ch13 current liab and contigencies

8/13/2019 Ch13 Current Liab and Contigencies

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CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

IFRS questions are avaia!e at t"e en# o$ t"is %"a&ter'

TRUE(FALSE)Con%e&tua

Ans*er No' Des%ri&tionF 1. Zero-interest-bearing note payable.F 2. Dividends in arrears.T 3. Examples of unearned revenues.T 4. eporting dis!ount on "otes #ayable.F $. %urrently maturing long-term debt.F &. Ex!luding s'ort-term debt refinan!ed.T (. )!!ounting for sales tax !olle!ted.F *. )!!ounting for si!+ pay.T ,. o!ial se!urity taxes as liabilities.F 1. Definition of a!!umulation rig'ts.T 11. e!ogni/ing !ompensated absen!es expense.F 12. )!!ruing estimated loss !ontingen!y.T 13. Dis!losing gain !ontingen!ies.F 14. ales-type 0arranty profit.T 1$. Fair value of asset retirement obligation.T 1&. eporting a litigation liability.F 1(. Expense 0arranty approa!'.F 1*. )!id-test ratio !omponents.F 1,. )ffe!t on !urrent ratio.T 2. eporting !urrent liabilities.

+ULTIPLE CHOICE)Con%e&tua

Ans*er No' Des%ri&tiond 21. Definition of a liability.d 22. "ature of !urrent liabilities.a 23. e!ording of a!!ounts payable.a 24. %lassifi!ation of notes payable.b 2$. %lassifi!ation of dis!ounts on notes payable.d 2&. dentify !urrent liability.! 2(. onds reported as !urrent liability.

d 2*. dentify item 0'i!' is not a !urrent liability.! 2,. Dividends reported as !urrent liability.d 3. %lassifi!ation of sto!+ dividends distributable.! 31. dentify item 0'i!' is not a !urrent liability.d 32. dentify !urrent liability.! 33. %'ara!teristi! of !urrent liability.d 34. Definition of a liability.b 3$. mportan!e of liability se!tion of balan!e s'eet.a 3&. %urrent liabilities and operating !y!le.


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Test Ban, $or Inter-e#iate A%%ountin./ Fourteent" E#ition

+ULTIPLE CHOICE)Con%e&tua 0%ont'

Ans*er No' Des%ri&tion

a 3(. #resent value and !on!ept of a liability.! 3*. Zero-interest-bearing notes payable.d 3,. %allable debt reporting.d 4. %ondition to ex!lude s'ort-term obligation.a 41. )bility to !onsummate refinan!ing of s'ort-term debt.b 42. Dis!losure of preferred dividends not de!lared.! 43. Example of unearned revenue.d 44. 'ort-term obligations expe!ted to be refinan!ed.d 4$. )bility to !onsummate refinan!ing of s'ort-term obligations.d 4&. Determine 0'at is a liability.a 4(. %lassifi!ation of sales taxes.d 4*. Dis!losure for s'ort-term debt refinan!ed.b 4,. ested rig'ts vs. a!!umulated rig'ts.d #$. Dedu!tions in !omputing net pay.d $1. Employers payroll tax expense.d $2. )!!rual of a liability for !ompensated absen!es.! $3. )!!rual of a liability for !ompensated absen!es.d $4. )!!rual of a liability for !ompensated absen!es.d $$. %ompensated absen!es.d $&. e5uirements for !ompensated absen!es a!!rual.b $(. %ondition for si!+ pay a!!rual.! $*. #ayroll tax dedu!tion.d $,. Definition of a !ontingen!y.b &. e!ording !ontingent liability.a &1. Example of !ontingent liability.d &2. e!ording !ontingent liability.

d &3. Dis!losure of a gain !ontingen!y.d &4. Dis!losure of !ontingen!ies.b &$. )!!rual of loss !ontingen!y.a &&. 6itigation and loss !ontingen!ies.! &(. )!!rual of a !ontingent liability.d &*. our!e of a !ontingent liability.b &,. )sset retirement obligation.! (. )sset retirement obligation.! (1. %lassifi!ation of 0arranty liability.! (2. 6iability a!!rual due to governmental a!tion.a (3. )!!rual of produ!t 0arranties.b #(4. Determining loss amount to report.

d ($. eporting la0suit loss and liability.d (&. )!!rual met'od for 0arranty !osts.! ((. )!!rual 0arranty met'od.d (*. %as'-basis 0arranty met'od.a (,. %'ara!teristi! of expense 0arranty approa!'.b *. )!!ounting for dis!ount !oupon.a *1. %ondition to re!ogni/e asset retirement obligation.b *2. e!ording liability for pending litigation.d *3. %omputation of a!id-test ratio.! *4. %urrent ratio information.

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%urrent 6iabilities and %ontingen!ies

+ULTIPLE CHOICE)Con%e&tua 0%ont'

Ans*er No' Des%ri&tion

! *$. #resentation of !urrent liabilities.a #*&. %urrent ratio formula.d *(. Dis!losure of a!!rued liabilities.d **. )!id-test ratio elements.d *,. tems in!luded in !urrent ratio and a!id-test ratio.

#T'ese 5uestions also appear in t'e #roblem-olving urvival 7uide.T'ese 5uestions also appear in t'e tudy 7uide.

+ULTIPLE CHOICE)Co-&utationa

Ans*er No' Des%ri&tionb ,. )d8usting entry involving dis!ount on s'ort-term note payable.d ,1. %al!ulate effe!tive interest on dis!ounted note.a ,2. %al!ulate !ost of inventory pur!'ase.d ,3. %al!ulate interest expense.b ,4. %al!ulate interest expense.! ,$. eporting $-year note in finan!ial statements.b ,&. %al!ulate unearned revenue.d ,(. %al!ulate amount of sales tax payable.b ,*. Determine amount of s'ort-term debt to be reported.d ,,. Determine amount of s'ort-term debt to be reported.b 1. %al!ulate sales taxes for t'e mont'.b 11. %al!ulate amount of sales taxes payable.! 12. Determine amount of sales sub8e!t to sales tax.a 13. 'ort-term debt to be ex!luded.a 14. 'ort-term debt to be ex!luded.d 1$. Federal9state unemployment taxes.d 1&. Federal9state unemployment taxes.! 1(. a!ation liability a!!rual.! 1*. a!ation liability a!!rual.! 1,. %al!ulate payroll tax expense.d 11. %al!ulation of va!ation expense to be re!ogni/ed.a 111. %al!ulation of a!!rued liability to be re!ogni/ed for !ompensated balan!es.d 112. Effe!t of payroll taxes on assets 9 liabilities.a 113. e!ord va!ation liability a!!rual.b 114. e!ord loss !ontingen!y amount.

d 11$. e!ord asset retirement obligation.d 11&. %al!ulate extended 0arranty !ontra!t profit.! 11(. %al!ulate 0arranty liability.b 11*. %al!ulate rebate expense and liability.d 11,. )sset retirement obligation.a 12. %al!ulate insuran!e expense and loss.b 121. %al!ulate rebate expense and liability.d 122. )sset retirement obligation.d 123. %al!ulate 0arranty liability.

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+ULTIPLE CHOICE)Co-&utationa 0%ont'

Ans*er No' Des%ri&tionb 124. %al!ulate liability for premiums.d 12$. %al!ulate 0arranty liability.b 12&. %al!ulate liability for premiums.d 12(. Determine premiums expense for t'e year.d 12*. %al!ulate estimated liability for premiums.d 12,. %al!ulate estimated liability for premiums.b 13. Determine amount to a!!rue as a loss !ontingen!y.d 131. )!!rue 0arranty expense for t'e year.a 132. %al!ulate 0arranty liability.d 133. Determine amount to a!!rue as a gain !ontingen!y.b 134. %al!ulate liability for unredeemed !oupons.! 13$. %al!ulate t'e 5ui!+ :a!id-test; ratio.

+ULTIPLE CHOICE)CPA A#a&te#

Ans*er No' Des%ri&tiona 13&.


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CHAPTER LEARNING OB5ECTI6ES

1. Des!ribe t'e nature> type> and valuation of !urrent liabilities.

2. Explain t'e !lassifi!ation issues of s'ort-term debt expe!ted to be refinan!ed.

3. dentify types of employee-related liabilities.

4. dentify t'e !riteria used to a!!ount for and dis!lose gain and loss !ontingen!ies.

$. Explain t'e a!!ounting for different types of loss !ontingen!ies.

&. ndi!ate 'o0 to present and analy/e liabilities and !ontingen!ies.

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SU++AR8 OF LEARNING OB5ECTI6ES B8 9UESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Learnin. O!:e%tive 1

1. TF 22. ?% 2(. ?% 32. ?% 3(. ?% ,2. ?% 13*. ?%2. TF 23. ?% 2*. ?% 33. ?% 3*. ?% ,3. ?% 14(. E3. TF 24. ?% 2,. ?% 34. ?% 3,. ?% ,4. ?% 1$3. #4. TF 2$. ?% 3. ?% 3$. ?% ,. ?% 13&. ?%

21. ?% 2&. ?% 31. ?% 3&. ?% ,1. ?% 13(. ?%


$. TF 41. ?% 4$. ?% ,$. ?% ,,. ?% 13. ?%&. TF 42. ?% 4&. ?% ,&. ?% 1. ?% 14. ?%(. TF 43. ?% 4(. ?% ,(. ?% 11. ?% 13,. ?%

4. ?% 44. ?% 4*. ?% ,*. ?% 12. ?% 1$4. #


*. TF 4&. ?% $2. ?% $&. ?% 1&. ?% 11. ?% 14. ?%,. TF 4,. ?% $3. ?% $(. ?% 1(. ?% 111. ?% 141. ?%1. TF #$. ?% $4. ?% $*. ?% 1*. ?% 112. ?% 14*. E11. TF $1. ?% $$. ?% 1$. ?% 1,. ?% 113. ?% 14,. E


12. TF 4&. ?% &. ?% &2. ?% &4. ?% &&. ?% &*. ?%13. TF $,. ?% &1. ?% &3. ?% &$. ?% &(. ?% 1$. E


14. TF (2. ?% (,. ?% 11(. ?% 124. ?% 131. ?% 14$. ?%1$. TF (3. ?% *. ?% 11*. ?% 12$. ?% 132. ?% 14&. ?%1&. TF #(4. ?% *1. ?% 11,. ?% 12&. ?% 133. ?% 1$1. E

1(. TF

($. ?% *2. ?% 12. ?% 12(. ?% 134. ?% 1$2. E&,. ?% (&. ?% 114. ?% 121. ?% 12*. ?% 142. ?% 1$$. #(. ?% ((. ?% 11$. ?% 122. ?% 12,. ?% 143. ?% 1$&. #(1. ?% (*. ?% 11&. ?% 123. ?% 13. ?% 144. ?%

Learnin. O!:e%tive ;

1*. TF 2. TF *4. ?% #*&. ?% **. ?% 13$. ?% 1$4. #1,. TF *3. ?% *$. ?% *(. ?% *,. ?% 1$3. # 1$$. #

"ote@ TF A True-False E A Exer!ise?% A ?ultiple %'oi!e # A #roblem

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TRUE(FALSE)Con%e&tua

1. ) /ero-interest-bearing note payable t'at is issued at a dis!ount 0ill not result in anyinterest expense being re!ogni/ed.

2. Dividends in arrears on !umulative preferred sto!+ s'ould be re!orded as a !urrent liability.

3. ?aga/ine subs!riptions and airline ti!+et sales bot' result in unearned revenues.

