Question 1:CACL-0078Need a hint?See Reference...A company receives an advance payment for special-order goods that are to be manufactured and delivered within 6 months. The advance payment should be reported in the company’s balance sheet as aDeferred charge.Contra asset account.Current liability.Noncurrent liability.This answer is correct. ASC Topic 605 specifically identifies deposits and prepayments for goods or services to be provided at a future time ("unearned revenues") as liabilities. In this case, the goods are to be manufactured and delivered within 6 months. Because the liability will be settled within the next year, it should be classified as current.

Question 2:CACL-0071Need a hint?See Reference...Which of the following is classified as an accrued liability?

Liability for federal unemployment taxes

Liability for employer's share of FICA taxes

Yes YesYes NoNo NoNo YesThis answer is correct. Accrued liabilities include expenses which have been incurred but not yet paid. Both federal unemployment tax and the employer’s share of FICA taxes represent the employer’s payroll tax expense which is incurred as employees earn wages, but which is only paid periodically. Therefore, both types of expense represent accrued liabilities.

Question 3:CACL-0085Need a hint?See Reference...Bell Co. is a defendant in a lawsuit that could result in a large payment to the plaintiff. Bell’s attorney believes that there is a 90% chance that Bell will lose the suit, and estimates that the loss will be anywhere from $5,000,000 to $20,000,000 and possibly as much as $30,000,000. None of the estimates are better than the others.  What amount of liability should Bell report on its balance sheet related to the lawsuit?$0$

5,000,000$20,000,000$30,000,000This answer is correct. The requirement is to determine the amount of liability that Bell should report on its balance sheet related to the lawsuit. In this case, ASC Topic 450 requires accrual of the lower limit of the estimate of probable loss, and disclosure of the possible amounts. Therefore, this answer is correct; Bell should accrue $5,000,000.

Question 4:AICPA.940522FAR-FAUnder state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during 2004. In its December 31, 2004 balance sheet, what amount should Acme report as accrued liability for unemployment claims?$1,000$1,500$2,000$3,000The wage limit on unemployment tax is $10,000. Thus, the total accrued liability, which is also the unemployment tax amount, is 5($10,000)(.02) = $1,000.

Question 5:CACL-0133Need a hint?See Reference...Hope Corporation prepares its financial statements in accordance with IFRS. Hope intends to refinance a $500,000 note payable due on March 1, year 2. The company expects the note to be refinanced for a period of five years. Under what circumstances can Hope report the note payable as a noncurrent liability on its December 31, year 1 statement of financial position?If Hope has the intent and ability to refinance before December 31, year 1.If Hope has executed an agreement to refinance prior to the issuance of the financial statements on March 31, year 2.If Hope has the intent and ability to refinance before the issuance of the financial statements on March 31, year 2.If Hope has executed an agreement to refinance by December 31, year 1.This answer is correct. IFRS requires that Hope have executed an agreement to refinance at the balance sheet date in order to classify the debt as a noncurrent

liability. Inasmuch as no agreement existed at the balance sheet date, the note payable must be classified as a current liability.

Question 6:CACL-0099Need a hint?See Reference...An expropriation of assets which is imminent and for which the amount of loss can be reasonably estimated should be

Accrued

Disclosed

No NoNo YesYes YesYes NoThis answer is correct because per ASC Topic 450, an estimated loss from contingencies shall be accrued and charged to income when it is probable that an asset has been impaired or a liability incurred and when the amount of the loss can be reasonably estimated. Both of these requirements are met by the expropriation of assets described in this question. Therefore, this loss contingency should be accrued. Additionally, the nature of the contingency should be disclosed in a note to the financial statements.

Question 7:CACL-0054Need a hint?See Reference...Willem Co. reported the following liabilities at December 31, year 1: 

Accounts payable—trade$ 750,000

Short-term borrowings 400,000Mortgage payable, current portion $100,000

3,500,000

Other bank loan, matures June 30, year 2

1,000,000

 The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, year 2, with the first principal payment due January 15, year 3.  Willem’s audited financial statements were issued February 28, year 2.  What amount should Willem report as current liabilities at December 31, year 1?$ 850,000$ 1,150,000$ 2,250,000$ 1,250,000

This answer is correct. Current liabilities are those liabilities expected to require the use of current assets or the creation of other current liabilities. Accounts payable--trade and short-term borrowings are classified as current liabilities because they are expected to be repaid within one year or the current operating cycle. The current portion of long-term debt for the mortgage payable of $100,000 should also be classified as a current liability because it is due and payable within one year. Therefore, this answer is correct because current liabilities are equal to $1,250,000 ($750,000 + $400,000 + $100,000). The $1,000,000 refinanced loan may be reclassified as a long-term liability.

Question 8:CACL-0110Need a hint?See Reference...Morgan Company determined that: (1) it has a material obligation relating to employees’ rights to receive compensation for future absences attributable to employees’ services already rendered, (2) the obligation relates to rights that vest, and (3) payment of the compensation is probable.  The amount of Morgan’s obligation as of December 31, year 1, is reasonably estimated for the following employee benefits:

Vacation pay

$100,000

Holiday pay

25,000

What total amount should Morgan report as its liability for compensated absences in its December 31, year 1 balance sheet?$0$ 25,000$100,000$125,000This answer is correct. A liability for compensated absences should be accrued if the obligation is attributable to employees’ services already rendered, the obligation relates to rights which vest or accumulate, payment is probable, and the amount is reasonably estimable. All four conditions are met. Per ASC Topic 710, both the vacation pay and holiday pay are considered compensated absences. Therefore, $125,000 ($100,000 + $25,000) should be accrued for compensated absences.

Question 9:CACL-0102Need a hint?See Reference...Tone Company is the defendant in a lawsuit filed by Witt in year 1 disputing the validity of a copyright held by Tone. At December 31, year 1, Tone determined that Witt would probably be successful against Tone for an estimated amount of $400,000. Appropriately, a $400,000 loss was accrued by a charge to income for

the year ended December 31, year 1.  On December 15, year 2, Tone and Witt agreed to a settlement providing for cash payment of $250,000 by Tone to Witt, and transfer of Tone’s copyright to Witt.  The carrying amount of the copyright on Tone’s accounting records was $60,000 at December 15, year 2.  What would be the effect of the settlement on Tone’s income before income tax in year 2?No effect.$ 60,000 decrease.$ 90,000 increase.$150,000 increase.This answer is correct. At 12/31/Y1, the contingent liability from the lawsuit met ASC Topic 450’s criteria for accrual (probable and reasonably estimable), so a loss and liability of $400,000 was recognized.  In year 2, the lawsuit was settled and the actual loss was $310,000 ($60,000 copyright transfer and $250,000 cash payment). This is a change in estimate which should be accounted for in the period of change per ASC Topic 250.  Therefore the $90,000 difference will be reflected in year 2 income.  The journal entry on 12/15/Y2 to record the settlement would be

Lawsuit liability400,000  

     Gain from settlement of lawsuit

 90,000

     Cash  250,00

0     Copyright   60,000

Question 10:CACL-0066Need a hint?See Reference...On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, year 2, the note was refinanced. How should Taylor report the note payable in its December 31, year 1 balance sheet?A current liability.A long-term liability.A long-term note receivable.A current note receivable.This answer is correct. The requirement is to identify how the note payable would be presented. A note is normally considered a current liability if it is due and payable in one year. However, if a company has both the intent and ability to refinance the debt on a long-term basis (ASC 470-10-45-14), the note can be classified as a long-term liability in the December 31, year 1, balance sheet. Therefore, this answer is correct.

