupons would be redeemed. For the six months ended December 31, 2009, the following information is available: Products sold

2,000,000 boxes Required:Record all necessary journal entries for the premium offer for 2009.

210.Muller Corp. pays its employees monthly. The payroll information listed below is for January, 2009, the

first month of Muller's fiscal year. The company is required to make contributions to CPP equal to the employees and to EI equal to 1.4 times the employees contributions:Required:What is the total payroll expense for the company?

211.Identify the major components included in the official definition of a liability as set forth by the

CICA.

212.Define the following:

(1.) Liabilities that are definite in amount.(2.) Liabilities that must be estimated.(3.) Liabilities that are contingent.

213.Bank loans are often arranged in advance as lines of credit. What is a line of credit? How do a committed

and a noncommitted line of credit differ?

214.How are customer advances and refundable deposits similar and yet different?

215.Define and distinguish between current and noncurrent liabilities.

216.What factors are important in determining whether a pending lawsuit should be accrued as a liability and

reflected in the financial statements?

217.Identify and define the three classifications prescribed by CICA 3290 to identify the range of possibilities

for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.

218.Define a loss contingency and give two examples that almost always are accrued.

219.Alberta Oil is being sued for price fixing and environmental damage. The litigation started this year

and is expected to last five years. There is no doubt that Alberta is guilty but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Alberta would address this in its current year financial statements.

220.Amber Inc. is one of the largest pharmacy retailers in Canada. In its 2009 annual report to shareholders, it made the following disclosure:In 2000, Amber assigned a number of leases to Bell's Inc. and Home Stores, Inc. as part of the sale of the Company s former Eastern divisions. Amber is contingently liable if Bell's and Home are unable to continue making rental payments on these leases. In 2006, Amber recorded a pretax charge to earnings of $42.7 million to recognize the estimated lease liabilities associated with the Bell's and Home bankruptcies and for a single lease from Amber's former Georgia division. In 2009, Bell's began the liquidation process and Home emerged from bankruptcy and, based on the resolution of various leases, Amber reversed $12.1 million of this accrual.Explain the accounting principle(s) that required Amber to record the $42.7 million charge in 2006 and the $12.1 million reversal in 2009.

221.Swift Drug Company is being sued this year for a wrongful death due to violation of Government drug

agency rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements.

12 Key 1.(p. 555)

____ Expenses incurred but not yet paid.

A

Difficulty: Easy

Level of Learning: KnowledgeSpiceland - Chapter 12 #22

Topic: LO 1

2.(p. 560)

____ A third party liability.

G

Difficulty: Easy


Topic: LO 1

3.(p. 556)

____ Accrues with passage of time.

E

Difficulty: Easy


Topic: LO 1

4.(p. 554)

____ Contra liability.

D

Difficulty: Easy


Topic: LO 3

5.(p. 561)

____ Due on demand.

C

Difficulty: Easy


Topic: LO 4

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accrued liabilitiesB. Advances from customersC. CallableD. Discount on notes payableE. Interest payableF. ProbableG. Sales tax payableH. Secured loanI. Short-term noteJ. Warranty liability

Difficulty: EasyLevel of Learning: Knowledge

Spiceland - Chapter 12Topic: LO 5

6.(p. 554)

____ Requires collateral.

H

Difficulty: Medium


Topic: LO 6

7.(p. 553)

____ Most common temporary financing arrangement.

I

Difficulty: Easy


Topic: LO 6

8.(p. 565)

____ Confirming event is likely to occur.

F

Difficulty: Easy


Topic: LO 6

9.(p. 566)

____ A loss contingency accrued in the period of related sales.

J

Difficulty: Medium


Topic: LO 6

10.(p. 559)

____ Liabilities when received.

B

Difficulty: Easy


11.(p. 559)

Employers deduct CPP and EI premiums from employee wages.Ans: TRUE

Difficulty: Easy


12.(p. 560)

Companies are not obligated to charge GST on goods and services. FALSE

Spiceland - Chapter 12 #12

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accrued liabilitiesB. Advances from customersC. CallableD. Discount on notes payableE. Interest payableF. LikelihoodG. Sales tax payableH. Secured loanI. Short-term noteJ. Warranty liability

Difficulty: EasyLevel of Learning: Comprehension

Spiceland - Chapter 12

13.(p. 566)

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold. TRUE

Difficulty: Easy

Level of Learning: ComprehensionSpiceland - Chapter 12 #6

Topic: LO 6

14.(p. 569)