4. Dis!ount on "otes #ayable is a !ontra a!!ount to "otes #ayable on t'e balan!e s'eet.

$. )ll long-term debt maturing 0it'in t'e next year must be !lassified as a !urrent liability ont'e balan!e s'eet.

&. ) s'ort-term obligation !an be ex!luded from !urrent liabilities if t'e !ompany intends torefinan!e it on a long-term basis.

(. ?any !ompanies do not segregate t'e sales tax !olle!ted and t'e amount of t'e sale at t'etime of t'e sale.

*. ) !ompany must a!!rue a liability for si!+ pay t'at a!!umulates but does not vest.

,. %ompanies report t'e amount of so!ial se!urity taxes 0it''eld from employees as 0ell ast'e !ompaniesB mat!'ing portion as !urrent liabilities until t'ey are remitted.

1. )!!umulated rig'ts exist 0'en an employer 'as an obligation to ma+e payment to anemployee even after terminating 'is employment.

11. %ompanies s'ould re!ogni/e t'e expense and related liability for !ompensated absen!es in

t'e year earned by employees.

12. %ompanies s'ould a!!rue an estimated loss from a loss !ontingen!y if information availableprior to t'e issuan!e of finan!ial statements indi!ates t'at it is probable t'at a liability 'asbeen in!urred.

13. ) !ompany dis!loses gain !ontingen!ies in t'e notes only 0'en a 'ig' probability exists forreali/ing t'em.

14. T'e expe!ted profit from a sales type 0arranty t'at !overs several years s'ould all bere!ogni/ed in t'e period t'e 0arranty is sold.

1$. T'e fair value of an asset retirement obligation is re!orded as bot' an in!rease to t'erelated asset and a liability.

1&. T'e !ause for litigation must 'ave o!!urred on or before t'e date of t'e finan!ial statementsto report a liability in t'e finan!ial statements.

1(. Cnder t'e expense 0arranty approa!'> !ompanies !'arge 0arranty !osts only to t'e periodin 0'i!' t'ey !omply 0it' t'e 0arranty.

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1*. #repaid insuran!e s'ould be in!luded in t'e numerator 0'en !omputing t'e a!id-test:5ui!+; ratio.

1,. #aying a !urrent liability 0it' !as' 0ill al0ays redu!e t'e !urrent ratio.

2. %urrent liabilities are usually re!orded and reported in finan!ial statements at t'eir fullmaturity value.

True Fase Ans*ers)Con%e&tua

Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'

1. F &. F 11. T 1&. T2. F (. T 12. F 1(. F3. T *. F 13. T 1*. F4. T ,. T 14. F 1,. F$. F 1. F 1$. T 2. T

+ULTIPLE CHOICE)Con%e&tua

21. 6iabilities area. any a!!ounts 'aving !redit balan!es after !losing entries are made.b. deferred !redits t'at are re!ogni/ed and measured in !onformity 0it' generally

a!!epted a!!ounting prin!iples.!. obligations to transfer o0ners'ip s'ares to ot'er entities in t'e future.

d. obligations arising from past transa!tions and payable in assets or servi!es in t'e future.

22. ='i!' of t'e follo0ing is a !urrent liabilitya. ) long-term debt maturing !urrently> 0'i!' is to be paid 0it' !as' in a sin+ing fundb. ) long-term debt maturing !urrently> 0'i!' is to be retired 0it' pro!eeds from a ne0

debt issue!. ) long-term debt maturing !urrently> 0'i!' is to be !onverted into !ommon sto!+d. "one of t'ese

23. ='i!' of t'e follo0ing is true about a!!ounts payable

1. )!!ounts payable s'ould not be reported at t'eir present value.2. ='en a!!ounts payable are re!orded at t'e net amount> a #ur!'ase Dis!ounts

a!!ount 0ill be used.3. ='en a!!ounts payable are re!orded at t'e gross amount> a #ur!'ase

Dis!ounts 6ost a!!ount 0ill be used.a. 1b. 2!. 3d. ot' 2 and 3 are true.

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24. )mong t'e s'ort-term obligations of 6an!e %ompany as of De!ember 31> t'e balan!es'eet date> are notes payable totaling 2$> 0it' t'e ?adison "ational an+. T'eseare ,-day notes> rene0able for anot'er ,-day period. T'ese notes s'ould be !lassifiedon t'e balan!e s'eet of 6an!e %ompany asa. !urrent liabilities.b. deferred !'arges.!. long-term liabilities.d. intermediate debt.

2$. ='i!' of t'e follo0ing is nottrue about t'e dis!ount on s'ort-term notes payablea. T'e Dis!ount on "otes #ayable a!!ount 'as a debit balan!e.b. T'e Dis!ount on "otes #ayable a!!ount s'ould be reported as an asset on t'e

balan!e s'eet.!. ='en t'ere is a dis!ount on a note payable> t'e effe!tive interest rate is 'ig'er t'an

t'e stated dis!ount rate.d. )ll of t'ese are true.

2&. ='i!' of t'e follo0ing may be a !urrent liabilitya. =it''eld n!ome Taxesb. Deposits e!eived from %ustomers!. Deferred evenued. )ll of t'ese

2(. ='i!' of t'e follo0ing items is a !urrent liabilitya. onds :for 0'i!' t'ere is an ade5uate sin+ing fund properly !lassified as a long-term

investment; due in t'ree mont's.b. onds due in t'ree years.!. onds :for 0'i!' t'ere is an ade5uate appropriation of retained earnings; due in

eleven mont's.d. onds to be refunded 0'en due in eig't mont's> t'ere being no doubt about t'e

mar+etability of t'e refunding issue.

2*. ='i!' of t'e follo0ing s'ould notbe in!luded in t'e !urrent liabilities se!tion of t'ebalan!e s'eeta. Trade notes payableb. 'ort-term /ero-interest-bearing notes payable!. T'e dis!ount on s'ort-term notes payabled. )ll of t'ese are in!luded

2,. ='i!' of t'e follo0ing is a !urrent liabilitya. #referred dividends in arrearsb. ) dividend payable in t'e form of additional s'ares of sto!+

!. ) !as' dividend payable to preferred sto!+'oldersd. )ll of t'ese

3. to!+ dividends distributable s'ould be !lassified on t'ea. in!ome statement as an expense.b. balan!e s'eet as an asset.!. balan!e s'eet as a liability.d. balan!e s'eet as an item of sto!+'olders e5uity.

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31. f t'e follo0ing items> t'e only one 0'i!' s'ould not be !lassified as a !urrent liability isa. !urrent maturities of long-term debt.b. sales taxes payable.!. s'ort-term obligations expe!ted to be refinan!ed.d. unearned revenues.

32. )n a!!ount 0'i!' 0ould be !lassified as a !urrent liability isa. dividends payable in t'e !ompanys sto!+.b. a!!ounts payableGdebit balan!es.!. losses expe!ted to be in!urred 0it'in t'e next t0elve mont's in ex!ess of t'e

!ompanys insuran!e !overage.d. none of t'ese.

33. ='i!' of t'e follo0ing is a !'ara!teristi! of a !urrent liability but not a long-term liabilitya. Cnavoidable obligation.b. #resent obligation t'at entails settlement by probable future transfer or use of !as'>

goods> or servi!es.!. 6i5uidation is reasonably expe!ted to re5uire use of existing resour!es !lassified as

!urrent assets or !reate ot'er !urrent liabilities.d. Transa!tion or ot'er event !reating t'e liability 'as already o!!urred.

34. ='i!' of t'e follo0ing is not !onsidered a part of t'e definition of a liabilitya. Cnavoidable obligation.b. Transa!tion or ot'er event !reating t'e liability 'as already o!!urred.!. #resent obligation t'at entails settlement by probable future transfer or use of !as'>

goods> or servi!es.d. 6i5uidation is reasonably expe!ted to re5uire use of existing resour!es !lassified as

!urrent assets or !reate ot'er !urrent liabilities.

3$. ='y is t'e liability se!tion of t'e balan!e s'eet of primary importan!e to ban+ers

a. To evaluate t'e entitys !redit 5uality.b. To assist in understanding t'e entitys li5uidity.!. To better understand sour!es of repayment.d. To evaluate operating effi!ien!y.

3&. ='at is t'e relations'ip bet0een !urrent liabilities and a !ompanys operating !y!lea. 6i5uidation of !urrent liabilities is reasonably expe!ted 0it'in t'e !ompanys operating

!y!le :or one year if less;.b. %urrent liabilities are t'e result of operating transa!tions.!. %urrent liabilities !ant ex!eed t'e amount in!urred in one operating !y!le.d. T'ere is no relations'ip bet0een t'e t0o.

3(. ='at is t'e relations'ip bet0een present value and t'e !on!ept of a liabilitya. #resent values are used to measure !ertain liabilities.b. #resent values are not used to measure liabilities.!. #resent values are used to measure all liabilities.d. #resent values are only used to measure long-term liabilities.

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3*. ='at is a dis!ount as it relates to /ero-interest-bearing notes payablea. T'e dis!ount represents t'e lenders !osts to under0rite t'e note.b. T'e dis!ount represents t'e !redit 5uality of t'e borro0er.!. T'e dis!ount represents t'e !ost of borro0ing.d. T'e dis!ount represents t'e allo0an!e for un!olle!tible amounts.

3,. ='ere is debt !allable by t'e !reditor reported on t'e debtors finan!ial statementsa. 6ong-term liability.b. %urrent liability if t'e !reditor intends to !all t'e debt 0it'in t'e year> ot'er0ise a long-

term liability.!. %urrent liability if it is probable t'at !reditor 0ill !all t'e debt 0it'in t'e year> ot'er0ise

a long-term liability.d. %urrent liability.

4. ='i!' of t'e follo0ing is not a !ondition ne!essary to ex!lude a s'ort-term obligation from!urrent liabilitiesa. ntend to refinan!e t'e obligation on a long-term basis.b. bligation must be due 0it' one year.!. Demonstrate t'e ability to !omplete t'e refinan!ing.d. ubse5uently refinan!e t'e obligation on a long-term basis.

41. ='i!' of t'e follo0ing does not demonstrate eviden!e regarding t'e ability to!onsummate a refinan!ing of s'ort-term debta. ?anagement indi!ated t'at t'ey are going to refinan!e t'e obligation.b. )!tually refinan!e t'e obligation.!. Have !apa!ity under existing finan!ing agreements t'at !an be used to refinan!e t'e

obligation.d. Enter into a finan!ing agreement t'at !learly permits t'e entity to refinan!e t'e

obligation.

42. ) !ompany 'as not de!lared a dividend on its !umulative preferred sto!+ for t'e pastt'ree years. ='at is t'e re5uired a!!ounting treatment or dis!losure in t'is situationa. e!ord a liability for !umulative amount of preferred sto!+ dividends not de!lared.b. Dis!lose t'e amount of t'e dividends in arrears.!. e!ord a liability for t'e !urrent years dividends only.d. "o dis!losure or re!ognition is re5uired.

43. ='i!' of t'e follo0ing situations may give rise to unearned revenuea. #roviding trade !redit to !ustomers.b. elling inventory.!. elling maga/ine subs!riptions.d. #roviding manufa!turer 0arranties.

44. ='i!' of t'e follo0ing statements is !orre!ta. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm

intends to refinan!e t'e obligation on a long-term basis.b. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm !an

demonstrate an ability to !onsummate a refinan!ing.!. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if it is paid off

after t'e balan!e s'eet date and subse5uently repla!ed by long-term debt before t'ebalan!e s'eet is issued.

d. "one of t'ese.