Question 11:CACL-0098Need a hint?See Reference...Dell Company sells its products in reusable, expensive containers.  The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Dell accounts for the containers not returned within the time limit as being retired by sale at the deposit amount. Information for year 3. concerning the containers is as follows:

    Total    Held by customers at 12/31/Y2 from deliveries in

 

     Year 1 $ 50,000       Year 2  145,000 $195,0

00Delivered in year 3   $260,0

00Returned in year 3 from deliveries in:       Year 1 $ 30,000       Year 2    85,000       Year 3    95,000 $210,0

00

What amount should Dell report as a liability for returnable containers at December 31, year 3?$165,000$215,000$225,000$245,000This answer is correct. The solutions approach is to set up a T- account for the liability for returnable containers.

Deposit receipts are credited to the liability, and deposit refunds are debited to the liability.  In addition, the account is debited for forfeited deposits after the 2-year refund period expires.  In this case, the refund period for year 1 deliveries has

expired by 12/31/Y3.  Therefore, $20,000 ($50,000 – $30,000) of unclaimed year 1 deposits should be removed from the liability account and recorded as sales.

Question 12:CACL-0049Need a hint?See Reference...Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1:

Accounts payable$19,000

Bonds payable, due year 2

34,000

Deferred income tax liability

4,000

Discount on bonds payable

2,000

Dividends payable on 2/15/Y2

5,000

Income tax payable 9,000Notes payable, due 1/19/Y3

6,000

The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes.

In Gar’s December 31, year 1 balance sheet, the current liabilities total was$71,000$69,000$67,000$65,000This answer is correct. ASC 210-10-20 Glossary states that current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities. This means that generally, current liabilities are liabilities due within 1 year of the balance sheet date. Clearly, accounts payable ($19,000), dividends payable ($5,000) and income tax payable ($9,000) are current liabilities. Generally bonds payable are a long-term liability; however, since these bonds are due in year 2, they must be reported as a current liability at 12/31/Y1 ($34,000 face less $2,000 discount, or $32,000). Therefore, total current liabilities are $65,000 ($19,000 + $5,000 + $9,000 + $32,000). The deferred income tax payable ($4,000) is classified as a long-term liability because it is related to the noncurrent asset, property, plant, and equipment. Similarly, the notes payable ($6,000) are classified as long-term because they are due in year 3.

Question 13:

CACL-0135Need a hint?See Reference...Bryce Corp. signed an agreement with Casey, which requires that if Casey does not meet certain contractual obligations, Casey must forfeit land worth $100,000 to Bryce. Bryce’s accountants believe that Casey will not meet its contractual obligations, and it is probable Bryce will receive the land by the end of year 3. Bryce uses IFRS for reporting purposes. How should Bryce report the land in its December 31, year 2 financial statements?As investment property in the asset section of the balance sheet.As a contingent asset in the current asset section of the balance sheet.In a footnote disclosure if the economic benefits are probable.As a contingent asset and other comprehensive income for the period.This answer is correct. IFRS provides that a contingent asset is a possible asset that arises from past events, and is confirmed only by the occurrence of uncertain future events that are not within the control of the reporting entity. A contingent asset is not recognized, but it is disclosed in the notes to the financial statements if the economic benefits are probable.

Question 14:CACL-0058Need a hint?See Reference...On September 1, year 1, a company borrowed cash and signed a 2-year interest-bearing note on which both the principal and interest are payable on September 1, year 3. The company did not elect the fair value option for reporting this note. At December 31, year 2, the liability for accrued interest should beZero.For 4 months of interest.For 12 months of interest.For 16 months of interest.This answer is correct because although the interest does not have to be paid until September 1, year 3, proper accrual accounting requires that at the end of each year an adjusting entry be made to accrue that year’s interest expense. Therefore, at the end of year 1, 4 months’ interest would be accrued. At the end of year 2, an additional 12 months of interest would be accrued, which makes the total interest accrued as of December 31, year 2, equal 16 months.

Question 15:CACL-0064Need a hint?See Reference...

Bake Co.’s trial balance included the following at December 31, year 1: 

Accounts payable$80,000

Bonds payable, due year 2

300,000

Discount on bonds payable

15,000

Deferred income tax liability

25,000

 The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in year 2. What amount should be included in the current liability section of Bake’s December 31, year 2 balance sheet?$365,000$390,000$395,000$420,000This answer is correct. The requirement is to determine the amount that should be included in the current liability section of the balance sheet. The accounts payable and the bond payable are classified as current liabilities because they are due within the next 12 months. The bond payable is valued at its carrying value of $285,000 ($300,000 – $15,000 discount). The deferred income tax liability is classified as a current liability because it not related to an asset and it is expected to reverse in the next 12 months. This answer is correct because the amount of current liabilities is equal to $390,000 ($80,000 + $285,000 + $25,000).

Question 16:CACL-0077Need a hint?See Reference...A retail store sells gift certificates that are redeemable in merchandise. When the gift certificate was sold for cash, aDeferred revenue account should be decreased.Deferred revenue account should be increased.Revenue account should be decreased.Revenue account should be increased.This answer is correct. Per ASC Topic 605, revenue is recognized when it is both realized and earned. The cash received upon issuance of the gift certificates is not earned until the gift certificates are redeemed.

Question 17:

CACL-0068Need a hint?See Reference...Agee Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of the sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of April year 2 for the three salespersons in sales region 330 are as follows: Salesperson

Fixed salary

Net sales Commission rate

A$  5,000          

$100,000       

4%

B 7,000          200,000       

6%

C 9,000           300,000       

6%

Totals$21,000          

$600,000       

 

 For sales region 330, what total amount should Agee accrue for sales commissions payable at April 30, year 2?$13,000$14,000$34,000$35,000This answer is correct. The requirement is the total amount of sales commissions payable to be accrued on 4/30/Y2. No sales commissions are due to salesperson A because his commissions earned ($100,000 × 4% – $4,000) are less than his fixed salary ($5,000). Note that the excess of the fixed salary over commissions earned is not charged back against A.  Commissions totaling $14,000 are due to salespersons B and C as computed below. 

 Commissions earned

 Fixed salary paid

 Commissions payable

B($200,000 × 6%)

–7,000 =    5,000

C($300,000 × 6%)

–9,000 =     9,000

          $14,000

Question 18:CACL-0065Need a hint?

See Reference...Arno Corp.’s liability account balances at June 30, year 2, included a 10% note payable in the amount of $1,800,000. The note is dated October 1, year 1, and is payable in three equal annual payments of $600,000 plus interest. Arno does not elect the fair value option for reporting this financial liability. The first interest and principal payment was made on October 1, year 2. In Arno’s June 30, year 3 balance sheet, what amount should be reported as accrued interest payable for this note?$135,000$ 90,000$ 45,000$ 30,000This answer is correct. Accrued interest payable at 6/30/Y3 is interest which has been expensed but not yet paid. Interest was last paid on 10/1/Y1, so the accrued interest payable includes interest expense incurred from 10/1/Y2 through 6/30/Y3 (9 months). The original balance of the note payable was $1,800,000, but the 10/1/Y2 principal payment of $600,000 reduced this balance to $1,200,000. Therefore, the interest payable at 6/30/Y3 is $90,000 ($1,200,000 × 10% × 9/12).