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

Difficulty: Easy


Topic: LO 5

15.(p. 570)

A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated. FALSE

Difficulty: Easy


Topic: LO 2

16.(p. 565)

A disclosure note is required for all material loss contingencies for which the probability of loss is likely. TRUE

Difficulty: Easy


Topic: LO 2

17.(p. 567)

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


18.(p. 559)

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

Level of Learning: Comprehension

Spiceland - Chapter 12 #4Topic: LO 4

19.(p. 562)

The concept of substance over form influences the classification of obligations expected to be refinanced. TRUE



20.(p. 561)

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. FALSE



21.(p. 560)

Amounts withheld from employees in connection with payroll often represent liabilities to third parties. TRUE



22.(p. 550)

Some liabilities are not contractual obligations and may not be payable in cash. TRUE


23.(p. 550)

Some liabilities are not contractual obligations and may not be payable in cash. TRUE

Difficulty: Easy


Topic: LO 1

24.(p. 561)

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. FALSE

Difficulty: Easy


Topic: LO 1

25.(p. 560)

Amounts withheld from employees in connection with payroll often represent liabilities to third parties. TRUE

Difficulty: Easy


Topic: LO 1

26.(p. 559)

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

Difficulty: Easy


Topic: LO 3

27.(p. 562)

The concept of substance over form influences the classification of obligations expected to be refinanced. TRUE

Difficulty: Easy


Topic: LO 4

28.(p. 566)

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold. TRUE

Difficulty: Easy


Topic: LO 5

29.(p. 569)

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

Difficulty: Medium


Topic: LO 6

30.(p. 570)

A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated. FALSE

Difficulty: Easy


Topic: LO 6

31.(p. 565)

A disclosure note is required for all material loss contingencies for which the probability of loss is likely. TRUE

Difficulty: Easy


Topic: LO 6

32.(p. 567)

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

Difficulty: Medium


Topic: LO 6

33.(p. 559)

Employers deduct CPP and EI premiums from employee wages.Ans: TRUE

Difficulty: Easy


Topic: LO 3

34.(p. 560)

Companies are not obligated to charge GST on goods and services. FALSE

Difficulty: Easy


Topic: LO 3

35.(p. 559)

____ Liabilities when received.

B

Difficulty: Easy


Topic: LO 3

36.(p. 565)

____ Confirming event is likely to occur.

F

Difficulty: Easy


Topic: LO 6

37.(p. 566)

____ A loss contingency accrued in the period of related sales.

J

Difficulty: Easy


Topic: LO 5

38.(p. 553)

____ Most common temporary financing arrangement.

I

Difficulty: Easy


Topic: LO 2

39.(p. 554)

____ Requires collateral.

H

Difficulty: Easy


Topic: LO 2

40.(p. 561)

____ Due on demand.

C

Difficulty: Easy


Topic: LO 4

41.(p. 554)

____ Contra liability.

D

Difficulty: Easy


Topic: LO 2

42.(p. 560)

____ A third party liability.

G

Difficulty: Easy


Topic: LO 3

43.(p. 556)

____ Accrues with passage of time.

E

Difficulty: Easy


Topic: LO 5

44.(p. 555)


A

Difficulty: Easy


Topic: LO 3

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accounting liabilitiesB. Customer depositsC. Effective interestD. FactoringE. Gain contingenciesF. Interest paid on debtG. Noncommitted lines of creditH. Reasonably possibleI. Subsequent eventsJ. Unasserted claims


45.(p. 558)

____ Liabilities until refunded.

B

Difficulty: Easy


Topic: LO 3

46.(p. 565)

____ Chance of occurrence of future event is high

H

Difficulty: Easy


Topic: LO 6

47.(p. 556)

____ Face amount x rate x time.

F

Difficulty: Easy


Topic: LO 3

48.(p. 570)

____ Not recorded until realized.

E

Difficulty: Easy


Topic: LO 6

49.(p. 553)

____ Informal borrowing agreements.

G

Difficulty: Easy


Topic: LO 2

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accured liabilitiesB. Customer depositsC. Effective interestDVacationE. Gain contingenciesF. Interest paid on debtG. Noncommitted lines of creditH. Reasonably possibleI. Subsequent eventsJ. Unasserted claims


50.(p. 544)

____ Exceeds the stated rate on discounted notes.

C

Difficulty: Easy


Topic: LO 2

51.(p. 555)


A

Difficulty: Easy


Topic: LO 3

52.(p. 556)