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4$. T'e ability to !onsummate t'e refinan!ing of a s'ort-term obligation may be demon-strated by

a. a!tually refinan!ing t'e obligation by issuing a long-term obligation after t'e date oft'e balan!e s'eet but before it is issued.

b. entering into a finan!ing agreement t'at permits t'e enterprise to refinan!e t'e debton a long-term basis.

!. a!tually refinan!ing t'e obligation by issuing e5uity se!urities after t'e date of t'ebalan!e s'eet but before it is issued.

d. all of t'ese.

4&. ='i!' of t'e follo0ing statements is false?a. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm

intends to refinan!e t'e obligation on a long-term basis and demonstrates an ability to!omplete t'e refinan!ing.

b. %as' dividends s'ould be re!orded as a liability 0'en t'ey are de!lared by t'e boardof dire!tors.

!. Cnder t'e !as' basis met'od> 0arranty !osts are !'arged to expense as t'ey are paid.d. F%) taxes 0it''eld from employees payroll !'e!+s s'ould never be re!orded as a

liability sin!e t'e employer 0ill eventually remit t'e amounts 0it''eld to t'eappropriate taxing aut'ority.

4(. ='i!' of t'e follo0ing is nota !orre!t statement about sales taxesa. ales taxes are an expense of t'e seller.b. ?any !ompanies re!ord sales taxes in t'e sales a!!ount.!. f sales taxes are in!luded in t'e sales a!!ount> t'e first step to find t'e amount of

sales taxes is to divide sales by 1 plus t'e sales tax rate.d. )ll of t'ese are true.

4*. f a s'ort-term obligation is ex!luded from !urrent liabilities be!ause of refinan!ing> t'efootnote to t'e finan!ial statements des!ribing t'is event s'ould in!lude all of t'e follo0ing

information excepta. a general des!ription of t'e finan!ing arrangement.b. t'e terms of t'e ne0 obligation in!urred or to be in!urred.!. t'e terms of any e5uity se!urity issued or to be issued.d. t'e number of finan!ing institutions t'at refused to refinan!e t'e debt> if any.

4,. n a!!ounting for !ompensated absen!es> t'e differen!e bet0een vested rig'ts anda!!umulated rig'ts isa. vested rig'ts are normally for a longer period of employment t'an are a!!umulated

rig'ts.b. vested rig'ts are not !ontingent upon an employees future servi!e.!. vested rig'ts are a legal and binding obligation on t'e !ompany> 0'ereas

a!!umulated rig'ts expire at t'e end of t'e a!!ounting period in 0'i!' t'ey arose.d. vested rig'ts !arry a stipulated dollar amount t'at is o0ed to t'e employeeI

a!!umulated rig'ts do not represent monetary !ompensation.

#$. )n employees net :or ta+e-'ome; pay is determined by gross earnings minus amounts forin!ome tax 0it''oldings and t'e employeesa. portion of F%) taxes and unemployment taxes.b. and employers portion of F%) taxes> and unemployment taxes.!. portion of F%) taxes> unemployment taxes> and any voluntary dedu!tions.d. portion of F%) taxes and any voluntary dedu!tions.

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$1. ='i!' of t'ese is notin!luded in an employers payroll tax expensea. F..%.). :so!ial se!urity; taxesb. Federal unemployment taxes!. tate unemployment taxesd. Federal in!ome taxes

$2. ='i!' of t'e follo0ing is a !ondition for a!!ruing a liability for t'e !ost of !ompensation forfuture absen!esa. T'e obligation relates to t'e rig'ts t'at vest or a!!umulate.b. #ayment of t'e !ompensation is probable.!. T'e obligation is attributable to employee servi!es already performed.d. )ll of t'ese are !onditions for t'e a!!rual.

$3. ) liability for !ompensated absen!es su!' as va!ations> for 0'i!' it is expe!ted t'atemployees 0ill be paid> s'oulda. be a!!rued during t'e period 0'en t'e !ompensated time is expe!ted to be used by

employees.b. be a!!rued during t'e period follo0ing vesting.!. be a!!rued during t'e period 0'en earned.d. not be a!!rued unless a 0ritten !ontra!tual obligation exists.

$4. T'e amount of t'e liability for !ompensated absen!es s'ould be based on

1. t'e !urrent rates of pay in effe!t 0'en employees earn t'e rig't to!ompensated absen!es.

2. t'e future rates of pay expe!ted to be paid 0'en employees use!ompensated time.

3. t'e present value of t'e amount expe!ted to be paid in future periods.a. 1.b. 2.

!. 3.d. Eit'er 1 or 2 is a!!eptable.

$$. ='at are !ompensated absen!esa. Cnpaid time off.b. ) form of 'ealt'!are.!. #ayroll dedu!tions.d. #aid time off.

$&. ='i!' gives rise to t'e re5uirement to a!!rue a liability for t'e !ost of !ompensatedabsen!esa. #ayment is probable.b. Employee rig'ts vest or a!!umulate.!. )mount !an be reasonably estimated.d. )ll of t'e above.

$(. Cnder 0'at !onditions is an employer re5uired to a!!rue a liability for si!+ paya. i!+ pay benefits !an be reasonably estimated.b. i!+ pay benefits vest.!. i!+ pay benefits e5ual 1J of t'e pay.d. i!+ pay benefits a!!umulate.

13 ( 13


14/46


$*. ='i!' of t'e follo0ing taxes does not represent a !ommon payroll dedu!tiona. Federal in!ome taxes.b. F%) taxes.!. tate unemployment taxes.d. tate in!ome taxes.

$,. ='at is a !ontingen!ya. )n existing situation 0'ere !ertainty exists as to a gain or loss t'at 0ill be resolved

0'en one or more future events o!!ur or fail to o!!ur.b. )n existing situation 0'ere un!ertainty exists as to possible loss t'at 0ill be resolved

0'en one or more future events o!!ur.!. )n existing situation 0'ere un!ertainty exists as to possible gain or loss t'at 0ill not

be resolved in t'e foreseeable future.d. )n existing situation 0'ere un!ertainty exists as to possible gain or loss t'at 0ill be

resolved 0'en one or more future events o!!ur or fail to o!!ur.

&. ='en is a !ontingent liability re!ordeda. ='en t'e amount !an be reasonably estimated.

b. ='en t'e future events are probable to o!!ur and t'e amount !an be reasonablyestimated.

!. ='en t'e future events are probable to o!!ur.d. ='en t'e future events 0ill possibly o!!ur and t'e amount !an be reasonably

estimated.

&1. ='i!' of t'e follo0ing is an example of a !ontingent liabilitya. bligations related to produ!t 0arranties.b. #ossible re!eipt from a litigation settlement.!. #ending !ourt !ase 0it' a probable favorable out!ome.d. Tax loss !arryfor0ards.

&2. ='i!' of t'e follo0ing terms is asso!iated 0it' re!ording a !ontingent liabilitya. #ossible.b. 6i+ely.!. emote.d. #robable.

&3. ='i!' of t'e follo0ing is t'e proper 0ay to report a gain !ontingen!ya. )s an a!!rued amount.b. )s deferred revenue.!. )s an a!!ount re!eivable 0it' additional dis!losure explaining t'e nature of t'e

!ontingen!y.d. )s a dis!losure only.

&4. ='i!' of t'e follo0ing !ontingen!ies need notbe dis!losed in t'e finan!ial statements ort'e notes t'eretoa. #robable losses not reasonably estimableb. Environmental liabilities t'at !annot be reasonably estimated!. 7uarantees of indebtedness of ot'ersd. )ll of t'ese must be dis!losed.

13 ( 14


15/46


&$. ='i!' of t'e follo0ing sets of !onditions 0ould give rise to t'e a!!rual of a !ontingen!yunder !urrent generally a!!epted a!!ounting prin!iplesa. )mount of loss is reasonably estimable and event o!!urs infre5uently.b. )mount of loss is reasonably estimable and o!!urren!e of event is probable.!. Event is unusual in nature and o!!urren!e of event is probable.d. Event is unusual in nature and event o!!urs infre5uently.

&&. Keff e!+ is a farmer 0'o o0ns land 0'i!' borders on t'e rig't-of-0ay of t'e "ort'ernailroad. n )ugust 1> 212> due to t'e admitted negligen!e of t'e ailroad> 'ay on t'efarm 0as set on fire and burned. e!+ 'ad 'ad a dispute 0it' t'e ailroad for severalyears !on!erning t'e o0ners'ip of a small par!el of land. T'e representative of t'eailroad 'as offered to assign any rig'ts 0'i!' t'e ailroad may 'ave in t'e land to e!+in ex!'ange for a release of 'is rig't to reimbursement for t'e loss 'e 'as sustained fromt'e fire. e!+ appears in!lined to a!!ept t'e ailroads offer. T'e ailroads 212 finan!ialstatements s'ould in!lude t'e follo0ing related to t'e in!ident@a. re!ognition of a loss and !reation of a liability for t'e value of t'e land.b. re!ognition of a loss only.!. !reation of a liability only.

d. dis!losure in note form only.

&(. ) !ontingen!y !an be a!!rued 0'ena. it is !ertain t'at funds are available to settle t'e disputed amount.b. an asset may 'ave been impaired.!. t'e amount of t'e loss !an be reasonably estimated and it is probable t'at an asset

'as been impaired or a liability in!urred.d. it is probable t'at an asset 'as been impaired or a liability in!urred even t'oug' t'e

amount of t'e loss !annot be reasonably estimated.

&*. ) !ontingent liabilitya. definitely exists as a liability but its amount and due date are indeterminable.

b. is a!!rued even t'oug' not reasonably estimated.!. is not dis!losed in t'e finan!ial statements.d. is t'e result of a loss !ontingen!y.

&,. To re!ord an asset retirement obligation :);> t'e !ost asso!iated 0it' t'e ) isa. expensed.b. in!luded in t'e !arrying amount of t'e related long-lived asset.!. in!luded in a separate a!!ount.d. none of t'ese.

(. ) !ompany is legally obligated for t'e !osts asso!iated 0it' t'e retirement of a long-livedasset

a. only 0'en it 'ires anot'er party to perform t'e retirement a!tivities.b. only if it performs t'e a!tivities 0it' its o0n 0or+for!e and e5uipment.!. 0'et'er it 'ires anot'er party to perform t'e retirement a!tivities or performs t'e

a!tivities itself.d. 0'en it is probable t'e asset 0ill be retired.

13 ( 17


16/46


(1. )ssume t'at a manufa!turing !orporation 'as :1; good 5uality !ontrol> :2; a one-yearoperating !y!le> :3; a relatively stable pattern of annual sales> and :4; a !ontinuing poli!yof guaranteeing ne0 produ!ts against defe!ts for t'ree years t'at 'as resulted in materialbut rat'er stable 0arranty repair and repla!ement !osts. )ny liability for t'e 0arrantya. s'ould be reported as long-term.b. s'ould be reported as !urrent.!. s'ould be reported as part !urrent and part long-term.d. need not be dis!losed.