Question 19:CACL-0108Need a hint?See Reference...In determining whether to accrue employees’ compensation for future absences, among the conditions that must be met are that the obligation relates to rights that

Accumulate

Vest

No NoNo YesYes NoYes YesThis answer is correct because per ASC 710, accrual of compensation for future absences is required if all of the following conditions exist: (1) obligation of employer to compensate employees arises from services already performed; (2) obligation arises from vesting or accumulation of rights; (3) probable payment of compensation; and (4) amount can be reasonably estimated.

Question 20:CACL-0073Need a hint?See Reference...A state requires quarterly sales tax returns to be filed with the sales tax bureau by the 20th day following the end of the calendar quarter. However, the state further requires that sales taxes collected be remitted to the sales tax bureau by the 20th day of the month following any month such collections exceed $500. These

payments can be taken as credits on the quarterly sales tax return.

Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state sales tax, which Taft collects and records as sales revenue. The sales taxes paid by Taft are charged against sales revenue. Taft pays the sales taxes when they are due. Following is a monthly summary appearing in Taft’s first quarter year 2 sales revenue account:

 Debit

Credit

January

$ —$10,600

February

600 7,420

March   — 9,540

 $600

$27,560

In its financial statements for the quarter ended March 31, year 2, Taft’s sales revenue and sales taxes payable would be

Sales revenue

Sales taxes payable

$27,560 $1,560$26,960 $ 600$26,000 $1,560$26,000 $ 960

This answer is correct. The amount reported for sales revenue should include amounts charged customers when inventory is sold, but should exclude amounts collected for sales taxes. To determine the correct amount for sales revenue, Taft must divide the total of sales and sales taxes by 100% plus the sales tax percentage (6%), as indicated below.

Month

Total  Percentage

Sales revenue

Jan.$10,600      

÷106%$10,000            

Feb.$ 7,420      

÷106%7,000            

March

9,540      ÷106%  9,000             

Total      $26,000            

 Sales taxes payable would include all sales taxes collected, less any sales taxes already remitted.

January sales taxes ($10,600 – $10,000)

$ 600

February sales taxes ($7,420 – 420

$7,000)March sales taxes ($9,540 – $9,000)

540

Total1,560

Less taxes remitted(600)

Sales taxes payable$ 960

Question 21:CACL-0090Need a hint?See Reference...Snelling Co. did not record an accrual for a contingent loss, but disclosed the nature of the contingency and the range of the possible loss. How likely is the loss?Remote.Reasonably possible.Probable.Certain.This answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency shall be accrued if the loss is both probable and reasonably estimable. If no accrual is made for a loss contingency because one or both of the conditions above are not met (as in this case), disclosure of the contingency shall be made where it is at least reasonably possible that a loss was incurred.

Question 22:AICPA.901122FAR-TH-FAWhich of the following is generally associated with payables classified as accounts payable?Periodic payment of interest

Secured by collateral

No NoNo YesYes NoYes YesAccounts payable is also labeled: accounts payable, trade. The accounts payable account is used only for routine trade payables, typically for purchases of inventory and supplies. Interest accrued is recorded in accrued interest payable, and secured debt is recorded in other specifically-labeled liability accounts.

Question 23:CACL-0107Need a hint?See Reference...In determining whether to accrue employees’ compensation for future absences, one of the conditions that must be met is that the employer has an obligation to make payment even if an employee terminates. This an example of a(n)Vested right.

Accumulated right.Contingent right.Estimable right.This answer is correct because vested rights are those rights which are not contingent on an employee’s future service; the employer has an obligation to make payment even if an employee terminates employment (ASC Topic 710).

Question 24:CACL-0006Need a hint?See Reference...On July 1, year 1, Cody Company obtained a $2,000,000, 180-day bank loan at an annual rate of 12%. The loan agreement requires Cody to maintain a $400,000 compensating balance in its checking account at the lending bank. Cody would otherwise maintain a balance of only $200,000 in this account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year, the effective interest rate on the borrowing is12.00%12.67%13.33%13.50%This answer is correct. The effective interest rate on a borrowing is the net annual interest cost divided by the net available proceeds from the borrowing. Cody’s gross annual interest cost is $240,000 ($2,000,000 x 12%). Cody is required to maintain a compensating balance of $400,000, which is $200,000 more than their normal balance of $200,000. Therefore, Cody earns incremental annual interest revenue of $12,000 ($200,000 x 6%) on the excess compensating balance. The net annual interest cost is $228,000 ($240,000 - $12,000). The net available proceeds from the borrowing is $1,800,000 ($2,000,000 loan less $200,000 excess compensating balance). Therefore, the effective annual interest rate is 12.67% ($228,000 ?? $1,800,000).

Question 25:CACL-0052Need a hint?See Reference...On September 1, year 1, a company borrowed cash and signed a 1-year interest-bearing note on which both the principal and interest are payable on September 1, year 2. How will the note payable and the related interest be classified in the December 31, year 1 balance sheet?

Note payable Accrued interest

Current liability Noncurrent

Note payable Accrued interest liability

Noncurrent liability

Current liability

Current liability Current liabilityNoncurrent liability

No entry

This answer is correct because current liabilities are those that are scheduled to mature within 1 year after the balance sheet date or within the entity’s operating cycle, whichever is longer. Since both the principal and accrued interest are due 9 months after the balance sheet date, they would be classified as current liabilities.

Question 26:CACL-0094Need a hint?See Reference...In December year 1, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, year 1 balance sheet, what amount should Mill report as estimated liability for coupons?$ 3,960$10,560$19,800$52,800This answer is correct. Mill expects 60% of the 110,000 coupons to be redeemed, resulting in redemptions of 66,000 coupons. Since five coupons must be presented to receive a toy, it is expected that 13,200 toys (66,000 / 5) will be mailed in the future as a result of December year 1 sales.  The net cost per toy for Mill is 30¢ (80¢ – 50¢), so the estimated liability for coupons is $3,960 (13,200 × 30¢).