____ Paid future absences

D

Difficulty: Easy


Topic: LO 3

53.(p. 570)

____ Evaluated for recognition only if an unfavorable outcome is likely

J

Difficulty: Easy


Topic: LO 5

54.(p. 569)

____ Occur in the current year before prior year financial statements are issued.

I

Difficulty: Easy


Topic: LO 5

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided.Terms:A. Accounts payableB. Commercial paperC. Committed lines of creditD. Current liabilitiesE. Disclosure notesF. Long-term liabilitiesG. Loss contingenciesH. Noninterest-bearing notesI. PremiumsJ. Usual valuation of long-term liabilities


55.(p. 567)

____ Type of promotional offer

I

Difficulty: Easy


Topic: LO 5

56.(p. 553)

____ Often require compensating balance.

C

Difficulty: Easy


Topic: LO 2

57.(p. 552)

____ Only formal credit instrument is the invoice.

A

Difficulty: Easy


Topic: LO 2

58.(p. 554)

____ Effective interest higher than stated interest.

H

Difficulty: Easy


Topic: LO 2

59.(p. 565)

____ Recorded if likely and amount is known or reasonably estimable.

G

Difficulty: Easy


Topic: LO 6

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.Terms:A. Accounts payableB. Commercial paperC. Committed lines of creditD. Current liabilitiesE. Disclosure notesF. Long-term liabilitiesG. Loss contingenciesH. Noninterest-bearing notesI. Pledging arrangementsJ. Usual valuation of long-term liabilities


60.(p. 562)

____ Present value of interest plus present value of principal.

J

Difficulty: Easy


Topic: LO 5

61.(p. 565)

____ Required for contingencies.

E

Difficulty: Easy


Topic: LO 5

62.(p. 550)

____ Payable with current assets.

D

Difficulty: Easy


Topic: LO 1

63.(p. 562)

____ Short-term debt to be refinanced with long-term bonds payable.

F

Difficulty: Easy


Topic: LO 4

64.(p. 555)

____ Avoids registration with its security regulators

B

Difficulty: Easy


Topic: LO 2

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2009.Reporting MethodA. AssetL. LiabilityD. Disclosure note onlyN. Not reported


65.(p. 570)

____ An estimable gain that is contingent on a future event that appears exceedingly likely.

D

Difficulty: Easy


Topic: LO 6

66.(p. 565)

____ A penalty assessment that likely will be asserted by the Canadian Environment Protection Act, in which case a determinable payment is probable.

L

Difficulty: Easy


Topic: LO 4

67.(p. 570)

____ Unassessed penalty with a reasonable likelihood of being asserted, in which case a determinable payment can be estimated.

N

Difficulty: Easy


Topic: LO 6

68.(p. 565)

____ An extremely likely loss due an event that occurred previously and whose amount is unknown but estimable.

L

Difficulty: Easy


Topic: LO 5



69.(p. 566)

Estimated warranty cost.

C

Difficulty: Easy


Topic: LO 6

70.(p. 570)

An estimable gain that is contingent on a future event that appears extremely likely to occur in three months.

D

Difficulty: Easy


Topic: LO 6

71.(p. 570)

Unasserted assessment of penalty that likely will be asserted, in which case there would an estimatable loss in six months.

C

Difficulty: Easy


Topic: LO 6

72.(p. 570)

Unasserted assessment of penalty with a likely chance of being asserted, in which case damages cannot be estimated.

N

Difficulty: Easy


Topic: LO 6

73.(p. 565)

A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months.

C

Difficulty: Easy


Topic: LO 6



74.(p. 558)

Customer advances.

C

Difficulty: Easy


Topic: LO 3

75.(p. 553)

Noncommitted line of credit.

D

Difficulty: Easy


Topic: LO 2

76.(p. 555)

Commercial paper.

C

Difficulty: Easy


Topic: LO 2

77.(p. 553)

Note due June 9, 2010.

C

Difficulty: Easy


Topic: LO 2

78.(p. 552)

Accounts payable.

C

Difficulty: Easy


Topic: LO 2

79.(p. 556)

Interest accrued on note, Dec. 31, 2009.

C

Difficulty: Easy


Topic: LO 3

80.(p. 562)

Short-term bank loan to be paid with proceeds of sale of common shares

L

Difficulty: Easy


Topic: LO 4



81.(p. 558)

Customer advances.

C

Difficulty: Easy


Topic: LO 3

82.(p. 553)

Noncommitted line of credit.