(2. rti/ %orporation> a manufa!turer of 'ouse'old paints> is preparing annual finan!ialstatements at De!ember 31> 212. e!ause of a re!ently proven 'ealt' 'a/ard in one ofits paints> t'e government 'as !learly indi!ated its intention of 'aving rti/ re!all all !ansof t'is paint sold in t'e last six mont's. T'e management of rti/ estimates t'at t'is re!all0ould !ost *>. ='at a!!ounting re!ognition> if any> s'ould be a!!orded t'issituationa. "o re!ognitionb. "ote dis!losure only!. perating expense of *> and liability of *>

d. )ppropriation of retained earnings of *>(3. nformation available prior to t'e issuan!e of t'e finan!ial statements indi!ates t'at it is

probable t'at> at t'e date of t'e finan!ial statements> a liability 'as been in!urred forobligations related to produ!t 0arranties. T'e amount of t'e loss involved !an bereasonably estimated. ased on t'e above fa!ts> an estimated loss !ontingen!y s'ould bea. a!!rued.b. dis!losed but nota!!rued.!. neithera!!rued nordis!losed.d. !lassified as an appropriation of retained earnings.

#(4. Espinosa %o. 'as a loss !ontingen!y to a!!rue. T'e loss amount !an only be reasonablyestimated 0it'in a range of out!omes. "o single amount 0it'in t'e range is a better

estimate t'an any ot'er amount. T'e amount of loss a!!rual s'ould bea. /ero.b. t'e minimum of t'e range.!. t'e mean of t'e range.d. t'e maximum of t'e range.

($. Dean %ompany be!omes a0are of a la0suit after t'e date of t'e finan!ial statements> butbefore t'ey are issued. ) loss and related liability s'ould be reported in t'e finan!ialstatements if t'e amount !an be reasonably estimated> an unfavorable out!ome is 'ig'lyprobable> anda. t'e Dean %ompany admits guilt.b. t'e !ourt 0ill de!ide t'e !ase 0it'in one year.!. t'e damages appear to be material.d. t'e !ause for a!tion o!!urred during t'e a!!ounting period !overed by t'e finan!ial

statements.

(&. Cse of t'e a!!rual met'od in a!!ounting for produ!t 0arranty !ostsa. is re5uired for federal in!ome tax purposes.b. is fre5uently 8ustified on t'e basis of expedien!y 0'en 0arranty !osts are immaterial.!. finds t'e expense a!!ount being !'arged 0'en t'e seller performs in !omplian!e 0it'

t'e 0arranty.d. represents a!!epted pra!ti!e and s'ould be used 0'enever t'e 0arranty is an integral

and inseparable part of t'e sale.

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17/46


((. ='i!' of t'e follo0ing best des!ribes t'e a!!rual met'od of a!!ounting for 0arranty!ostsa. Expensed 0'en paid.b. Expensed 0'en 0arranty !laims are !ertain.!. Expensed based on estimate in year of sale.d. Expensed 0'en in!urred.

(*. ='i!' of t'e follo0ing best des!ribes t'e !as'-basis met'od of a!!ounting for 0arranty!ostsa. Expensed based on estimate in year of sale.b. Expensed 0'en liability is a!!rued.!. Expensed 0'en 0arranty !laims are !ertain.d. Expensed 0'en in!urred.

(,. ='i!' of t'e follo0ing is a !'ara!teristi! of t'e expense 0arranty approa!'> but not t'esales 0arranty approa!'a. Estimated liability under 0arranties.b. =arranty expense.

!. Cnearned 0arranty revenue.d. =arranty revenue.

*. )n ele!troni!s store is running a promotion 0'ere for every video game pur!'ased> t'e!ustomer re!eives a !oupon upon !'e!+out to pur!'ase a se!ond game at a $Jdis!ount. T'e !oupons expire in one year. T'e store normally re!ogni/ed a gross profitmargin of 4J of t'e selling pri!e on video games. Ho0 0ould t'e store a!!ount for apur!'ase using t'e dis!ount !oupona. T'e redu!tion in sales pri!e attributed to t'e !oupon is re!ogni/ed as premium

expense.b. T'e differen!e bet0een t'e !ost of t'e video game and t'e !as' re!eived is

re!ogni/ed as premium expense.

!. #remium expense is not re!ogni/ed.d. T'e differen!e bet0een t'e !ost of t'e video game and t'e selling pri!e prior to t'e!oupon is re!ogni/ed as premium expense.

*1. ='at !ondition is ne!essary to re!ogni/e an asset retirement obligationa. %ompany 'as an existing legal obligation and !an reasonably estimate t'e amount of

t'e liability.b. %ompany !an reasonably estimate t'e amount of t'e liability.!. %ompany 'as an existing legal obligation.d. bligation event 'as o!!urred.

*2. ='i!' of t'e follo0ing are not fa!tors t'at are !onsidered 0'en evaluating 0'et'er or notto re!ord a liability for pending litigation

a. Time period in 0'i!' t'e underlying !ause of a!tion o!!urred.b. T'e type of litigation involved.!. T'e probability of an unfavorable out!ome.d. T'e ability to ma+e a reasonable estimate of t'e amount of t'e loss.

13 ( 1


18/46


*3. Ho0 do you determine t'e a!id-test ratioa. T'e sum of !as' and s'ort-term investments divided by s'ort-term debt.b. %urrent assets divided by !urrent liabilities.!. %urrent assets divided by s'ort-term debt.d. T'e sum of !as'> s'ort-term investments and net re!eivables divided by !urrent

liabilities.

*4. ='at does t'e !urrent ratio inform you about a !ompanya. T'e extent of slo0-moving inventories.b. T'e effi!ient use of assets.!. T'e !ompanys li5uidity.d. T'e !ompanys profitability.

*$. ='i!' of t'e follo0ing is not a!!eptable treatment for t'e presentation of !urrentliabilitiesa. 6isting !urrent liabilities in order of maturityb. 6isting !urrent liabilities a!!ording to amount!. ffsetting !urrent liabilities against assets t'at are to be applied to t'eir li5uidation

d. 'o0ing !urrent liabilities immediately belo0 !urrent assets to obtain a presentation of0or+ing !apital

#*&. T'e ratio of !urrent assets to !urrent liabilities is !alled t'ea. !urrent ratio.b. a!id-test ratio.!. !urrent asset turnover ratio.d. !urrent liability turnover ratio.

*(. )!!rued liabilities are dis!losed in finan!ial statements bya. a footnote to t'e statements.b. s'o0ing t'e amount among t'e liabilities but not extending it to t'e liability total.

!. an appropriation of retained earnings.d. appropriately !lassifying t'em as regular liabilities in t'e balan!e s'eet.

**. T'e numerator of t'e a!id-test ratio !onsists ofa. total !urrent assets.b. !as' and mar+etable se!urities.!. !as' and net re!eivables.d. !as'> mar+etable se!urities> and net re!eivables.

*,. Ea!' of t'e follo0ing are in!luded in bot' t'e !urrent ratio and t'e a!id-test ratio ex!epta. !as'.b. s'ort-term investments.

!. net re!eivables.d. inventory.

13 ( 1=


19/46


+uti&e C"oi%e Ans*ers)Con%e&tua

Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'

21. d 31. ! 41. a $1. d &1. a (1. ! *1. a22. d 32. d 42. b $2. d &2. d (2. ! *2. b

23. a 33. ! 43. ! $3. ! &3. d (3. a *3. d

24. a 34. d 44. d $4. d &4. d (4. b *4. !

2$. b 3$. b 4$. d $$. d &$. b ($. d *$. !

2&. d 3&. a 4&. d $&. d &&. a (&. d *&. a

2(. ! 3(. a 4(. a $(. b &(. ! ((. ! *(. d

2*. d 3*. ! 4*. d $*. ! &*. d (*. d **. d

2,. ! 3,. d 4,. b $,. d &,. b (,. a L*,. d

3. d 4. d $. d &. b (. ! *. b

olutions to t'ose ?ultiple %'oi!e 5uestions for 0'i!' t'e ans0er is Mnone of t'ese.N

22. ) long-term debt maturing !urrently to be paid 0it' !urrent assets is a !urrent liability.

32. )!!ounts #ayable> =ages #ayable> et!.> 0ould be examples of !urrent liabilities.

44. T'e !ompany must bot' intend to refinan!e t'e obligation on a long-term basis anddemonstrate t'e ability to !onsummate t'e refinan!ing to ex!lude a s'ort-term obligationfrom !urrent liabilities.

+ULTIPLE CHOICE)Co-&utationa

,. 7laus %orp. signed a t'ree-mont'> /ero-interest-bearing note on "ovember 1> 212 for

t'e pur!'ase of 2$> of inventory. T'e fa!e value of t'e note 0as 2$3>&($.)ssuming 7laus used a MDis!ount on "ote #ayableN a!!ount to initially re!ord t'e noteand t'at t'e dis!ount 0ill be amorti/ed e5ually over t'e 3-mont' period> t'e ad8ustingentry made at De!ember 31> 212 0ill in!lude aa. debit to Dis!ount on "ote #ayable for 1>22$.b. debit to nterest Expense for 2>4$.!. !redit to Dis!ount on "ote #ayable for 1>2$$.d. !redit to nterest Expense for 2>4$.

,1. T'e effe!tive interest on a 12-mont'> /ero-interest-bearing note payable of 3>>dis!ounted at t'e ban+ at *J isa. *.$1J.

b. *J.!. 11.4,J.d. *.(J.

13 ( 1>


20/46


,2. n eptember 1> Hydra pur!'ased 13>3 of inventory items on !redit 0it' t'e terms191$> net 3> F destination. Freig't !'arges 0ere 2*. #ayment for t'e pur!'ase 0asmade on eptember 1*. )ssuming Hydra uses t'e perpetual inventory system and t'e netmet'od of a!!ounting for pur!'ase dis!ounts> 0'at amount is re!orded as inventory fromt'is pur!'asea. 13>1&(.b. 13>44(.!. 13>$*.d. 13>3.

,3. odium n!. borro0ed 2*> on )pril 1. T'e note re5uires interest at 12J andprin!ipal to be paid in one year. Ho0 mu!' interest is re!ogni/ed for t'e period from )pril1 to De!ember 31a. .b. 33>&.!. *>4.d. 2$>2.

,4. %ollier borro0ed 3$> on !tober 1 and is re5uired to pay 3&> on ?ar!' 1.='at amount is t'e note payable re!orded at on !tober 1 and 'o0 mu!' interest isre!ogni/ed from !tober 1 to De!ember 31a. 3$> and .b. 3$> and &>.!. 3&> and .d. 3$> and 1>.

,$. #urest o0es 2 million t'at is due on February 2*. T'e !ompany borro0s 1>&> onFebruary 2$ :$-year note; and uses t'e pro!eeds to pay do0n t'e 2 million note anduses ot'er !as' to pay t'e balan!e. Ho0 mu!' of t'e 2 million note is !lassified as long-term in t'e De!ember 31 finan!ial statements.

a. 2>>.b. .!. 1>&>.d. 4>.

,&. ista ne0spapers sold &> of annual subs!riptions at 12$ ea!' on eptember 1. Ho0mu!' unearned revenue 0ill exist as of De!ember 31a. .b. $>.!. 2$>.d. ($>.

,(. #ur!'ase etailer made !as' sales during t'e mont' of !tober of 221>. T'e salesare sub8e!t to a &J sales tax t'at 0as also !olle!ted. ='i!' of t'e follo0ing 0ould bein!luded in t'e summary 8ournal entry to refle!t t'e sale transa!tionsa. Debit %as' for 221>.b. %redit ales Taxes #ayable for 12>$1.!. %redit ales evenue for 2*>4,.d. %redit ales Taxes #ayable for 13>2&.

13 ( 2?