Question 27:CACL-0097Need a hint?See Reference...Fulton Cereal Company inaugurated a new sales promotional program.  For every 10 cereal box tops returned to the company, customers receive an attractive prize.  Fulton estimates that only 30% of the cereal box tops reaching the consumer market will be redeemed. Additional information is as follows:

  Units     Amounts

Sales of cereal boxes2,000,000

$1,400,000

Purchase of prizes 36,000 18,000

Prizes distributed to customers

28,000  

At the end of its year, Fulton recognized a liability equal to the estimated cost of potential prizes outstanding.  What is the amount of this estimated liability?$ 4,000$16,000$18,000$42,000This answer is correct.  The estimated liability at the end of the year is the value of the prizes expected to be distributed less the value of the prizes actually distributed.  Only 600,000 box tops (2,000,000 box tops x 30%) are expected to be redeemed.  Because 10 box tops must be redeemed for 1 prize, 60,000 prizes (600,000 box tops/10) are expected to be distributed. Only 28,000 prizes have been distributed. Thus, 32,000 more prizes are expected to be distributed. Each prize cost $.50 ($18,000/36,000 prizes).  Therefore, Fulton has an estimated liability of $16,000 (32,000 prizes x $.50)

Question 28:CACL-0137Need a hint?See Reference...On September 30, World Co. borrowed $1,000,000 on a 9% note payable.  World paid the first of four quarterly payments of $264,200 when due on December 30.  In its December 31 balance sheet, what amount should World report as note payable?$735,800$750,000$758,300$825,800This answer is correct. Interest expense is calculated as $1,000,000 x 9% x 3/12 months = $22,500. The payment of $264,200 less $22,500 in interest is equal to $241,700, which is the amount of the payment which is applied to the principal balance of the note. Therefore, this answer is correct because the carrying value of the note on December 31 is $758,300 ($1,000,000 – $241,700)

Question 29:CACL-0062Need a hint?See Reference...Bloy Company pays all salaried employees on a biweekly basis.  Overtime pay, however, is paid in the next biweekly period. Bloy accrues salaries expense only at

its December 31 year-end.  Data relating to salaries earned in December year 1 are as follows:     •Last payroll was paid on 12/26/Y1, for the 2-week period ended 12/26/Y1. •Overtime pay earned in the 2-week period ended 12/26/Y1 was $4,200.  •Remaining work days in year 1 were December 29, 30, and 31, on which days there was no overtime.

 •The recurring biweekly salaries total $75,000.   Assuming a 5-day work week, Bloy should record a liability at December 31, year 1, for accrued salaries of$22,500$26,700$45,000$49,200This answer is correct. The liability for accrued salaries at 12/31/Y1 should include all salaries expense which has been incurred, but not yet paid. This would include the overtime pay earned by employees in the 2-week period ended 12/26/Y1 ($4,200), which will not be paid until the next pay period. Accrued salaries would also include the regular pay for the workdays since 12/26/Y1. There were three such workdays (December 29, 30, and 31). Since each biweekly pay period results in $75,000 regular pay for 10 workdays (two 5-day weeks), the accrued salaries for 3 workdays would be 3/10 of $75,000, or $22,500. Therefore, the total liability for accrued salaries at 12/31/Y1 is $26,700 ($22,500 + $4,200).

Question 30:CACL-0061Need a hint?See Reference...Bronson Apparel, Inc. operates a retail store and must determine the proper December 31, year 1 year-end accrual for the following expenses:   •The store lease calls for fixed rent of $1,000 per month, payable at the beginning of the month, and additional rent equal to 6% of net sales over $200,000 per calendar year, payable on January 31 of the following year.  Net sales for year 1 are $800,000.•Bronson has personal property subject to a city property tax.  The city’s fiscal year runs from July 1 to June 30 and the tax, assessed at 3% of personal property on hand at April 30, is payable on June 30. Bronson estimates that its personal property tax will amount to $6,000 for the city’s fiscal year ending June 30, year 2.  In its December 31, year 1 balance sheet, Bronson should report accrued expenses of$39,000$39,60

0$51,000$51,600This answer is correct. Because fixed rent is paid at the beginning of the month, there is no need to accrue any fixed rent expense on 12/31/Y1. However, additional rent of $36,000 [6% × ($800,000 - $200,000)] should be recorded as an accrued expense. Additionally, the property tax expense applicable from 7/1/Y1 to 12/31/Y1 is $3,000 ($6,000 × 6/12) and will not be paid until 6/30/Y2. Therefore, accrued expenses on 12/31/Y1 is $39,000 ($36,000 + $3,000).

Question 31:CACL-0074Need a hint?See Reference...Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income in excess of $200,000 before income tax but after deduction of the bonus. If income before income tax and bonus is $640,000 and the tax rate is 40%, the amount of the bonus would be$40,000$44,000$58,180$64,000This answer is correct. The bonus is equal to 10% of income in excess of $200,000 after deducting the bonus.  The solutions approach is to set up and solve an equation. 

B =.10 ($640,000 – $200,000 – B)

B =.10 ($440,000 – B)B =$44,000 – .10B1.10 B

=$44,000

B =$44,000 / 1.10 = $40,000

 Note that the tax rate (40%) is not used.  The bonus is based on income before, not after, taxes.

Question 32:CACL-0055Need a hint?See Reference...

Stark, Inc. has $1,000,000 of notes payable due June 15, year 2. At the financial statement date of December 31, year 1, Stark signed an agreement to borrow up to $1,000,000 to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Stark was providing. At the date of issue of the December 31, year 1 financial statements, the value of the collateral was $1,200,000 and was not expected to fall below this amount during year 2. On the December 31, year 1 balance sheet, Stark should classify$40,000 of notes payable as short-term and $960,000 as long-term obligations.$200,000 of notes payable as short-term and $800,000 as long-term obligations.$1,000,000 of notes payable as short-term obligations.$1,000,000 of notes payable as long-term obligations.This answer is correct. For a currently maturing liability to be classified as long-term, a company must show intent and ability to refinance the obligation (per ASC 470-10-45-14). Stark, Inc. intends to refinance the entire $1,000,000; however, Stark only has the ability to refinance $960,000 (.8 x $1,200,000) due to the financing agreement that limits borrowing to 80% of the value of collateral. Thus, $40,000 ($1,000,000 - $960,000) is considered short-term and $960,000 is considered long-term.

Question 33:CACL-0105Need a hint?See Reference...Gain contingencies are usually recognized in the income statement whenRealized.Occurrence is reasonably possible and the amount can be reasonably estimated.Occurrence is probable and the amount can be reasonably estimated.The amount can be reasonably estimated.This answer is correct. "Contingency" designates a claim or right whose existence is uncertain but which may become valid property rights eventually. Accountants have adopted a conservative policy in the area of gain contingencies. Per ASC Topic 450, gain contingencies should not be reflected in the accounts since to do so might be to recognize revenue prior to its realization.

Question 34:CACL-0100Need a hint?See Reference...In March year 2, an explosion occurred at Nilo Co.’s plant, causing damage to area properties.  By May year 2, no claims had yet been asserted against Nilo.  However, Nilo’s management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages.  Nilo’s $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo’s December 31, year 2 financial statements, for which the auditor’s fieldwork was completed in April year 3, how should this casualty be reported?

As a footnote disclosing a possible liability of $3,000,000.As an accrued liability of $300,000.As a footnote disclosing a possible liability of $300,000.No footnote disclosure or accrual is required for year 3 because the event occurred in year 2.This answer is correct. Per ASC Topic 450, a loss contingency should be accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. Although this contingency is reasonably estimable, it is not probable. Therefore, no loss is accrued. However, since the contingency is reasonably possible, it will be disclosed in the footnotes to the 12/31/Y2 financial statements. The possible loss will be disclosed as $300,000. The additional potential liability above the deductible would be covered by the insurance policy, and would not be a loss for Nilo.

