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Exam 13: Current Liabilities and Contingencies

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Question 61

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

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A loss contingency is an existing situat...

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Question 62

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State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages.

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Question 63

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What is the expense that ALA should report for its frequent flyer program in its 2009 income statement?

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 (b) Third Bank's receivable on December 1, 2009. 2. Prepare the journal entries by both firms to record all subsequent events related to the note through March 31, 2010. 3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entries to record the issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2009. What would be the effective interest rate?

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.

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

Which of the following is not a liability?

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

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? $\begin{array} { l l } \text { Products sold } & 2,000,000 \text { boxes } \\\text { Prizes purchased } & 240,000 \\\text { Coupons redeemed } & 560,000\end{array}$

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.

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.

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: Required: Record all necessary journal entries for the premium offer for 2009. $\begin{array} { l l } \text { Products sold } & 2,000,000 \text { boxes } \\\text { Prizes purchased } & 240,000 \\\text { Coupons redeemed } & 560,000\end{array}$

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

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 company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

Which of the following entail essentially the same accounting treatment?

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:

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

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?

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?