21/46


,*. n February 1> 212> after issuan!e of its finan!ial statements for 211> House%ompany entered into a finan!ing agreement 0it' 6ebo an+> allo0ing House %ompanyto borro0 up to &>> at any time t'roug' 214. )mounts borro0ed under t'eagreement bear interest at 2J above t'e ban+s prime interest rate and mature t0o yearsfrom t'e date of loan. House %ompany presently 'as 2>2$> of notes payable 0it'First "ational an+ maturing ?ar!' 1$> 212. T'e !ompany intends to borro0 3>($>under t'e agreement 0it' 6ebo and li5uidate t'e notes payable to First "ational. T'eagreement 0it' 6ebo also re5uires House to maintain a 0or+ing !apital level of,>> and pro'ibits t'e payment of dividends on !ommon sto!+ 0it'out priorapproval by 6ebo an+. From t'e above information only> t'e total s'ort-term debt ofHouse %ompany as of t'e De!ember 31> 212 balan!e s'eet date isa. .b. 2>2$>.!. 3>>.d. &>>.

,,. n De!ember 31> 212> rey %o. 'as 4>> of s'ort-term notes payable due onFebruary 14> 213. n Kanuary 1> 213> rey arranged a line of !redit 0it' %ounty an+0'i!' allo0s rey to borro0 up to 3>> at one per!ent above t'e prime rate for t'reeyears. n February 2> 213> rey borro0ed 2>4> from %ounty an+ and used1>> additional !as' to li5uidate 3>4> of t'e s'ort-term notes payable. T'eamount of t'e s'ort-term notes payable t'at s'ould be reported as !urrent liabilities on t'eDe!ember 31> 212 balan!e s'eet 0'i!' is issued on ?ar!' $> 213 isa. .b. &>.!. 1>>.d. 1>&>.

Use t"e $oo*in. in$or-ation $or questions 1?? an# 1?1'

tine %o. is a retail store operating in a state 0it' a &J retail sales tax. T'e retailer may +eep 2Jof t'e sales tax !olle!ted. tine %o. re!ords t'e sales tax in t'e ales evenue a!!ount. T'eamount re!orded in t'e ales evenue a!!ount during ?ay 0as 222>&.

1. T'e amount of sales taxes :to t'e nearest dollar; for ?ay isa. 13>*,.b. 12>&.!. 13>3$&.d. 14>1$(.

11. T'e amount of sales taxes payable :to t'e nearest dollar; to t'e state for t'e mont' of?ay is

a. 12>*2&.b. 12>34*.!. 13>*,.d. 13>*(3.

13 ( 21


22/46


12. opat> n!.> is a retail store operating in a state 0it' a $J retail sales tax. T'e state la0provides t'at t'e retail sales tax !olle!ted during t'e mont' must be remitted to t'e stateduring t'e follo0ing mont'. f t'e amount !olle!ted is remitted to t'e state on or beforet'e t0entiet' of t'e follo0ing mont'> t'e retailer may +eep 3J of t'e sales tax !olle!ted.n )pril 1> 212> opat remitted 13$>* tax to t'e state tax division for ?ar!' 212retail sales. ='at 0as opat s ?ar!' 212 retail sales sub8e!t to sales taxa. 2>(1&>.b. 2>&&>.!. 2>*>.d. 2>(41>&&(.

13. Ken+ins %orporation 'as 2>$> of s'ort-term debt it expe!ts to retire 0it' pro!eedsfrom t'e sale of ,> s'ares of !ommon sto!+. f t'e sto!+ is sold for 2 per s'aresubse5uent to t'e balan!e s'eet date> but before t'e balan!e s'eet is issued> 0'atamount of s'ort-term debt !ould be ex!luded from !urrent liabilitiesa. 1>*>b. 2>$>!. (>d.

14. Ermler %orporation 'as 1>*> of s'ort-term debt it expe!ts to retire 0it' pro!eedsfrom t'e sale of $> s'ares of !ommon sto!+. f t'e sto!+ is sold for 2 per s'aresubse5uent to t'e balan!e s'eet date> but before t'e balan!e s'eet is issued> 0'atamount of s'ort-term debt !ould be ex!luded from !urrent liabilitiesa. 1>>b. 1>*>!. *>d.

1$. #reston %o.> 0'i!' 'as a taxable payroll of (>> is sub8e!t to FCT) tax of &.2J and

a state !ontribution rate of $.4J. Ho0ever> be!ause of stable employment experien!e> t'e!ompanyBs state rate 'as been redu!ed to 2J. ='at is t'e total amount of federal andstate unemployment tax for #reston %o.a. *1>,b. $(>4!. 2*>d. 1,>&

1&. oar+ %o.> 0'i!' 'as a taxable payroll of &>> is sub8e!t to FCT) tax of &.2J and astate !ontribution rate of $.4J. Ho0ever> be!ause of stable employment experien!e> t'e!ompanyBs state rate 'as been redu!ed to 2J. ='at is t'e total amount of federal andstate unemployment tax for oar+ %o.

a. (>2b. 4,>2!. 24>d. 1&>*

13 ( 22


23/46


1(. ) !ompany gives ea!' of its $ employees :assume t'ey 0ere all employed !ontinuouslyt'roug' 212 and 213; 12 days of va!ation a year if t'ey are employed at t'e end of t'eyear. T'e va!ation a!!umulates and may be ta+en starting Kanuary 1 of t'e next year.T'e employees 0or+ * 'ours per day. n 212> t'ey made 21 per 'our and in 213 t'eymade 24 per 'our. During 213> t'ey too+ an average of , days of va!ation ea!'. T'e!ompanyBs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0age ratefor t'at year. ='at amount of va!ation liability 0ould be refle!ted on t'e 212 and 213balan!e s'eets> respe!tivelya. 1>*I 14>4b. 11$>2I 144>!. 1>*I 144>d. 11$>2I 14>4

1*. ) !ompany gives ea!' of its $ employees :assume t'ey 0ere all employed !ontinuouslyt'roug' 212 and 213; 12 days of va!ation a year if t'ey are employed at t'e end of t'eyear. T'e va!ation a!!umulates and may be ta+en starting Kanuary 1 of t'e next year.T'e employees 0or+ * 'ours per day. n 212> t'ey made 24.$ per 'our and in 213t'ey made 2* per 'our. During 213> t'ey too+ an average of , days of va!ation ea!'.T'e !ompanyBs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0agerate for t'at year. ='at amount of va!ation liability 0ould be refle!ted on t'e 212 and213 balan!e s'eets> respe!tivelya. 11(>&I 1&3>*b. 134>4I 1&*>!. 11(>&I 1&*>d. 134>4I 1&3>*

1,. T'e total payroll of Teeter %ompany for t'e mont' of !tober> 212 0as &>> of0'i!' 1$> represented amounts paid in ex!ess of 1&>* to !ertain employees.$> represented amounts paid to employees in ex!ess of t'e (> maximumsub8e!t to unemployment taxes. 1$> of federal in!ome taxes and 1$> of union

dues 0ere 0it''eld. T'e state unemployment tax is 1J> t'e federal unemployment tax is .*J> and t'e !urrent F..%.). tax is (.&$J on an employeeBs 0ages to 1&>* and1.4$J in ex!ess of 1&>*. ='at amount s'ould Teeter re!ord as payroll tax expensea. 1,(>(.b. 1**>4.!. 3*>4.d. 4(>4.

Cse t'e follo0ing information for 5uestions 11 and 111.

argas %ompany 'as 3$ employees 0'o 0or+ *-'our days and are paid 'ourly. n Kanuary 1>211> t'e !ompany began a program of granting its employees 1 days of paid va!ation ea!'

year. a!ation days earned in 211 may first be ta+en on Kanuary 1> 212. nformation relative tot'ese employees is as follo0s@

Hourly a!ation Days Earned a!ation Days CsedOear =ages by Ea!' Employee by Ea!' Employee211 21.$ 1 212 22.$ 1 *213 23.($ 1 1

argas 'as !'osen to a!!rue t'e liability for !ompensated absen!es at t'e !urrent rates of pay ineffe!t 0'en t'e !ompensated time is earned.

13 ( 23


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11. ='at is t'e amount of expense relative to !ompensated absen!es t'at s'ould be reportedon argasBs in!ome statement for 211a. .b. $(>4.!. &3>.d. &>2.

111. ='at is t'e amount of t'e a!!rued liability for !ompensated absen!es t'at s'ould bereported at De!ember 31> 213a. (,>1.b. ($>&.!. &&>$.d. (,>*.

112. %al%ount pays a 0ee+ly payroll of 1(> t'at in!ludes federal taxes 0it''eld of2$>4> F%) taxes 0it''eld of 1$>(*> and 41:+; 0it''oldings of 1*>. ='at is t'eeffe!t of assets and liabilities from t'is transa!tiona. )ssets de!rease 1(> and liabilities do not !'ange.b. )ssets de!rease 12*>*2 and liabilities in!rease 41>1*.!. )ssets de!rease 12*>*2 and liabilities de!rease 41>1*.d. )ssets de!rease 11>*2 and liabilities in!rease $,>1*.

113. %al%ount provides its employees t0o 0ee+s of paid va!ation per year. )s of De!ember31> &$ employees 'ave earned t0o 0ee+s of va!ation time to be ta+en t'e follo0ing year.f t'e average 0ee+ly salary for t'ese employees is 1>14> 0'at is t'e re5uired 8ournalentrya. Debit alaries and =ages Expense for 14*>2 and !redit alaries and =ages

#ayable for 14*>2.b. "o 8ournal entry re5uired.!. Debit alaries and =ages #ayable for 14(>& and !redit alaries and =ages

Expense for 14(>&.

d. Debit alaries and =ages Expense for (4>1 and !redit alaries and =ages#ayable for (4>1.

114. Tender Foot n!. is involved in litigation regarding a faulty produ!t sold in a prior year.T'e !ompany 'as !onsulted 0it' its attorney and determined t'at it is possible t'at t'eymay lose t'e !ase. T'e attorneys estimated t'at t'ere is a 4J !'an!e of losing. f t'is ist'e !ase> t'eir attorney estimated t'at t'e amount of any payment 0ould be $>.='at is t'e re5uired 8ournal entry as a result of t'is litigationa. Debit 6itigation Expense for $> and !redit 6itigation liability for $>.b. "o 8ournal entry is re5uired.!. Debit 6itigation Expense for 2> and !redit 6itigation 6iability for 2>.d. Debit 6itigation Expense for 3> and !redit 6itigation 6iability for 3>.

11$. e!y!le Exploration is involved 0it' innovative approa!'es to finding energy reserves.e!y!le re!ently built a fa!ility to extra!t natural gas at a !ost of 1$ million. Ho0ever>e!y!le is also legally responsible to remove t'e fa!ility at t'e end of its useful life oft0enty years. T'is !ost is estimated to be 21 million :t'e present value of 0'i!' is *million;. ='at is t'e 8ournal entry re5uired to re!ord t'e asset retirement obligationa. "o 8ournal entry re5uired.b. Debit "atural 7as Fa!ility for 21>> and !redit )sset etirement bligation for

21>>

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!. Debit "atural 7as Fa!ility for &>> and !redit )sset etirement bligation for&>>.

d. Debit "atural 7as Fa!ility for *>> and !redit )sset etirement bligation for*>>.

11&. =arranty4C provides extended servi!e !ontra!ts on ele!troni! e5uipment sold t'roug'ma8or retailers. T'e standard !ontra!t is for t'ree years. During t'e !urrent year>=arranty4C provided 42> su!' 0arranty !ontra!ts at an average pri!e of *1 ea!'.elated to t'ese !ontra!ts> t'e !ompany spent 4> servi!ing t'e !ontra!ts duringt'e !urrent year and expe!ts to spend 2>1> more in t'e future. ='at is t'e net profitt'at t'e !ompany 0ill re!ogni/e in t'e !urrent year related to t'ese !ontra!tsa. ,2>.b. 3>2>.!. 3>&&(.d. (34>.