Question 35:CACL-0059Need a hint?See Reference...A company has the following liabilities at year-end: 

Mortgage note payable; $16,000 due within 12 months$355,000

Short-term debt that the company is refinancing with long-term debt

175,000

Deferred tax liability arising from depreciation 25,000 What amount should the company include in the current liability section of the balance sheet?$0$ 16,000$ 41,000$191,000This answer is correct. Determine the amount to be included in the current liability section of the balance sheet. Although the mortgage note payable is a long-term liability, the amount due within the next 12 months, $16,000, should be reclassified to the current liability section of the balance sheet. The short-term debt that the company is refinancing with long-term debt is reclassified as a long-term liability if the company has both the intent and the ability to consummate the refinancing. Deferred tax assets and liabilities are classified as current or noncurrent based upon the related asset or liability account. For depreciation, the related asset account is a noncurrent asset, and the deferred tax liability is included in the noncurrent liability section of the balance sheet. Therefore, the only item which should be included in the current liability section of the balance sheet is the $16,000 of long-term debt that is due within the next 12 months.

Question 36:

CACL-0063Need a hint?See Reference...On October 1, year 1, a company borrowed cash and signed a 3-year interest-bearing note on which both the principal and interest are payable on October 1, year 4. The company did not elect to use the fair value option for reporting financial liabilities. At December 31, year 3, accrued interest shouldBe reported on the balance sheet as a current liability.Be reported on the balance sheet as a noncurrent liability.Be reported on the balance sheet as part of long-term notes payable.Not be reported on the balance sheet as a liability.This answer is correct. ASC 210-10-20 Glossary states that current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets. Current liabilities include liabilities coming due in 1 year. Since the principal and interest are both payable within the next year, the accrued interest should be reported on the balance sheet as a current liability.

Question 37:CACL-0067Need a hint?See Reference...On December 1, year 1, Paxton Co. had a note payable due on August 1, year 2. On January 20, year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, year 2. How should Paxton classify the note on its balance sheet at December 31, year 1?As a current liability because the financing agreement was signed after the balance sheet date.As a current liability because the lender is not expected to be financially capable of honoring the agreement.As a long-term liability because the agreement does not expire within one year.As a long-term liability because no violation of any provision in the financing agreement exists.This answer is correct. The requirement is to identify how Paxton should classify the note on its balance sheet at year-end. According to ASC 470-10-45-14, three conditions must be met to disclose the short-term obligation as a long-term liability: the agreement does not expire within one year, no violation of any provision in the financing agreement exists at the balance sheet date, and the lender is expected to be financially capable of honoring the agreement. This answer is correct because this item indicates that the lender is not expected to be financially capable of honoring the agreement.

Question 38:CACL-0086

Need a hint?See Reference...During year 2, a former employee of Dane Co. began a suit against Dane for wrongful termination in November year 1. After considering all of the facts, Dane’s legal counsel believes that the former employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being the most likely amount. Dane’s financial statements for the year ended December 31, year 1, will not be issued until February year 2. In its December 31, year 1 balance sheet, what amount should Dane report as a liability with respect to the suit?$0$1,000,000$1,300,000$1,500,000This answer is correct. If the loss is probable and reasonably estimable, the most likely amount should be recorded as a loss on the income statement, and a corresponding liability should be reported on the balance sheet. The most likely amount of the loss is $1,300,000.

Question 39:CACL-0060Need a hint?See Reference...On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31, year 1 balance sheet?

Alpha

Omega

Yes YesYes NoNo YesNo NoThis answer is correct. The requirement is to determine the amounts that should be reported for the two notes receivable. Notes that arise from customers in the normal course of business and are due in one year are classified as current liabilities and recorded at their maturity value. Notes that are due in more than one year are classified as long-term liabilities and are recorded at their present value (ASC 310-10-30-2 and 835-30-25-4). This answer is correct because the Alpha note should be recorded at $10,000, and the Omega note should be recorded at its present value of $8,570 (.857 x $10,000).

Question 40:

CACL-0050Need a hint?See Reference...Which of the following is generally associated with payables classified as accounts payable?

Periodic payment of interest

Secured by collateral

Yes YesYes NoNo YesNo NoThis answer is correct because in general, accounts payable are liabilities to suppliers that are incurred in the regular course of a company’s business. Short-term liabilities such as accounts payable do not usually provide for the periodic payment of interest or a security interest in collateral.

Question 41:CACL-0051Need a hint?See Reference...Office supplies were ordered by Dwyer Company from Orcutt Company on December 15, year 1. The terms of sale were FOB destination. Orcutt shipped the office supplies on December 28, year 1, and Dwyer received them on January 3, year 2. When should Dwyer record the account payable?December 15, year 1.December 28, year 1.December 31, year 1.January 3, year 2.This answer is correct because when goods are shipped FOB destination, title does not pass to the buyer until the goods have been delivered. The purchase and related liability will not be recorded by Dwyer until title passes, which is on the date the supplies are received—January 3, year 2.

Question 42:CACL-0134Need a hint?See Reference...On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?As a loss recorded in other comprehensive income.As a provision for loss reported in the balance sheet and a loss on the income statement.

As a contingent liability reported in the balance sheet and a loss on the income statement.In the footnotes to the financial statements as a contingency.This answer is correct. IFRS defines a provision as a liability that is uncertain in timing or amount. Provisions are made for estimated liabilities and recorded as a loss in earnings for the period if the outcome is probable and measurable.

Question 43:CACL-0141Need a hint?See Reference...Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements.  This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000.  Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000.  What amount should Finch report for the asset retirement obligation in this year’s balance sheet?$238,000$264,000$280,000$306,000This answer is correct. The asset retirement obligation (ARO) is recorded at its fair value in the period in which it is incurred. Subsequently, it is adjusted for revisions in estimates and the passage of time. The beginning balance in the asset retirement obligation account is $257,000. The fair value of the additional unconditional retirement obligations incurred during the year was $68,000 and increases the ARO. The $87,000 paid toward the settlement of obligations decreases the ARO. The $26,000 accretion expense is the expense recognized on the ARO due to the passage of time and will increase the ARO. ($257,000 + $68,000 — $87,000 + $26,000 = $264,000).

Question 44:CACL-0109Need a hint?See Reference...If the payment of compensation is probable, the amount can be reasonably estimated, and the obligation relates to rights that vest, employees’ compensation for future absences should beAccrued if attributable to employees’ services already rendered.Accrued if attributable to employees’ services not already rendered.Accrued if attributable to employees’ services whether already rendered or not.Recognized when paid.

This answer is correct because per ASC Topic 710, a liability for compensated absences should be accrued if the obligation is attributable to employees’ services already rendered, the obligation relates to rights which vest or accumulate, payment is probable, and the amount is reasonably estimable. This completes the conditions in ASC 710-10-25-1 which are necessary to accrue the liability.

