Current Liabilities and Contingencies
13 – 21
80. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50% discount.
The coupons expire in one year. The store normally recognized a gross profit margin of
40% of the selling price on video games. How would the store account for a purchase using
the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized
as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81. What condition(s) is/are necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.
82. Which of the following is not a factor that is considered when evaluating whether or not to
record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company’s liquidity.
d. The company’s profitability.
Current Liabilities and Contingencies
13 – 22
85. Which of the following is not an acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash, inventory, and marketable securities.
c. cash, inventory, and net receivables.
d. cash, marketable securities, and net receivables.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.
Current Liabilities and Contingencies
13 – 23
MULTIPLE CHOICE—Computational
90. Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for
the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson
used a “Discount of Note Payable” account to initially record the note. Assuming that the
discount will be amortized equally over the 3-month period and that there was no adjusting
entry made for November, the adjusting entry made at December 31, 2020 will include a
a. debit to Discount on Note Payable for $2,600.
b. debit to Interest Expense for $5,200.
c. credit to Discount on Note Payable for $2,600.
d. credit to Interest Expense for $5,200.
91. The effective interest on a 12-month, zero-interest-bearing note payable of $400,000,
discounted at the bank at 7% is
a. 6.54%.
b. 7%.
c. 14.29%.
d. 7.53%.
92. On September 1, Horton purchased $39,900 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $840. Payment for the purchase was
Current Liabilities and Contingencies
13 – 24
made on September 18. Assuming Horton uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $39,501.
b. $40,341.
c. $40,740.
d. $39,900.
93. Slack Inc. borrowed $400,000 on April 1. The note requires interest at 12% and principal
to be paid in one year. How much interest is recognized for the period from April 1 to
December 31?
a. $0.
b. $48,000.
c. $32,000.
d. $36,000.
94. Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1,
2021. What amount is the note payable recorded at on October 1, 2020 and how much
interest is recognized from October 1 to December 31, 2020?
a. $700,000 and $0.
b. $700,000 and $12,000.
c. $720,000 and $0.
d. $700,000 and $20,000.
95. Parton owes $3 million that is due on February 28. The company borrows $2,400,000 on
February 25 (5-year note) and uses the proceeds to pay down the $3 million note and uses
other cash to pay the balance. How much of the $3 million note is classified as long-term in
the December 31 financial statements?
a. $3,000,000.
b. $0.
c. $2,400,000.
d. $600,000.
96. Venible newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much
unearned revenue will exist as of December 31?
a. $0.
b. $375,000.
c. $450,000.
d. $900,000.
97. Bargain Surplus made cash sales during the month of October of $375,000. The sales are
subject to a 6% sales tax that was also collected. Which of the following would be included
in the summary journal entry to reflect the sale transactions?
a. Debit Accounts Receivable for $375,000.
Current Liabilities and Contingencies
13 – 25
b. Credit Sales Taxes Payable for $21,226.
c. Credit Sales Revenue for $347,483.
d. Credit Sales Taxes Payable for $22,500.
98. On February 10, 2021, after issuance of its financial statements for 2020, Higgins
Company entered into a financing agreement with Cleveland Bank, allowing Higgins
Company to borrow up to $8,000,000 at any time through 2023. Amounts borrowed under
the agreement bear interest at 2% above the bank’s prime interest rate and mature two
years from the date of loan. Higgins Company presently has $3,000,000 of notes payable
with Star National Bank maturing March 15, 2021. The company intends to borrow
$5,000,000 under the agreement with Cleveland and liquidate the notes payable to Star
National Bank. The agreement with Cleveland also requires Higgins to maintain a working
capital level of $12,000,000 and prohibits the payment of dividends on common stock
without prior approval by Cleveland Bank. From the above information only, the total short-
term debt of Higgins Company as of the December 31, 2020 balance sheet date is
a. $0.
b. $3,000,000.
c. $4,000,000.
d. $8,000,000.
99. On December 31, 2020, Isle Co. has $6,000,000 of short-term notes payable due on
February 14, 2021. On January 10, 2019, Isle arranged a line of credit with Beach Bank
which allows Isle to borrow up to $4,500,000 at one percent above the prime rate for three
years. On February 2, 2021, Isle borrowed $3,600,000 from Beach Bank and used
$1,500,000 additional cash to liquidate $5,100,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2020 balance sheet which is issued on March 5, 2021 is
a. $0.
b. $900,000.
c. $1,500,000.
d. $2,400,000.
Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep
2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $754,350.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $62,286.
b. $49,350.
c. $67,893.
d. $52,806.
Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep
2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $754,350.
Current Liabilities and Contingencies
13 – 26
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May
is
a. $37,719.
b. $48,363.
c. $62,286.
d. $51,750.
102. Valley, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before the
twentieth of the following month, the retailer may keep 3% of the sales tax collected. On
April 10, 2020 Valley remitted $203,700 tax to the state tax division for March 2020 retail
sales. What was Valley’s March 2020 retail sales subject to sales tax?
a. $4,074,000.
b. $3,990,000.
c. $4,200,000.
d. $4,112,500.