11(. Ele!troni!s4C manufa!tures 'ig'-end 0'ole 'ome ele!troni! systems. T'e !ompanyprovides a one-year 0arranty for all produ!ts sold. T'e !ompany estimates t'at t'e0arranty !ost is 2 per unit sold and reported a liability for estimated 0arranty !osts(.* million at t'e beginning of t'is year. f during t'e !urrent year> t'e !ompany sold&> units for a total of 243 million and paid 0arranty !laims of ,>> on !urrentand prior year sales> 0'at amount of liability 0ould t'e !ompany report on its balan!es'eet at t'e end of t'e !urrent yeara. 3>>.b. 4>2>.!. 1>*>.d. 12>>.

11*. ) !ompany offers a !as' rebate of 1 on ea!' 4 pa!+age of lig't bulbs sold during 212.Histori!ally> 1J of !ustomers mail in t'e rebate form. During 212> 3>> pa!+agesof lig't bulbs are sold> and 1&> 1 rebates are mailed to !ustomers. ='at is t'e

rebate expense and liability> respe!tively> s'o0n on t'e 212 finan!ial statements datedDe!ember 31a. 3>I 3>b. 3>I 14>!. 14>I 14>d. 1&>I 14>

11,. ) !ompany buys an oil rig for 2>> on Kanuary 1> 212. T'e life of t'e rig is 1years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1 years is 4>:present value at 1J is 1$4>22;. 1J is an appropriate interest rate for t'is !ompany.='at expense s'ould be re!orded for 212 as a result of t'ese eventsa. Depre!iation expense of 24>

b. Depre!iation expense of 2> and interest expense of 1$>422!. Depre!iation expense of 2> and interest expense of 4>d. Depre!iation expense of 21$>42 and interest expense of 1$>422

12. Ziegler %ompany self insures its property for fire and storm damage. f t'e !ompany 0ereto obtain insuran!e on t'e property> it 0ould !ost t'em 1>$> per year. T'e!ompany estimates t'at on average it 0ill in!ur losses of 1>2> per year. During212> $2$> 0ort' of losses 0ere sustained. Ho0 mu!' total expense and9or losss'ould be re!ogni/ed by Ziegler %ompany for 212a. $2$> in losses and no insuran!e expense

13 ( 27


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b. $2$> in losses and &($> in insuran!e expense!. in losses and 1>2> in insuran!e expensed. in losses and 1>$> in insuran!e expense

121. ) !ompany offers a !as' rebate of 2 on ea!' & pa!+age of batteries sold during 212.Histori!ally> 1J of !ustomers mail in t'e rebate form. During 212> &>> pa!+ages

of batteries are sold> and 21> 2 rebates are mailed to !ustomers. ='at is t'e rebateexpense and liability> respe!tively> s'o0n on t'e 212 finan!ial statements datedDe!ember 31a. 1>2>I 1>2>b. 1>2>I (*>!. (*>I (*>d. 42>I (*>

122. ) !ompany buys an oil rig for 3>> on Kanuary 1> 212. T'e life of t'e rig is 1years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1 years is &>:present value at 1J is 231>33;. 1J is an appropriate interest rate for t'is !ompany.='at expense s'ould be re!orded for 212 as a result of t'ese events

a. Depre!iation expense of 3&>b. Depre!iation expense of 3> and interest expense of 23>133!. Depre!iation expense of 3> and interest expense of &>d. Depre!iation expense of 323>133 and interest expense of 23>133

123. During 211> anpelt %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year0arranty against manufa!turerBs defe!ts. ased on industry experien!e> 0arranty !ostsare estimated at 2J of sales in t'e year of sale> 3J in t'e year after sale> and 4J in t'ese!ond year after sale. ales and a!tual 0arranty expenditures for t'e first t'ree-yearperiod 0ere as follo0s@

ales )!tual =arranty Expenditures211 &> ,>

212 1>$> &$>213 2>1> 13$>

4>2> 2,>

='at amount s'ould anpelt report as a liability at De!ember 31> 213a. b. 12>!. $4>d. 1&,>

124. #almer Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in3 boxtops from #almer Frosted Fla+es boxes and 1. T'e !ompany estimates t'at &J oft'e boxtops 0ill be redeemed. n 212> t'e !ompany sold &($> boxes of Frosted

Fla+es and !ustomers redeemed 33> boxtops re!eiving 11> bo0ls. f t'e bo0ls!ost #almer %ompany 3 ea!'> 'o0 mu!' liability for outstanding premiums s'ould bere!orded at t'e end of 212a. 2(>b. $>!. ($>d. 13*>

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12$. During 211> tabler %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year0arranty against manufa!turerBs defe!ts. ased on industry experien!e> 0arranty !ostsare estimated at 2J of sales in t'e year of sale> 3J in t'e year after sale> and 4J in t'ese!ond year after sale. ales and a!tual 0arranty expenditures for t'e first t'ree-yearperiod 0ere as follo0s@

ales )!tual =arranty Expenditures211 4> &>212 1>> 4>213 1>4> ,>

2>*> 13&>

='at amount s'ould tabler report as a liability at De!ember 31> 213a. b. 2*>!. 3&>d. 11&>

12&. 6e?ay Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in

4 boxtops from 6e?ay Frosted Fla+es boxes and 1. T'e !ompany estimates t'at &J oft'e boxtops 0ill be redeemed. n 212> t'e !ompany sold $> boxes of FrostedFla+es and !ustomers redeemed 22> boxtops re!eiving $$> bo0ls. f t'e bo0ls!ost 6e?ay %ompany 3 ea!'> 'o0 mu!' liability for outstanding premiums s'ould bere!orded at t'e end of 212a. 1$>b. 4>!. &>d. *4>

Cse t'e follo0ing information for 5uestions 12(> 12*> and 12,.

?ott %o. in!ludes one !oupon in ea!' bag of dog food it sells. n return for eig't !oupons>!ustomers re!eive a leas'. T'e leas'es !ost ?ott 3 ea!'. ?ott estimates t'at 4 per!ent of t'e!oupons 0ill be redeemed. Data for 212 and 213 are as follo0s@

212 213ags of dog food sold $> &>6eas'es pur!'ased 1*> 22>%oupons redeemed 12> 1$>

12(. T'e premium expense for 212 isa. 3(>$.b. 4$>.!. $2>$.

d. ($>.

12*. T'e premium liability at De!ember 31> 212 isa. 11>2$.b. 1$>.!. 2&>2$.d. 3>.

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12,. T'e premium liability at De!ember 31> 213 isa. 1&>*($b. 31>*($.!. 33>($.d. &3>($.

13. =inter %o. is being sued for illness !aused to lo!al residents as a result of negligen!e ont'e !ompanys part in permitting t'e lo!al residents to be exposed to 'ig'ly toxi!!'emi!als from its plant. =inters la0yer states t'at it is probable t'at =inter 0ill lose t'esuit and be found liable for a 8udgment !osting =inter any0'ere from 1>&> to*>>. Ho0ever> t'e la0yer states t'at t'e most probable !ost is 4>*>. )s aresult of t'e above fa!ts> =inter s'ould a!!ruea. a loss !ontingen!y of 1>&> and dis!lose an additional !ontingen!y of up to

&>4>.b. a loss !ontingen!y of 4>*> and dis!lose an additional !ontingen!y of up to

3>2>.!. a loss !ontingen!y of 4>*> but notdis!lose any additional !ontingen!y.d. no loss !ontingen!y but dis!lose a !ontingen!y of 1>&> to *>>.

131. "an!e %ompany estimates its annual 0arranty expense as 2J of annual net sales. T'efollo0ing data relate to t'e !alendar year 212@

"et sales 1>$>=arranty liability a!!ount

alan!e> De!. 31> 212 1> debit before ad8ustmentalan!e> De!. 31> 212 $> !redit after ad8ustment

='i!' one of t'e follo0ing entries 0as made to re!ord t'e 212 estimated 0arrantyexpensea. =arranty Expense .............................................................. 3>

etained Earnings :prior-period ad8ustment; ............ $>

=arranty 6iability ...................................................... 2$>b. =arranty Expense .............................................................. 2$>

etained Earnings :prior-period ad8ustment; ...................... $>=arranty 6iability ...................................................... 3>

!. =arranty Expense .............................................................. 2>=arranty 6iability ...................................................... 2>

d. =arranty Expense .............................................................. 3>=arranty 6iability ...................................................... 3>

132. n 212> #ayton %orporation began selling a ne0 line of produ!ts t'at !arry a t0o-year0arranty against defe!ts. ased upon past experien!e 0it' ot'er produ!ts> t'e estimated0arranty !osts related to dollar sales are as follo0s@

First year of 0arranty 2Je!ond year of 0arranty $J

ales and a!tual 0arranty expenditures for 212 and 213 are presented belo0@

212 213ales &> *>

)!tual 0arranty expenditures 2> 4>

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='at is t'e estimated 0arranty liability at t'e end of 213a. 3*>.b. $*>.!. ,*>.d. 1&>.

133. n Kanuary 3> 212> oyer %orp. o0ned a ma!'ine t'at 'ad !ost 3>. T'ea!!umulated depre!iation 0as 1*>> estimated salvage value 0as 1*>> and fairvalue 0as 4*>. n Kanuary 4> 212> t'is ma!'ine 0as irreparably damaged by #ine%orp. and be!ame 0ort'less. n !tober 212> a !ourt a0arded damages of 4*>against #ine in favor of oyer. )t De!ember 31> 212> t'e final out!ome of t'is !ase 0asa0aiting appeal and 0as> t'erefore> un!ertain. Ho0ever> in t'e opinion of oyerBsattorney> #ineBs appeal 0ill be denied. )t De!ember 31> 212> 0'at amount s'ould oyera!!rue for t'is gain !ontingen!ya. 4*>.b. 3,>.!. 3>.

d. .

134. Fuller Food %ompany distributes to !onsumers !oupons 0'i!' may be presented :on orbefore a stated expiration date; to gro!ers for dis!ounts on !ertain produ!ts of Fuller. T'egro!ers are reimbursed 0'en t'ey send t'e !oupons to Fuller. n Fullers experien!e> $Jof su!' !oupons are redeemed> and generally one mont' elapses bet0een t'e date agro!er re!eives a !oupon from a !onsumer and t'e date Fuller re!eives it. During 212Fuller issued t0o separate series of !oupons as follo0s@

%onsumer )mount Disbursedssued n Total alue Expiration Date as of 12931912

191912 $> &93912 23&>(91912 (2> 12931912 3>

T'e only 8ournal entries to date re!orded debits to !oupon expense and !redits to !as' of(1$>. T'e De!ember 31> 212 balan!e s'eet s'ould in!lude a liability forunredeemed !oupons ofa. .b. &>.!. 124>.d. 3&>.

13$. #resented belo0 is information available for ?orton %ompany.

%urrent )ssets%as' 4>'ort-term investments ($>

)!!ounts re!eivable &1>nventory 11>#repaid expenses 3>

Total !urrent assets 2*>

Total !urrent liabilities are 11>. T'e a!id-test ratio for ?orton isa. 2.$$ to 1.b. 2.2( to 1.!. 1.2( to 1.d. .(2 to 1.