Question 45:CACL-0053Need a hint?See Reference...Royal Corporation’s liabilities at 12/31/Y1 were as follows: 

Trade accounts payable$100,000

16% notes payable issued 11/1/Y1, maturing 7/1/Y2 30,00014% debentures payable issued 2/1/Y1; final installment due 2/1/Y5;balance at 12/31/Y1, including annual installment of $50,000 due 2/1/Y2

300,000

 $430,000

 Royal’s 12/31/Y1, financial statements were issued on 3/31/Y2.  On 1/5/Y2 the entire $300,000 balance of the 14% debentures was refinanced by issuance of a long-term obligation.  In addition, on 3/1/Y2, Royal consummated a noncancelable agreement with the lender to refinance the 16% note payable on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of any of the agreement’s provisions. The total amount of Royal’s short-term obligations that may properly be excluded from current liabilities at 12/31/Y1 is$0$30,000$50,000$80,000This answer is correct. Per ASC 470-10-45-14, an enterprise may exclude a short-term obligation from current liabilities only if (1) it intends to refinance the obligation on a long-term basis and (2) it demonstrates an ability to consummate the refinancing. The $50,000 current installment of the 14% debentures qualify for exclusion because those debentures were actually refinanced on a long-term basis. When a financing agreement is used to provide evidence of ability to consummate, the agreement must: be noncancelable, be long-term, and possess readily determinable terms. In addition, the company must not be in violation of the agreement, and both the lender and investor must be financially capable of honoring the agreement. Since all these requirements are met by the described financing agreement, the $30,000 note payable may also be excluded from current liabilities. Therefore, $80,000 would be properly excluded.

Question 46:CACL-0076Need a hint?See Reference...Jackson Corporation provides an incentive compensation plan under which its president is to receive a bonus equal to 10% of Jackson’s income in excess of $100,000 before deducting income tax but after deducting the bonus. If income before income tax and the bonus is $320,000, the amount of the bonus should be$44,000$32,000$22,000$20,000This answer is correct. Before multiplying by 10%, $100,000 and the amount of the bonus must be deducted from $320,000. The bonus can be calculated by setting up the following equation. 

B =10% ($320,000 – $100,000 – B)

B =$22,000 – .1B1.1B

=$22,000

B =$20,000 Thus the bonus is $20,000.

Question 47:CACL-0095Need a hint?See Reference...Baker Co. sells consumer products that are packaged in boxes.  Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year.  The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses.  What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?$0$5,000$20,000$25,000This answer is correct. The requirement is to determine the amount that should be accrued as an estimated liability.  The estimated liability at the end of the current

year is calculated as follows:  boxes sold 100,000 × 50% estimated to be redeemed = 50,000 box tops estimated to be redeemed. Since 40,000 box tops have been redeemed, this leaves an estimated 10,000 box tops to be redeemed.  It takes 2 box tops and $1 to receive the unbreakable glass. Therefore, 5,000 (10,000 ÷ 2) unbreakable glasses are estimated to be redeemed. The cost of the glasses is $2.00 each, and 5,000 units × $2.00 = $10,000, which is the estimated cost of the glasses.  However, the customer must pay $1.00 per glass, so the estimated liability is $5,000 ($10,000 cost less $5,000 customer payment), and this answer is correct.

Question 48:CACL-0075Need a hint?See Reference...After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For year 1, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone’s bonus for the year year 1?$12,000$15,000$25,000$32,000This answer is correct because the bonus is equal to $12,000. To calculate the bonus, let x = Bonus. 

x =.25 [($160,000 – x) – $100,000]

x =.25 ($60,000 – x)x =$15,000 – .25x1.25x

=$15,000

x =$12,000

Question 49:CACL-0111Need a hint?See Reference...The following information pertains to Rik Co.’s two employees:

Name

Weekly salary

Number of weeksworked in year 2

Vacation rightsvest or accumulate

Ryan

$800 52 Yes

Todd

600 52 No

Neither Ryan nor Todd took the usual 2-week vacation in year 2.  In Rik’s December 31, year 2 financial statements, what amount of vacation expense and liability should be reported?$2,800$1,600$1,400$0This answer is correct. ASC 710-10-25-1 states that accrual of a liability for future vacation pay is required if all of the conditions below are met.

1.Obligation arises from employee services already performed.

2.Obligation arises from vesting or accumulation of rights.

3.Payment is probable.4.Amount can be reasonably estimated.

These criteria are met for Ryan but not for Todd since Todd’s rights do not vest or accumulate.  Rik Co. would record $1,600 ($800 per week x 2 weeks vacation) as an expense and liability for future vacation pay owed to Ryan.

Question 50:CACL-0101Need a hint?See Reference...On March 1, year 1, a suit was filed against Dean Company for patent infringement. Dean’s legal counsel believes an unfavorable outcome is probable, and estimates that Dean will have to pay between $500,000 and $900,000 in damages.  However, Dean’s legal counsel is of the opinion that $600,000 is a better estimate than any other amount in the range.  The situation was unchanged when the December 31, year 1 financial statements were released on February 24, year 2.  How much of a liability should Dean report on its balance sheet at December 31, year 1 in connection with this suit?$0$500,000$600,000$900,000This answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency should be accrued only if it is probable that a liability exists at the balance sheet date and if the loss is reasonably estimable.  The contingency meets

the “probable” requirement.  In addition, the best estimate of the loss is $600,000. Therefore, a contingent loss of $600,000 should be reported on December 31, year 1.

Question 51:CACL-0057Need a hint?See Reference...Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?$0$100,000$400,000$500,000This answer is correct. The requirement is to determine the amount of short-term liability that should be presented on the balance sheet. ASC 470-10-45-14 allows classification of short-term liabilities expected to be refinanced to be classified as noncurrent assuming that the short-term liabilities do not arise from the normal course of business (e.g., accounts payable and accrued liabilities). Therefore this answer is correct because the $400,000 may be reclassified as noncurrent.

Question 52:CACL-0092Need a hint?See Reference...A new product introduced by Maude Corporation carries a 2-year warranty against defects. The estimated warranty costs related to dollar sales are as follows:

Year of sale

3%

Year after sale

5%

Sales and actual warranty expenditures for the years ended December 31, year 1 and year 2 are as follows:      

Sales Actual warranty expenditures

Year 1

$400,000

$10,000

Year 2

  500,000

  35,000

What amount should Maude report as its estimated warranty liability as of December 31, year 2?$ 2,000$12,000$27,000$37,000This answer is correct. The solutions approach is to prepare a T- account for the liability.  The warranty liability is the estimated warranty expense less the actual warranty expenditures.  Maude’s estimated warranty is 8% (3% + 5%) of sales.

 Therefore, Maude should report $27,000 as warranty liability.

Question 53:CACL-0088Need a hint?See Reference...A loss contingency for which the amount of loss can be reasonably estimated should be accrued when the occurrence of the loss is

Reasonably possible

Remote

Yes NoYes YesNo NoNo YesThis answer is correct because ASC Topic 450 requires accrual of a loss contingency only if both of the following conditions are met: (1) the future losses are probable and (2) the loss amount can be reasonably estimated. Loss contingencies that do not meet one or both of these criteria, but that are at least reasonably possible should be disclosed, but not accrued. Loss contingencies that have only a remote possibility of occurrence are generally not even disclosed.

Question 54:CACL-0103Need a hint?See Reference...