D

Difficulty: Easy


Topic: LO 2

83.(p. 555)

Commercial paper.

C

Difficulty: Difficult

Difficulty: EasyLevel of Learning: Comprehension


84.(p. 553)

Note due June 9, 2010.

C


Difficulty: EasyLevel of Learning: Analysis


Topic: LO 2

85.(p. 552)

Accounts payable.

C

Difficulty: Easy


Topic: LO 2

86.(p. 561)

Long-term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (it is likely the violation will be corrected within the grace period).

C

Difficulty: Easy


Topic: LO 4

87.(p. 561)

Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.

C

Difficulty: Easy


Topic: LO 4

88.(p. 566)

Estimated warranty cost.

C




Topic: LO 6

89.(p. 556)

Interest accrued on note, Dec. 31, 2009.

C


Difficulty: EasyLevel of Learning: Application


Topic: LO 3

90.(p. 562)

Short-term bank loan to be paid with proceeds of sale of common shares.

L




Topic: LO 4

91.(p. 570)

An estimable gain that is contingent on a future event that appears extremely likely to occur in three months.

D




Topic: LO 6

92.(p. 570)

Unasserted assessment of penalty that will likely be asserted, in which case there loss can be estimated.

C




Topic: LO 6

93.(p. 570)

Unasserted assessment of penalty with a likely chance of being assertedbut loss cannot be reasonably estimated.

N




Topic: LO 6

94.(p. 565)

A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months.

C




Topic: LO 5

95.(p. 550)

The most common type of liability is: A. One that comes into existence due to a loss contingency.B. One that must be estimated.C. One that comes into existence due to a gain contingency.D. One to be paid in cash and for which the amount and timing are known.




Topic: LO 1

96.(p. 550)

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

Difficulty: Easy


Topic: LO 1

97.(p. 550)

Which of the following is the best definition of a current liability? A. An obligation payable within one year.B. An obligation payable within one year of the balance sheet date.C. An obligation payable within one year or within the normal operating cycle, whichever is longer.D. An obligation expected to be satisfied with current assets or by the creation of other current

liabilities.



Topic: LO 1

98.(p. 553)

Which of the following is not a liability? A. An unused line of credit.B. Estimated income taxes.C. Sales tax collected from customers.D. Advances from customers.

Difficulty: Medium


Topic: LO 2

99.(p. 552)

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: A. Matching.B. Consistency.C. Materiality.D. Conservatism.

Difficulty: Medium

Level of Learning: ApplicationLevel of Learning: Comprehension


100.(p. 550)

The key accounting considerations relating to accounts payable are: A. Determining their existence and ensuring that they are recorded in the appropriate accounting

period.B. Determining their present value and ensuring that they are recorded in the appropriate accounting

period.C. Determining their existence and determining the correct amount.D. Determining the present value of the principal and the amount of the interest.

Difficulty: Medium

Level of Learning: ApplicationLevel of Learning: Knowledge


101.(p. 552)

Current liabilities normally are recorded at their: A. Present value.B. Cost.C. Maturity amount.D. Expected value.

Difficulty: Medium



102.(p. 559)

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party? A. Sales tax payable.B. Customer deposits.C. Employee insurance deductions.D. Federal income tax deductions.

Difficulty: DifficultDifficulty: Medium

Level of Learning: AnalysisLevel of Learning: Knowledge


103.(p. 551)

Classifying liabilities as either current or long-term helps creditors assess: A. Profitability.B. The relative risk of a firm's liabilities.C. The degree of a firm's liabilities.D. The amount of a firm's liabilities.




104.(p. 558)

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: A. A current liability.B. Revenue.C. Shareholders' equity.D. Paid-in capital.




105.(p. 558)

When a deposit on returnable containers is forfeited, the firm holding the deposit will experience: A. A decrease in cost of goods sold.B. An increase in current liabilities.C. An increase in accounts receivable.D. An increase in revenue.

Difficulty: DifficultDifficulty: Difficult



106.(p. 562)

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2010. At December 31, 2009, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2009, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2009, balance sheet, Branch should classify the notes as follows: A. $15,000,000 long-term and $3,000,000 current liabilities.B. $4,500,000 short-term and $13,500,000 current liabilities.C. $18,000,000 of current liabilities.D. $18,000,000 of long-term liabilities.


Level of Learning: AnalysisSpiceland - Chapter 12 #84

Topic: LO 4

107.(p. 554)

A discount on a noninterest-bearing note payable is classified in the balance sheet as: A. An asset.B. A component of shareholders' equity.C. A contingent liability.D. A contra liability.