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+uti&e C"oi%e Ans*ers)Co-&utationa

Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'

,. b ,(. d 14. a 111. a 11*. b 12$. d 132. a,1. d ,*. b 1$. d 112. d 11,. d 12&. b 133. d

,2. a ,,. d 1&. d 113. a 12. a 12(. d 134. b

,3. d 1. b 1(. ! 114. b 121. b 12*. d 13$. !

,4. b 11. b 1*. ! 11$. d 122. d 12,. d

,$. ! 12. ! 1,. ! 11&. d 123. d 13. b

,&. b 13. a 11. d 11(. ! 124. b 131. d

13 ( 3?


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+ULTIPLE CHOICE)CPA A#a&te#

13&. ='i!' of t'e follo0ing is generally asso!iated 0it' payables !lassified as a!!ountspayable

#eriodi! #ayment e!ured

of nterest by %ollaterala. "o "ob. "o Oes!. Oes "od. Oes Oes

13(. n Kanuary 1> 212> eyer %o. leased a building to Heins %orp. for a ten-year term at anannual rental of 14>. )t in!eption of t'e lease> eyer re!eived $&> !overingt'e first t0o years rent of 2*> and a se!urity deposit of 2*>. T'is deposit 0illnot be returned to Heins upon expiration of t'e lease but 0ill be applied to payment of rentfor t'e last t0o years of t'e lease. ='at portion of t'e $&> s'ould be s'o0n as a!urrent and long-term liability> respe!tively> in eyers De!ember 31> 212 balan!e s'eet

%urrent 6iability 6ong-term 6iabilitya. $&>b. 14> 2*>!. 2*> 2*>d. 2*> 14>

13*. n eptember 1> 212> Herman %o. issued a note payable to "ational an+ in t'eamount of 1>*>> bearing interest at 12J> and payable in t'ree e5ual annualprin!ipal payments of &>. n t'is date> t'e ban+s prime rate 0as 11J. T'e firstpayment for interest and prin!ipal 0as made on eptember 1> 213. )t De!ember 31>213> Herman s'ould re!ord a!!rued interest payable ofa. (2>.

b. &&>.!. 4*>.d. 44>.

13,. n!luded in ernon %orp.s liability a!!ount balan!es at De!ember 31> 212> 0ere t'efollo0ing@

(J note payable issued !tober 1> 212> maturing eptember 3> 213 2$>*J note payable issued )pril 1> 212> payable in six e5ual annual

installments of 1$> beginning )pril 1> 213 &>

ernons De!ember 31> 212 finan!ial statements 0ere issued on ?ar!' 31> 213. nKanuary 1$> 213> t'e entire &> balan!e of t'e *J note 0as refinan!ed by

issuan!e of a long-term obligation payable in a lump sum. n addition> on ?ar!' 1> 213>ernon !onsummated a non!an!elable agreement 0it' t'e lender to refinan!e t'e (J>2$> note on a long-term basis> on readily determinable terms t'at 'ave not yet beenimplemented. n t'e De!ember 31> 212 balan!e s'eet> t'e amount of t'e notes payablet'at ernon s'ould !lassify as s'ort-term obligations isa. 1($>.b. 12$>.!. $>.d. .

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14. Edge %ompanyBs salaried employees are paid bi0ee+ly. !!asionally> advan!es made toemployees are paid ba!+ by payroll dedu!tions. nformation relating to salaries for t'e!alendar year 213 is as follo0s@

12931912 12931913Employee advan!es 24> 3&>

)!!rued salaries payable 13> alaries expense during t'e year 1>3>alaries paid during t'e year :gross; 1>2$>

)t De!ember 31> 213> 0'at amount s'ould Edge report for a!!rued salaries payablea. 1*>.b. 1&*>.!. 144>.d. $>.

141. isen %orp.s payroll for t'e pay period ended !tober 31> 212 is summari/ed as follo0s@

Federal )mount of =ages ub8e!tDepartment Total n!ome Tax to #ayroll Taxes

#ayroll =ages =it''eld F..%.). CnemploymentFa!tory ($> ,> (> 32>ales 22> 3> 1&> 2>ffi!e 1*> 2> *> G

11$> 14> ,4> 34>

)ssume t'e follo0ing payroll tax rates@F..%.). for employer and employee (J ea!'Cnemployment 3J

='at amount s'ould isen a!!rue as its s'are of payroll taxes in its !tober 31> 212balan!e s'eeta. 21>&.

b. 1$>2.!. 14>1*.d. (>&.

142. Felton %o. sells ma8or 'ouse'old applian!e servi!e !ontra!ts for !as'. T'e servi!e!ontra!ts are for a one-year> t0o-year> or t'ree-year period. %as' re!eipts from !ontra!tsare !redited to unearned servi!e !ontra!t revenues. T'is a!!ount 'ad a balan!e of(2> at De!ember 31> 211 before year-end ad8ustment. ervi!e !ontra!t !osts are!'arged as in!urred to t'e servi!e !ontra!t expense a!!ount> 0'i!' 'ad a balan!e of1*> at De!ember 31> 211. utstanding servi!e !ontra!ts at De!ember 31> 211expire as follo0s@

During 212 During 213 During 214

1$> 24> 1$>='at amount s'ould be reported as unearned servi!e !ontra!t revenues in FeltonsDe!ember 31> 211 balan!e s'eeta. $4>.b. 4,$>.!. 3&>.d. 33>.

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143. Oount Trading tamp %o. re!ords stamp servi!e revenue and provides for t'e !ost ofredemptions in t'e year stamps are sold to li!ensees. Oounts past experien!e indi!atest'at only *J of t'e stamps sold to li!ensees 0ill be redeemed. Oounts liability for stampredemptions 0as &>> at De!ember 31> 211. )dditional information for 212 is asfollo0s@

tamp servi!e revenue from stamps sold to li!ensees 4>>%ost of redemptions 2>(2>

f all t'e stamps sold in 212 0ere presented for redemption in 213> t'e redemption !ost0ould be 2>>. ='at amount s'ould Oount report as a liability for stamp redemptionsat De!ember 31> 212a. (>2*>.b. $>2*>.!. 4>**>.d. 3>2*>.

144. "eer %o. 'as a probable loss t'at !an only be reasonably estimated 0it'in a range ofout!omes. "o single amount 0it'in t'e range is a better estimate t'an any ot'er amount.

T'e loss a!!rual s'ould bea. /ero.b. t'e maximum of t'e range.!. t'e mean of t'e range.d. t'e minimum of t'e range.

14$. During 212> Eaton %o. introdu!ed a ne0 produ!t !arrying a t0o-year 0arranty againstdefe!ts. T'e estimated 0arranty !osts related to dollar sales are 2J 0it'in 12 mont'sfollo0ing sale and 3J in t'e se!ond 12 mont's follo0ing sale. ales and a!tual 0arrantyexpenditures for t'e years ended De!ember 31> 212 and 213 are as follo0s@

)!tual =arranty

ales Expenditures212 *> 12>213 1>> 3$>

1>*> 4(>

)t De!ember 31> 213> Eaton s'ould report an estimated 0arranty liability ofa. .b. 1$>.!. 3$>.d. 43>.

14&. n ?ar!' 213> an explosion o!!urred at !ausing damage to areaproperties. y ?ay 213> no !laims 'ad yet been asserted against > 0ould be a reasonable estimateof t'e damages. > !ompre'ensive publi! liability poli!y !ontains a4> dedu!tible !lause. n 212 finan!ial statements> for 0'i!'t'e auditors field0or+ 0as !ompleted in )pril 213> 'o0 s'ould t'is !asualty be reporteda. )s a note dis!losing a possible liability of 4>>.b. )s an a!!rued liability of 4>.!. )s a note dis!losing a possible liability of 4>.d. "o note dis!losure of a!!rual is re5uired for 212 be!ause t'e event o!!urred in 213.

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+uti&e C"oi%e Ans*ers)CPA A#a&te#

Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'

13&. a 13*. ! 14. a 142. b 144. d 14&. !13(. b 13,. d 141. d 143. ! 14$. d

DERI6ATIONS) Co-&utationa

No' Ans*er Derivation

,. b 2$3>&($ P 2$> A 3>&($.3>&($ Q 293 A 2>4$.

,1. d 24> R :3> P 24>; A .*( A *.(J.

,2. a :13>3 Q .,,; A 13>1&(.

,3. d 2*> Q .12 Q ,912 A 2$>2.

,4. b :3&> P 3$>; Q 39$ A &>.

,$. ! 1>&>.

,&. b :&> Q 12$; Q *912 A $>.

,(. d 221> Q .& A 13>2&.

,*. b 2>2$>.

,,. d 4>> P 2>4> A 1>&>.

1. b S .& A 222>&> A 21>.222>& P 21> A 12>&.

11. b 12>& Q .,* A 12>34*.

12. ! .$ Q .,( A 13$>*> A 2>*>.

13. a ,> Q 2 A 1>*>.

14. a $> Q 2 A 1>>.

1$. d :.&2 P .$4; S .2U Q (> A 1,>&.

1&. d :.&2 P .$4; S .2U Q &> A 1&>*.

1(. ! $ Q 12 Q * Q 21 A 1>*I $ Q 1$ Q * Q 24 A 144>.

1*. ! $ Q 12 Q * Q 24.$ A 11(>&I $ Q 1$ Q * Q 2* A 1&*>.

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DERI6ATIONS) Co-&utationa 0%ont'


1,. ! :4$> Q (.&$J; S :1$> Q 1.4$J; S :1> Q 1.*J; A 3*>4.

11. d 21.$ Q * Q 1 Q 3$ A &>2.

111. a :23.($ Q * Q 1 Q 3$; S :22.$ Q * Q 2 Q 3$; A (,>1.

112. d 2$>4 S 1$>(* S 1*> A $,>1*I1(> P $,>1* A 11>*2.

113. a &$ Q 2 0ee+s Q 1>1490ee+ A 14*>2.

114. b 6i+eli'ood of loss is only possible> not probable.

11$. d #resent value of t'e removal !ost.

11&. d :42> Q *1; 3 yrs.UP 4> A (34>.

11(. ! (>*> S :&> Q 2; P ,>> A 1>*>.

11*. b 3>> Q .1 Q 1 A 3>I 3> P 1&> A 14>.

11,. d :2>> S 1$4>22; R 1 A 21$>42I 1$4>22 Q .1 A 1$>422.

12. a

121. b &>> Q .1 Q 2 A 1>2>I 1>2> P 42> A (*>.

122. d :3>> S 231>33; R 1 A 323>133I 231>33 Q .1 A 23>133.

123. d :4>2> Q .,; P 2,> A 1&,>.

124. b V:&($> Q .&; P 33>U R 3W Q 2 A $>.

12$. d :2>*> Q .,; P 13&> A 11&>.

12&. b V:$> Q .&; P 22>U R 4W Q 2 A 4>.

12(. d :$> Q .4; R *U Q 3 A ($>.

12*. d :2> P 12>; R *U Q 3 A 3>.

12,. d V:&> Q .4; P 1$>U R *W Q 3 A 33>($.33>($ S 3> A &3>($.

13. b 4>*> and 3>2>.

131. d 1>$> Q .2 A 3>.

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DERI6ATIONS) Co-&utationa 0%ont'

No' Ans*er Derivation132. a :&> S *>; Q .(U P &> A 3*>.

133. d > gain !ontingen!ies are not a!!rued.

134. b :(2> Q .$; P 3> A &>.

4> S ($> S &1>13$. ! GGGGGGGGGGGGG A 1.2( to 1.