Abbot Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant.  Abbot’s lawyer states that it is probable that Abbot will lose the suit and be found liable for a judgment costing Abbot anywhere from $500,000 to $2,500,000. However, the lawyer states that the most probable cost is $1,000,000. As a result of the above facts, Abbot should accrueA loss contingency of $500,000 and disclose an additional contingency of up to $2,000,000.A loss contingency of $1,000,000 and disclose an additional contingency of up to $1,500,000.A loss contingency of $1,000,000 but not disclose any additional contingency.No loss contingency but disclose a contingency of $500,000 to $2,500,000.This answer is correct because ASC Topic 450 requires that estimated losses from loss contingencies be accrued if the contingency is probable (as opposed to reasonably possible or remote) and the amount of loss can be reasonably estimated. ASC Topic 450 states that a range of loss rather than an estimate of a single loss amount is a basis for recording a probable loss. Furthermore, the loss should be recorded at the best estimate within the range. If there is no best estimate, one should use the minimum. The excess of the recorded amount within the range should be disclosed. Accordingly, a $1,000,000 loss contingency should be recorded in the accounts, because the lawyer stated that the most probable loss was $1,000,000. Additionally, $1,500,000 should be disclosed as a possible contingency because the range of the possible loss was up to $2,500,000.

Question 55:CACL-0089Need a hint?See Reference...Wyatt Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount.  The loss accrual should beZero.The maximum of the range.The mean of the range.The minimum of the range.This answer is correct. Per ASC Topic 450, a loss contingency should be accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. This loss must be accrued because it meets both criteria. ASC Topic 450 requires that when some amount within an estimated range is a better estimate than any other amount in the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the amount at the low end of the range is accrued and the amount at the high end is disclosed.

Question 56:

CACL-0093Need a hint?See Reference...Bold Company estimates its annual warranty expense at 2% of annual net sales. The following data are available:

Net sales for year 2 $4,000,000    Warranty liability account:  December 31, year 1

$     60,000 credit

Warranty payments during year 2        50,000 debit

After recording the year 2 estimated warranty expense, the warranty liability account would show a December 31, year 2 balance of$10,000$70,000$80,000$90,000This answer is correct. The solutions approach is to prepare a T- account for the liability.  The estimated warranty expense is 2% of annual net sales.  Therefore, the liability account is credited for $80,000 (2% × $4,000,000) in year 2. Since $50,000 of warranty expenditures were made during year 2, the ending balance in the liability account is $90,000.

Question 57:CACL-0091Need a hint?See Reference...The following information pertains to a fire insurance policy in effect during calendar year 1, covering Vail Co.’s inventory:

Face amount of policy

$800,000

Deductible clause50,000Amount of premium

4,000

Coinsurance 80%

clause

Vail’s inventory averages $1,000,000 uniformly throughout the year. Vail’s income tax rate is 40%. How much of a contingent liability should Vail accrue at December 31, year 1, to cover possible future fire losses?$0$ 30,000$ 46,000$120,000This answer is correct. The requirement is to determine the amount Vail should accrue as a contingent liability at 12/31/Y1 to cover possible future fire losses. This answer is correct because per ASC Topic 450, a contingent liability shall only be accrued if the likelihood of occurrence is probable and the amount of the loss can be reasonably estimated. An event such as a possible future fire loss is not considered probable at 12/31/Y1 based on the information given nor can an amount of the loss from such an event be reasonably estimated. Thus, an accrual at 12/31/Y1 is not required.

Question 58:CACL-0083Need a hint?See Reference...Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall’s first two years in business, it made the following sales and incurred the following warranty repair costs: Year 1  

Total sales$250,000

Total repair costs incurred

4,500

Year 2  

Total sales$300,000

Total repair costs incurred

5,000

 What amount should Wall report as warranty expense for year 2?$1,000$5,000$5,900$6,000

This answer is correct. Warranty expense is estimated at 2% of net sales each year. Warranty expense in Year 2 is calculated as $6,000 (2% × $300,000 sales).

Question 59:CACL-0096Need a hint?See Reference...Blake Foods Corporation mails coupons to consumers which may be presented by a stated expiration date at retail food stores to obtain discounts on certain Blake products.  Retailers are reimbursed for the face value of coupons redeemed, plus 10% of coupon value as compensation for handling costs.  Blake honors requests for coupon redemption by retailers received up to 3 months after the consumer expiration date. In Blake’s experience, 60% of the coupons issued ultimately are redeemed.  Information with respect to the two separate series of coupons issued by Blake during year 1 is as follows:

  Series A Series B Consumer expiration date June 30,

year 1December 31, year 1

Total face value of coupons issued $100,000 $200,000Total payments to retailers as of December 31, year 1

$ 60,500 $ 40,500

What amount should Blake report as a liability for unredeemed coupons at December 31, year 1?$0$79,500$91,500$97,000This answer is correct. Two separate series of coupons were mailed to consumers during year 1.  The first series expired on 6/30/Y1 and the problem indicated that Blake honors requests for coupon redemption by retailers only up to 3 months after the consumer expiration date. Therefore, no liability should be accrued for the Series A coupons. Payments of $40,500 have been made to retailers on the Series B coupons which expired on 12/31/Y1. To find the 12/31/Y1 liability, the $40,500 payments must be compared with the total expected payments to be made on the Series B coupons.  Since Blake’s experience is that 60% of the coupons will be redeemed, $120,000 face value of Series B coupons are expected to be redeemed (60% × $200,000).  Additionally, $12,000 is expected to be paid to retailers for handling ($120,000 × 10%).  Thus, an accrued liability of $91,500 is required ($132,000 expected total payments – $40,500 payments to date).

Question 60:CACL-0056Need a hint?See Reference...

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?Long-term liabilities of $130,000.Current liabilities of $130,000.Current liabilities of $30,000, long-term liabilities of $100,000.Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.This answer is correct. Accounts payable is classified as a current liability. Although the construction loan was originally due at year-end, if the company has both the intent and ability to refinance with long-term debt, the $100,000 construction loan may be reclassified at year-end as a long-term liability. Therefore, this answer is correct because current liabilities of $30,000 and long-term liabilities of $100,000 should be reported on the balance sheet.

Question 61:CACL-0104Need a hint?See Reference...Grim Corporation operates a plant in a foreign country.  It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reportedAs a valuation allowance as a part of stockholders’ equity.As a fixed asset valuation allowance account.In the notes to the financial statements.In the income statement.This answer is correct. A gain contingency results from the plant expropriation because the amount of compensation to be received from the foreign government exceeds the carrying amount of the plant. Per ASC Topic 450, “contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization.” Furthermore, “adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization.”

Question 62:CACL-0139Need a hint?See Reference...Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan.  Which of the following statements is correct?Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.Good Neighbor Financing will assume the responsibility of collecting the receivables.Milton will retain control of the receivables.

Good Neighbor Financing will take title to the receivables and will return title to Milton after the loan is paid.This answer is correct because pledging accounts receivable is treated as a borrowing with the accounts receivable used as collateral for the loan. Therefore, Milton retains control of the receivables.

Question 63:CACL-0138Need a hint?See Reference...Conlon Co. is the plaintiff in a patent-infringement case.  Conlon has a high probability of a favorable outcome, and can reasonably estimate the amount of the settlement.  What is the proper accounting treatment of the patent infringement case?A gain contingency for the minimum estimated amount of the settlement.A gain contingency for the estimated probable settlement.Disclosure in the notes only.No reporting is required at this time.This answer is correct. US GAAP does not permit the recognition of contingency gains in the financial statements. Therefore, this answer is correct because the contingency gain would be reported only in the notes to the financial statements.