Difficulty: Easy


Topic: LO 2

108.(p. 554)

The rate of interest printed on the face of a note payable is called the: A. Yield rate.B. Effective rate.C. Market rate.D. Stated rate.

Difficulty: Easy


Topic: LO 2

109.(p. 554)

The rate of interest that actually is incurred on a note payable is called the: A. Face rate.B. Contract rate.C. Effective rate.D. Stated rate.

Difficulty: Easy


Topic: LO 2

110.(p. 554)

On October 31, 2009, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky's effective interest rate on this loan is: A. More than the stated discount rate of 8%.B. Less than the stated discount rate of 8%.C. Equal to the stated discount rate of 8%.D. Unrelated to the stated discount rate of 8%.



Topic: LO 2

111.(p. 554)

Jane's Donut Co. borrowed $200,000 on January 1, 2009, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2011. In connection with this note, Jane's should report interest expense at December 31, 2009, in the amount of: A. $0.B. $24,000.C. $48,000.D. $50,880.

$200,000 × 12% × 12/12 = $24,000


Level of Learning: ApplicationSpiceland - Chapter 12 #89

Topic: LO 2

112.(p. 554)

What is the effective interest rate on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000? A. 12.36%.B. 12.00%.C. 11.46%.D. 3.00%.

$200,000 × 12% × 3/12 = $6,000$6,000/($200,000 - $6,000) = 3.09%3.09% × 12/3 = 12.36%


Level of Learning: AnalysisLevel of Learning: Application


113.(p. 554)

On September 1, 2009, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan is: A. 9.00%.B. 9.49%.C. 9.50%.D. 9.57%.

$100,000 × 9% × 8/12 = $6,000[$6,000/($100,000 - $6,000)] × 12/8 = 9.57%


Level of Learning: AnalysisLevel of Learning: AnalysisSpiceland - Chapter 12 #91

Topic: LO 2Topic: LO 7

114.(p. 554)

Universal Travel Inc. borrowed $500,000 on November 1, 2009, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2010. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2009, in the amount of: A. $8,000.B. $30,000.C. $5,000.D. $25,000.

$500,000 × 6% × 2/12 = $5,000



Topic: LO 2

115.(p. 554)

Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by Second Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this loan is: A. 9.28%B. 9.49%C. 9.50%D. 9.57%

$100,000 × 9% × 8/12 = $6,000$6,000/($100,000 - $6,000) = 6.38%3.38% × 12/8 = 9.57%



Topic: LO 2

116.(p. 554)

Oklahoma Oil Corp. paid interest of $785,000 during 2009, and the interest payable account decreased by $125,000. What was interest expense for the year? A. $890,000.B. $660,000.C. $555,000.D. $785,000.

Interest paid - decrease in payable = total interest expense785,000 - 125,000 = 660,000



Topic: LO 2

117.(p. 554)

On June 1, 2009, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2009? A. $525,000.B. $300,000.C. $495,000.D. $475,000.



Topic: LO 2

118.(p. 558)

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: A. Liabilities until the product or service is provided.B. A component of shareholders' equity.C. Long-term assets until the product or service is provided.D. Revenue upon receipt of the advance payment.

Difficulty: Easy


Topic: LO 3

119.(p. 557)

M Corp. has an employee benefit plan for compensated absences that gives employees 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, 2009, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2009. M's employees earn an average of $150 per day. In its December 31, 2009, 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.

The liability for compensated absences at December 31, 2009, is $30,000 for the 200 vacation days times $150 per day.

Difficulty: Easy


Topic: LO 3

120.(p. 552)

Which of the following generally is associated with accounts payable?

A. B. C. D.

Difficulty: Easy

Level of Learning: ComprehensionLevel of Learning: SynthesisSpiceland - Chapter 12 #98

Topic: LO 3

121.(p. 557)

B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2009, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2009. B's employees earn an average of $200 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is B required to report? A. $60,000.B. $84,000.C. $90,000.D. $144,000.

The liability for compensated absences at December 31, 2009, is $60,000 for the 300 vacation days times $200 per day. The key word in dealing with sick pay is the word "required". The problem asks what is the liability required at December 31, 2009. Since the accrual of sick pay is optional, B Corp. would not be required to accrue a liability for sick pay.

Difficulty: Medium


Topic: LO 3

122.(p. 558)

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2009 is as follows ($ in

millions): What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2009, balance sheet? A. $0.B. $80.C. $125.D. $170.