11>

DERI6ATIONS) CPA A#a&te#


13&. a %on!eptualGa!!ounts payable generally are /ero-interest-bearing andunse!ured.

13(. b 14> and 2*>.

13*. ! 1>2> Q .12 Q4

12A 4*>.

13,. d %on!eptualGbot' notes 'ave been refinan!ed by long-term obligations.

14. a 1>3> S 13> P 1>2$> A 1*>.

141. d :,4> Q .(; S :34> Q .3; A (>&.

142. b 1$> S 24> S 1$> A 4,$>.

143. ! :2>> Q .*; S &>> P 2>(2> A 4>**>.

144. d %on!eptual.

14$. d :1>*> Q .$; P 4(> A 43>.

14&. ! %on!eptual.

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EERCISES

E@' 13(14

nterest Expense........................................................................ 4$>Dis!ount on "otes #ayable :,J Q 4>;............................ 3&>

"otes #ayable................................................................ 4>%as'.............................................................................. 131>

:2; nterest Expense :193 Q 3&>;.............................................. 12>Dis!ount on "otes #ayable............................................ 12>

E@' 13(14=G#ayroll entries.

Total payroll of =atson %o. 0as 1>*4>> of 0'i!' 32> represented amounts paid inex!ess of 1&>* to !ertain employees. T'e amount paid to employees in ex!ess of (>0as 1>44>. n!ome taxes 0it''eld 0ere 4$>. T'e state unemployment tax is 1.2J> t'efederal unemployment tax is .*J> and t'e F..%.). tax is (.&$J on an employeeBs salaries and0ages to 1&>* and 1.4$J in ex!ess of 1&>*.

Instru%tions:a; #repare t'e 8ournal entry for t'e salaries and 0ages paid.

:b; #repare t'e entry to re!ord t'e employer payroll taxes.

Soution 13(14=

:a; alaries and =ages Expense.................................................... 1>*4>=it''olding Taxes #ayable............................................ 4$>F%) Taxes #ayable...................................................... 12>,2L%as'.............................................................................. 1>2&,>*

L :1>*4> P 32>; Q (.&$JU S :32> Q 1.4$J;

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Soution 13(14= :!ont.;

:b; #ayroll Tax Expense ............................................................... 12*>,2F%) Taxes #ayable

:1>$2> Q (.&$J; S :32> Q 1.4$J;........... 12>,2FCT) Taxes #ayable

:1>*4> P 1>44>; Q .*JU .......................... 3>2CT) Taxes #ayable :4> Q 1.2J; ..................... 4>*

E@' 13(14>G%ompensated absen!es.

Oates %o. began operations on Kanuary 2> 212. t employs 1$ people 0'o 0or+ *-'our days.Ea!' employee earns 1 paid va!ation days annually. a!ation days may be ta+en after Kanuary1 of t'e year follo0ing t'e year in 0'i!' t'ey are earned. T'e average 'ourly 0age rate 0as2. in 212 and 21.2$ in 213. T'e average va!ation days used by ea!' employee in 2130as ,. Oates %o. a!!rues t'e !ost of !ompensated absen!es at rates of pay in effe!t 0'en earned.

Instru%tions#repare 8ournal entries to re!ord t'e transa!tions related to paid va!ation days during 212 and213.

Soution 13(14>

212 alaries and =ages Expense.............................................. 24> :1;alaries and =ages #ayable................................... 24>

:1; 1$ Q * Q 2. A 2>4I 2>4 Q 1 A 24>.

213 alaries and =ages Expense.............................................. 1>3$alaries and =ages #ayable............................................... 21>& :2;%as'......................................................................... 22>,$ :3;

alaries and =ages Expense.............................................. 2$>$ :4;alaries and =ages #ayable................................... 2$>$

:2; 2>4 Q , A 21>&.

:3; 1$ * 21.2$ A 2>$$I 2>$$ , A 22>,$.

:4; 2>$$ 1 A 2$>$.

E@' 13(17?G%ontingent liabilities.

elo0 are t'ree independent situations.1. n )ugust> 212 a 0or+er 0as in8ured in t'e fa!tory in an a!!ident partially t'e result of 'is

o0n negligen!e. T'e 0or+er 'as sued =esley %o. for *>. %ounsel believes it isreasonably possible t'at t'e out!ome of t'e suit 0ill be unfavorable and t'at t'e settlement0ould !ost t'e !ompany from 2$> to $>.

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E@' 13(17? :!ont.;

2. ) suit for brea!' of !ontra!t see+ing damages of 2>4> 0as filed by an aut'or against7reer %o. on !tober 4> 212. 7reers legal !ounsel believes t'at an unfavorable out!ome isprobable. ) reasonable estimate of t'e a0ard to t'e plaintiff is bet0een *> and1>*>. "o amount 0it'in t'is range is a better estimate of potential damages t'an any

ot'er amount.

3. Xuinn is involved in a pending !ourt !ase. XuinnBs la0yers believe it is probable t'at Xuinn0ill be a0arded damages of 1>>.

Instru%tionsDis!uss t'e proper a!!ounting treatment> in!luding any re5uired dis!losures> for ea!' situation.7ive t'e rationale for your ans0ers.

Soution 13(17?

1. =esley %o. s'ould dis!lose in t'e notes to t'e finan!ial statements t'e existen!e of apossible !ontingent liability related to t'e la0 suit. T'e note s'ould indi!ate t'e range of t'epossible loss. T'e !ontingent liability s'ould not be a!!rued be!ause t'e loss is notprobable.

2. T'e probable a0ard s'ould be a!!rued by a !'arge to an estimated loss and a !redit to anestimated liability of *>. 7reer %o. s'ould dis!lose t'e follo0ing in t'e notes to t'efinan!ial statements@ t'e amount of t'e suit> t'e nature of t'e !ontingen!y> t'e reason for t'ea!!rual> and t'e range of t'e possible loss.

T'e a!!rual is made be!ause it is probable t'at a liability 'as been in!urred and t'e amountof t'e loss !an be reasonably estimated. T'e lo0est amount of t'e range of possible losses

is used 0'en no amount is a better estimate t'an any ot'er amount.

3. Xuinn s'ould not re!ord t'e gain !ontingen!y until itBs reali/ed. Csually> gain !ontingen!iesare neit'er a!!rued nor dis!losed. T'e 1>> gain !ontingen!y s'ould be dis!losedonly if t'e probability t'at it 0ill be reali/ed is very 'ig'.

E@' 13(171G#remiums.

rving ?usi! 'op gives its !ustomers !oupons redeemable for a poster plus a Dixie %'i!+s %D.ne !oupon is issued for ea!' dollar of sales. n t'e surrender of 1 !oupons and $. !as'>t'e poster and %D are given to t'e !ustomer. t is estimated t'at *J of t'e !oupons 0ill be

presented for redemption. ales for t'e first period 0ere (>> and t'e !oupons redeemedtotaled 42>. ales for t'e se!ond period 0ere *4>> and t'e !oupons redeemed totaled($>. rving ?usi! 'op boug't 2> posters at 2.9poster and 2> %Ds at &.9%D.

Instru%tions#repare t'e follo0ing entries for t'e t0o periods> assuming all t'e !oupons expe!ted to beredeemed from t'e first period 0ere redeemed by t'e end of t'e se!ond period.

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E@' 13(171 :!ont.;

Entry #eriod 1 #eriod 2

:a; To re!ord !oupons redeemed

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG

:b; To re!ord estimated liability


Soution 13(171

Entry #eriod 1 #eriod 2

:a; #remium 6iability 4>2#remium Expense :42> R 1; Q :*. P $;U 12>& 1*>3%as' :42> R 1; Q $ 21> 3(>$

nventory of #remiums 33>& &>


:b; #remium Expense 4>2L 1>*remium 6iability 4>2 1>*&

L:(> Q .*; P 42>U R 1 Q 3.

E@' 13(172G#remiums.

Ed0ards %o. in!ludes one !oupon in ea!' bag of dog food it sells. n return for 4 !oupons>!ustomers re!eive a dog toy t'at t'e !ompany pur!'ases for 1.$ ea!'. Ed0ardss experien!eindi!ates t'at & per!ent of t'e !oupons 0ill be redeemed. During 212> 1> bags of dogfood 0ere sold> 12> toys 0ere pur!'ased> and 4> !oupons 0ere redeemed. During 213>12> bags of dog food 0ere sold> 1&> toys 0ere pur!'ased> and &> !oupons 0ereredeemed.

Instru%tionsDetermine t'e premium expense to be reported in t'e in!ome statement and t'e premium liabilityon t'e balan!e s'eet for 212 and 213.

Soution 13(172

212 213#remium expense 22>$ :1; 2(> :3;#remium liability (>$ :2; 12> :4;

:1; 1> Q .& A &>I &> R 4 A 1$>I 1$> Q 1.$ A 22>$.:2; 4> R 4 A 1>I 1$> P 1> A $>I $> Q 1.$ A (>$.:3; 12> Q .& A (2>I (2> R 4 A 1*>I 1*> Q 1.$ A 2(>.:4; &> R 4 A 1$>I $> S 1*> P 1$> A *>I *> Q 1.$ A 12>.

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PROBLE+S

Pr' 13(173G)!!ounts and "otes #ayable.

Des!ribed belo0 are !ertain transa!tions of 6arson %ompany for 212@

1. n ?ay 1> t'e !ompany pur!'ased goods from Fry %ompany for ($>> terms 291> n93.#ur!'ases and a!!ounts payable are re!orded at net amounts. T'e invoi!e 0as paid on ?ay1*.

2. n Kune 1> t'e !ompany pur!'ased e5uipment for ,> from aney %ompany> paying3> in !as' and giving a one-year> ,J note for t'e balan!e.

3. n eptember 3> t'e !ompany dis!ounted at 1J its 2>> one-year /ero-interest-bearing note at First tate an+.

Instru%tions

:a; #repare t'e 8ournal entries ne!essary to re!ord t'e transa!tions above using appropriatedates.

:b; #repare t'e ad8usting entries ne!essary at De!ember 31> 212 in order to properly reportinterest expense related to t'e above transa!tions. )ssume straig't-line amorti/ation ofdis!ounts.

:!; ndi!ate t'e manner in 0'i!' t'e above transa!tions s'ould be refle!ted in t'e %urrent6iabilities se!tion of 6arson %ompanys De!ember 31> 212 balan!e s'eet.

Soution 13(173

:a; ?ay 1> 212

#ur!'ases9nventory.................................................................. (3>$)!!ounts #ayable.......................................................... (3>$

?ay 1*> 212)!!ounts #ayable...................................................................... (3>$

%as'.............................................................................. (3>$

Kune 1> 212E5uipment................................................................................. ,>

%as'.............................................................................. 3>"otes #ayable................................................................ &>

eptember 3> 212

%as'.......................................................................................... 1*>Dis!ount on "otes #ayable....................................................... 2>

"otes #ayable................................................................ 2>

:b; nterest Expense........................................................................ 3>1$nterest #ayable :&> Q ., Q (912;......................... 3>1$

nterest Expense........................................................................ $>Dis!ount on "otes #ayable :2> Q 3912;................. $>

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:!; %urrent 6iabilitiesnterest payable 3>1$"ote payableGaney %ompany &>"ote payableGFirst tate an+ 2>6ess@ Dis!ount on note 1$> 1*$>

24*>1$

Pr' 13(174Gefinan!ing of s'ort-term debt.

)t t'e finan!ia

ch13 current liab and contigencies

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