Question 64:CACL-0081Need a hint?See Reference...Fell, Inc. operates a retail grocery store that is required by law to collect refundable deposits of $.05 on soda cans. Information for year 2 follows: Liability for returnable deposits—12/31/Y1

$150,000

Cans of soda sold in year 210,000,000

Soda cans returned in year 211,000,000

On February 1, year 2, Fell subleased space and received a $25,000 deposit to be applied toward rent at the expiration of the lease in year 6. In Fell’s December 31, year 2 balance sheet, the current and noncurrent liabilities for deposits were Current

Noncurrent

$125,000

$0

$100,000

$ 25,000

$100,000

$0

Current

Noncurrent

$ 25,000

$100,000

This answer is correct. The 12/31/Y2 liability for returnable deposits can be determined by setting up a T-account.

Deposits (10,000,000 × $.05 = $500,000) are debited to cash and credited to the liability account, while deposits returned (11,000,000 × $.05 = $550,000) are debited to the liability account and credited to cash. The 12/31/Y2 balance of $100,000 is a current liability since the outstanding deposits are expected to be returned within the next year.  The year 6 rent collected in advance ($25,000) is a noncurrent liability since the obligation will not be satisfied within 1 year of the balance sheet date.

Question 65:CACL-0087Need a hint?See Reference...Which of the following contingencies should generally be accrued on the balance sheet as a liability when the occurrence of the contingent event is reasonably possible and its amount can be reasonably estimated?

Expropriation of assets

Product warranty obligation

No NoNo YesYes YesYes NoThis answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency should be accrued if the likelihood of occurrence is probable and the amount of the loss can be reasonably estimated. In this case, the likelihood of occurrence is only reasonably possible, so neither would be accrued.

Question 66:CACL-0084Need a hint?See Reference...An estimated loss from a loss contingency that is probable and for which the amount of the loss can be reasonably estimated shouldNot be accrued but should be disclosed in the notes to the financial statements.Be accrued by debiting an appropriated retained earnings account and crediting a

liability account or an asset account.Be accrued by debiting an expense account and crediting an appropriated retained earnings account.Be accrued by debiting an expense account and crediting a liability account or an asset account.This answer is correct because ASC Topic 450 requires that an estimated loss from a contingency be accrued by a charge to income and the recording of a liability if the loss is both probable and reasonably estimable. Loss contingencies that do not meet one or both of these criteria, but that are at least reasonably possible should be disclosed, but not accrued.

Question 67:CACL-0070Need a hint?See Reference...Pak Co.’s professional fees expense account had a balance of $82,000 at December 31, year 1, before considering year-end adjustments relating to the following:     •Consultants were hired for a special project at a total fee not to exceed $65,000.  Pak has recorded $55,000 of this fee based on billings for work performed in year 1.

 •The attorney’s letter requested by the auditors dated January 28, year 2, indicated that legal fees of $6,000 were billed on January 15, year 2, for work performed in November year 1, and unbilled fees for December year 1 were $7,000.

   What amount should Pak report for professional fees expense for the year ended December 31, year 1?$105,000$ 95,000$ 88,000$ 82,000This answer is correct. The professional fees expense amount of $82,000 must be adjusted if any year 1 expenses have been incurred, but not yet paid or recorded (accrued expenses). No adjustment is necessary for the consulting work since Pak has recorded $55,000 of expense based on work performed in year 1. However, an adjustment must be made for attorney fees since at 12/31/Y1 neither the fees for November year 1 ($6,000) or December year 1 ($7,000) have been recorded. These amounts must be recorded as an expense and liability at 12/31/Y1, resulting in total professional fees expense of $95,000 ($82,000 + $6,000 + $7,000).

Question 68:CACL-0072Need a hint?See Reference...

Bloy Corp.’s payroll for the pay period ended October 31, year 1, is summarized as follows:

Department payroll

Totalwages

Federal incometax withheld

Amount of wages subject to              payroll taxes                      

      FICA Unemployment

Factory$ 60,000      

$ 7,000            

$56,000          

$18,000         

Sales 22,000      3,000            

16,000          

2,000         

Office   18,000         2,000             

  8,000           

      —          

 $100,000      

$12,000            

$80,000          

$20,000         

 Assume the following payroll tax rates: FICA for employer and employee

7% each

Unemployment 3% What amount should Bloy accrue as its share of payroll taxes in its October 31, year 1 balance sheet?$18,200$12,600$11,800$ 6,200This answer is correct. The employer’s payroll taxes include the employer’s share of FICA taxes (7% x $80,000 = $5,600) and the unemployment taxes (3% x $20,000 = $600). Therefore, Bloy should accrue $6,200 ($5,600 + $600) as its share of payroll taxes in the 10/31/Y1 balance sheet. Note that Bloy would report an additional 10/31/Y1 liability of $5,600 for the employees’ share of FICA taxes and $12,000 for federal income taxes, which would be withheld from employees’ paychecks.

Question 69:CACL-0069Need a hint?See Reference...For the week ended June 30, year 1, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking

account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30, year 1?$21,400$22,800$23,900$25,300This answer is correct. Net payroll is gross wages paid minus taxes taken out for the employees.  The federal income tax of $2,500 was given and the FICA tax was given as 7% to both employer and employee. FICA tax is calculated by multiplying the gross wages ($20,000) by 7% to get $1,400.  This $1,400 is due both from the employer and the employee.  Net payroll will equal $20,000

Gross wages

 – 2,500

Federal income tax

  – 1,400

Employee FICA tax

$16,100

 

 Payroll taxes due are  $2,500

Federal income tax

+ 1,400

Employee FICA tax

+ 1,400

Employer FICA tax

 $5,300

 

 Free Co. will have to deposit $21,400 ($16,100 + $5,300) in order to cover both the net payroll and the related payroll taxes.

Question 70:CACL-0106Need a hint?See Reference...On November 1, year 1, Beni Corp. was awarded a judgment of $1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant, and it is expected that the appeal process will be completed by the end of year 2. Beni’s attorney feels that it is highly probable that an award will be upheld on appeal, but that the judgment may be reduced by an estimated 40%. In addition to footnote disclosure, what amount should be reported as a receivable in Beni’s balance sheet at December 31, year 1?

$1,500,000$ 900,000$ 600,000$0This answer is correct. ASC Topic 450 states that gain contingencies are not reflected in the accounts until realized. Since the case is unresolved at 12/31/Y1 none of this contingent gain should be recorded as revenue in year 1.

Question 71:CACL-0082Need a hint?See Reference...Reserves for contingencies for general or unspecified business risks shouldBe accrued in the financial statements and disclosed in the notes thereto.Not be accrued in the financial statements but should be disclosed in the notes thereto.Not be accrued in the financial statements and need not be disclosed in the notes thereto.Be accrued in the financial statements but need not be disclosed in the notes thereto.This answer is correct because ASC Topic 450 states that no accrual, loss, or disclosure should be made for general or unspecified business risks and that they need not be disclosed. An estimated loss for a loss contingency shall be accrued only if the loss is probable and the amount of the loss is reasonably estimated. General or unspecified business risks do not meet these conditions.

Question 72:CACL-0136Need a hint?See Reference...Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions.  The practice follows the accounting concept ofConsistency.Going concern.Matching.Substance over form.This answer is correct because estimating uncollectible accounts expense based on net credit sales is an application of the matching principle where expenses are matched to the related revenue earned.