$110 + 195 - 180 - 45 = $80

Difficulty: Medium


Topic: LO 3

123.(p. 557)

On January 1, 2009, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2009, G's employees each earned an average of $800 per week. 500 vacation weeks earned in 2009 were not taken during 2009. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2010. What is the amount of G's 2010 wages expense related to 2009 vacation time? A. $0B. $420,000C. $400,000D. $420,000

(500 × $800) × 1.05% = $420,000

Difficulty: Medium


Topic: LO 3

124.(p. 559)

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: A. A debit to a revenue and a credit to a liability account.B. A debit to a revenue and a credit to an asset account.C. A debit to an asset and a credit to a revenue account.D. A debit to a liability and a credit to a revenue account.



Topic: LO 3

125.(p. 558)

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2009. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture? A. $0.B. $2,000.C. $10,000.D. $14,400.

($100,000 × 12%) ÷ 120% = $10,000



Topic: LO 3Topic: LO 6.

126.(p. 565)

In May of 2009, Raymond Company became involved in a penalty dispute with the Canadian Environmental Protectional Agency. At December 31, 2009, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2009 financial statements were issued, Raymond accepted an settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of: A. $770,000.B. $900,000.C. $970,000.D. $1,170,000.



Topic: LO 5

127.(p. 558)

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2009. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits? A. $0.B. $7,500.C. $9,000.D. $45,000.



Topic: LO 3

128.(p. 561)

Which of the following is not a current liability? A. Accounts payable.B. A note payable due in 2 years.C. Accrued interest payable.D. Sales tax payable.

Difficulty: Easy


Topic: LO 4

129.(p. 562)

Short-term obligations can be reported as long-term liabilities if: A. The firm has a long-term line of credit.B. The firm has tentative plans to issue long-term bonds.C. The firm intends to and has the ability to refinance as long-term.D. The firm has the ability to refinance on a long-term basis.

Difficulty: Easy



130.(p. 562)

Of the following, which typically would not be classified as a current liability? A. Estimated liability from cash rebate program.B. A long-term note payable maturing within the coming year.C. Rent revenue received in advance.D. A six-month bank loan to be paid with the proceeds from the sale of common shares.

Difficulty: Easy


Topic: LO 4

131.(p. 555)

Large, highly rated firms sometimes sell commercial paper: A. To borrow funds at a lower rate than through a bank.B. To earn a profit on the paper.C. To avoid paperwork.D. Because the interest rate is locked in by the Federal Reserve Board.

Difficulty: Medium


Topic: LO 2

132.(p. 561)

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? A. The long-term debt is callable by the creditor.B. The creditor has the right to demand payment due to a contractual violation.C. The long-term debt matures within the upcoming year.D. All of these require the current classification.

Difficulty: Medium


Topic: LO 4

133.(p. 561)

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt A. is callable by the creditor.B. is secured by adequate collateral.C. will be refinanced with stock.D. will be refinanced with debt.

Difficulty: Medium


Topic: LO 4

134.(p. 563)

On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2010. In February 2010, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet? A. $0B. $500,000C. $1,000,000D. $1,500,000

L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2009 balance sheet. The refinancing was completed before the issuance of the financial statements and meets both criteria (intent & financial ability) for the classification of the $1,000,000 as a long-term liability.

Difficulty: Medium


Topic: LO 4

135.(p. 574)

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: 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.




136.(p. 565)

Footnote disclosure is required for material potential losses when the loss is likely to occur: A. Only if the amount is known.B. Only if the amount is known or reasonably estimable.C. Unless the amount is not reasonably estimable.D. Even if the amount is not reasonably estimable.


Difficulty: EasyLevel of Learning: ApplicationLevel of Learning: Knowledge


137.(p. 570)

Gain contingencies usually are recognized in a company's income statement when: A. Realized.B. The amount can be reasonably estimated.C. The gain is reasonably possible and the amount can be reasonable estimated.D. The gain is probable and the amount can be reasonably estimated.




138.(p. 565)

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is: A. More likely than not and the amount of the loss is known.B. At least reasonably possible and the amount of the loss is known.C. At least reasonably possible and the amount of the loss can be reasonably estimated.D. Likely and the amount of the loss can be reasonably estimated.




139.(p. 565)

A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: A. The likelihood of a loss is unlikelyB. The incurrence of a loss is likely but amount cannot be estimated.C. The incurrence of a loss is likely and amount can be estimated.D. None of the above.




140.(p. 566)

Which of the following is a contingency that should be accrued? A. The company is being sued and a loss is unlikely and reasonably estimable.B. The company deducts life insurance premiums from employees' paychecks.C. The company offers a two-year warranty and the expenses can be reasonably estimated.D. It is likely that the company will receive $100,000 in settlement of a lawsuit.

Difficulty: Medium


Topic: LO 6

141.(p. 566)

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is: A. unlikely and the amount of the loss is known.B. not determinable and the amount of the loss is known.C. not determinable and the amount of the loss can be reasonably estimated.D. likely and the amount of the loss can be reasonably estimated.




142.(p. 569)

Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is: A. To disclose it in a footnote.B. To accrue a long-term liability.C. To accrue the liability and explain it in a footnote.D. To do nothing relative to the contingency.



Level of Learning: SynthesisSpiceland - Chapter 12 #120

Topic: LO 6

143.(p. 559)

Which of the following may create employer liabilities in connection with their payrolls? A. Employee withholding taxesB. Employee voluntary deductionsC. Employee fringe benefitsD. All of these are correct.

Difficulty: Easy


Topic: LO 3

144.(p. 567)

Accounting for costs of incentive programs for customer purchases: A. Requires probability estimation.B. Follows the matching principle.C. Is a loss contingency situation.D. All of these are correct.




145.(p. 566)

Providing a monetary rebate program for purchasing a product: A. Is accounted for similarly to product warranties.B. Creates an expense for the seller in the period of sale.C. Creates a contingent liability for the seller at the time of sale.D. All of these are correct.




Topic: LO 6

146.(p. 567)

The main difference between accounting for rebate and cash discount coupons is: 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 deferred until redemption of the coupon.D. There are no significant differences in accounting between the two.




147.(p. 567)

Which of the following entail essentially the same accounting treatment? A. Coupons for cash rebates and coupons for other premiums.B. Cents-off coupons and coupons for other premiums.C. Cents-off coupons and coupons for cash rebates.D. All of these are correct.




Topic: LO 6.

148.(p. 565)

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




Topic: LO 5

149.(p. 565)

Orange Co. cannot 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 likely possible, a loss contingency should be A. Disclosed but not accrued as a liability.B. Disclosed and accrued as a liabilityC. Accrued as liability but not disclosed.D. Neither accrued as a liability nor disclosed.




Topic: LO 5

150.(p. 565)

Red 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 expropriation is likely, a loss contingency should be A. Disclosed but not accrued as a liability.B. Disclosed and accrued as a liabilityC. Accrued as liability but not disclosed.D. Neither accrued as a liability nor disclosed.

Difficulty: Easy


Topic: LO 5

151.(p. 571)

Z Co. filed suit against W, Inc. in 2009 seeking damages for patent infringement. At December 31, 2009, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2010. Z should report this award in its 2009 financial statements, issued in March, 2010 as A. A receivable and unearned revenue of $40 million.B. A receivable and revenue of $40 million.C. A disclosure of a gain contingency of $40 million.D.

A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

CICA 3290.18 states that gain contingencies should not be recognized in the financial statements until realized. Adequate disclosure should be made in the footnotes but care should be taken to avoid misleading implications as to the likelihood of realization of the contingent gain.


Level of Learning: ApplicationLevel of Learning: Application


152.(p. 571)

When a gain contingency is likley and the amount of gain can be reasonably estimated, the gain should be: A. Reported in the income statement and disclosed.B. Offset against shareholders' equity.C. Disclosed, but not recognized in the income statement.D. Neither recognized in the income statement nor disclosed.




153.(p. 567)

Which of the following is a contingency that would most likely require accrual? A. Potential losses from extended warranties.B. Customer premium offers.C. Potential liability on a product where none have yet been sold.D. Sales tax payable.


Level of Learning: ApplicationLevel of Learning: Comprehension


154.(p. 567)

The cost of customer premium offers should be charged to expense: A. When the related product is sold.B. When the premium offer expires.C. Over the life cycle of the product to which the premium relates.D. When the premiums are claimed.




155.(p. 567)

The accounting concept that requires recognition of a liability for customer premium offers is A. Periodicity.B. Conservatism.C. Historical cost.D. The matching principle.




156.(p. 567)

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




157.(p. 566)

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: 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.




158.(p. 568)

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement? A. $0.B. $400,000.C. $800,000.D. $1,200,000.

[(12,000,000 × 40%)/3] × ($1.50 - $1.00) = $800,000




159.(p. 568)

Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet? A. $0.B. $150,000.C. $300,000.D. $450,000.

[(6,000,000 × 20%) - 900,000]/3 = 100,000 puzzles100,000 × ($3.50 - $2.00) = $150,000




160.(p. 566)

At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is: A. $5.3 million.B. $7.2 million.C. $10.6 million.D. $27.0 million.

$180 million × 4% = $7.2 million



Spiceland - Chapter 12 #138Topic: LO 2, 3

Topic: LO 6

161.(p. 568)

During 2009, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2009. At December 31, 2009, Deluxe should report a liability for unredeemed coupons of: A. $560,000.B. $1,050,000.C. $1,225,000.D. $1,750,000.

[($800,000 × 70%) - 350,000] × $5 = $1,050,000




In 2009, Holyoak Inc. offers a $20 cash rebate coupon to customers who purchased one of its new line of products. Holyoak sold 10,000 of these products during the year. By year end of 2009, 7,600 of the rebates had been claimed, and 7,100 had been paid. Holyoak's historical experience with such rebates indicates that 85% of customers claim the rebates.

Difficulty: DifficultLevel of Learning: Application


162.(p. 568)

What is the expense that Holyoak should report for its promotional rebates in its 2009 income statement? A. $142,000B. $152,000C. $170,000D. $200,000

This is the expected amount to be claimed from 2009 sales; i.e., $20 × 10,000 × .85.




163.(p. 568)

What is the rebate promotion liability that Holyoak should report in its December 31, 2009 balance sheet? A. $20,000B. $28,000C. $18,000D. None of these is correct.

This is (8,500 expected - 7,100 paid) × $20 = $28,000.




Always Late Airline (ALA) operates a frequent flyer program in which mileage credits are earned by its customers for traveling on the airline. Awards are issued to members at the 25,000 miles level, and all awards expire five years from the date earned. The airline's historical experience indicates that 80% of all travel awards will actually be redeemed.ALA accounts for its frequent flyer obligation on the accrual basis. ALA's liability for free travel at the beginning of 2009 was $28 million. The cost of free travel awards redeemed in 2009 was $19 million. The estimated cost of free travel earned for miles traveled in 2009 are $50 million.



164.(p. 568)

What is the expense that ALA should report for its frequent flyer program in its 2009 income statement? A. $40 millionB. $41 millionC. $50 millionD. $69 million

This is 80% of the $50 million cost of free travel awards earned.




165.(p. 568)

Assume the same facts as in question 142, except that $2 million in earned travel awards on ALA expired during 2009. What is the expense that ALA should report for its frequent flyer program in its 2009 income statement? A. $38 millionB. $40 millionC. $42 millionD. None of these is correct.

This is 80% of the $50 million cost of free travel awards earned.




166.(p. 568)

Assume the same facts as in question 142. What is the frequent flyer program liability that ALA should report in its December 31, 2009 balance sheet? A. $31 millionB. $40 millionC. $45 millionD. $49 million

This is the beginning liability of $28 million minus awards redeemed of $19 million + new awards accrued of $40 million = $49 million.




167.(p. 566)

In the current year, Hanna Company reported warranty expense of $190,000 and the warranty liability account increased by $20,000. What were warranty expenditures during the year? A. $190,000.B. $170,000.C. $210,000D. $0.




168.(p. 566)

Panther Co. had a warranty liability of $350,000 at the beginning of 2009, and $310,000 at end of 2009. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2009? A. $0.B. $1,960,000.C. $2,000,000.D. $2,040,000.

$350,000 + $2,000,000 - $310,000 = $2,040,000




169.(p. 566)

Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2008. In 2009, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2009 were $40 million. What was the balance in the warranty liability account as of December 31, 2009? A. $35,000.B. $425,000.C. $125,000.D. $480,000.

80 + 445 - 400 = 35




General Product Inc. shipped 100 million coupons in products it sold in 2009. The coupons are redeemable for thirty cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2010. There were 45 million coupons redeemed in 2009, and 30 million redeemed in 2010.



170.(p. 568)

What was General's coupon liability as of December 31, 2009? A. $7.5 million.B. $13.5 million.C. $16.5 million.D. $21.0 million.

100 million × $.30 × 70% = $21 million$21 million - (45 million × $.30) = $7.5 million




171.(p. 568)

What was General's coupon promotion expense in 2009? A. $30.0 million.B. $21.0 million.C. $13.5 million.D. $7.5 million.

100 million × $.30 × 70% = $21 million




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