103. Jump Corporation has $3,000,000 of short-term debt it expects to retire with proceeds from
the sale of 85,000 shares of common stock. If the stock is sold for $25 per share subsequent
to the balance sheet date, but before the balance sheet is issued, what amount of short–
term debt could be excluded from current liabilities?
a. $2,125,000
b. $3,000,000
c. $875,000
d. $0
104. Elmer Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from
the sale of 50,000 shares of common stock. If the stock is sold for $30 per share subsequent
to the balance sheet date, but before the balance sheet is issued, what amount of short–
term debt could be excluded from current liabilities?
a. $1,500,000
b. $2,500,000
c. $1000,000
d. $0
105. Palco Co., which has a taxable payroll of $1,200,000, is subject to FUTA tax of 6.2% that
includes a state contribution rate of 5.4%. However, because of stable employment
experience, the company’s state rate has been reduced to 2%. What is the total amount of
federal and state unemployment tax for Palco Co.?
a. $139,200
b. $98,400
c. $48,000
d. $33,600
Current Liabilities and Contingencies
13 – 27
106. Roxy Co., which has a taxable payroll of $800,000, is subject to FUTA tax of 6.2% that
includes a state contribution rate of 5.4%. However, because of stable employment
experience, the company’s state rate has been reduced to 2%. What is the total amount of
federal and state unemployment tax for Roxy Co.?
a. $93,600
b. $65,600
c. $32,000
d. $22,400
107. A company gives each of its 75 employees (assume they were all employed continuously
through 2020 and 2021) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2020, they made $21 per hour and in 2021 they made
$24 per hour. During 2021, they took an average of 9 days of vacation each. The company’s
policy is to record the liability existing at the end of each year at the wage rate for that year.
What amount of vacation liability would be reflected on the 2020 and 2021 balance sheets,
respectively?
a. $151,200; $210,600
b. $172,800; $216,000
c. $151,200; $216,000
d. $172,800; $210,600
108. A company gives each of its 75 employees (assume they were all employed continuously
through 2020 and 2021) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2020, they made $24.50 per hour and in 2021 they
made $28 per hour. During 2021, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2020 and 2021
balance sheets, respectively?
a. $176,400; $245,700
b. $201,600; $252,000
c. $176,400; $252,000
d. $201,600; $245,700
Current Liabilities and Contingencies
13 – 28
109. The total payroll of Trolley Company for the month of October, 2020 was $960,000, of which
$180,000 represented amounts paid in excess of $128,400 to certain employees. $600,000
represented amounts paid to employees in excess of the $7,000 maximum subject to
unemployment taxes. $180,000 of federal income taxes and $18,000 of union dues were
withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the
current F.I.C.A. tax is 7.65% on an employee’s wages to $128,400 and 1.45% in excess of
$128,400. What amount should Trolley record as payroll tax expense?
a. $87,360.
b. $79,560.
c. $68,760.
d. $73,440.
Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1,
2020, the company began a program of granting its employees 10 days of paid vacation each year.
Vacation days earned in 2020 may first be taken on January 1, 2021. Information relative to these
employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2020 $20.50 10 0
2021 22.50 10 8
2022 25.50 10 10
Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported
on Vanco’s income statement for 2020?
a. $0.
b. $142,800.
c. $126,000.
d. $114,800.
Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1,
2020, the company began a program of granting its employees 10 days of paid vacation each year.
Vacation days earned in 2020 may first be taken on January 1, 2021. Information relative to these
employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2020 $20.50 10 0
2021 22.50 10 8
2022 25.50 10 10
Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
Current Liabilities and Contingencies
13 – 29
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2022?
a. $168,000.
b. $394,800.
c. $142,800.
d. $193,200.
112. Qualpoint pays a weekly payroll of $255,000 that includes federal taxes withheld of
$38,100, FICA taxes withheld of $23,670, and 401(k) withholdings of $27,000. What is the
effect on assets and liabilities from this transaction?
a. Assets decrease $255,000 and liabilities do not change.
b. Assets decrease $193,230 and liabilities increase $61,770.
c. Assets decrease $193,230 and liabilities decrease $61,770.
d. Assets decrease $166,230 and liabilities increase $88,770.
113. Qualpoint provides its employees two weeks of paid vacation per year. As of December 31,
65 employees have earned two weeks of vacation time to be taken the following year. If the
average weekly salary for these employees is $960, what is the required journal entry?
a. Debit Salaries and Wages Expense for $124,800 and credit Salaries and Wages
Payable for $124,800.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $124,295 and credit Salaries and Wages
Expense for $124,295.
d. Debit Salaries and Wages Expense for $62,400 and credit Salaries and Wages Payable
for $62,400.
114. Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.
The company has consulted with its attorney and determined that it is possible that they
may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is
the case, their attorney estimated that the amount of any payment would be $800,000. What
is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $800,000 and credit Litigation liability for $800,000.
b. No journal entry is required.
c. Debit Litigation Expense for $320,000 and credit Litigation Liability for $320,000.
d. Debit Litigation Expense for $480,000 and credit Litigation Liability for $480,000.
115. Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra
recently built a facility to extract natural gas at a cost of $12 million. However, Xtra is also
Current Liabilities and Contingencies
13 – 30
legally responsible to remove the facility at the end of its useful life of twenty years. This
cost is estimated to be $17 million (the present value of which is $6.5 million). What is the
journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $17,000,000 and credit Asset Retirement Obligation for
$17,000,000
c. Debit Natural Gas Facility for $5,000,000 and credit Asset Retirement Obligation for
$5,000,000.
d. Debit Natural Gas Facility for $6,500,000 and credit Asset Retirement Obligation for
$6,500,000.
116. Composite provides extended service contracts on electronic equipment sold through
major retailers. The standard contract is for four years. During the current year, Composite
provided 42,000 such warranty contracts at an average price of $162 each. Related to these
contracts, the company spent $800,000 servicing the contracts during the current year and
expects to spend $4,200,000 more in the future. What is the net profit that the company will
recognize in the current year related to these contracts?
a. $1,804.
b. $6,004,000.
c. $800,000.
d. $901,000.
117. Excom manufactures high-end whole home electronic systems. The company provides a
one-year warranty for all products sold. The company estimates that the warranty cost is
$300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the
beginning of this year. If during the current year, the company sold 60,000 units for a total
of $324 million and paid warranty claims of $12,000,000 on current and prior year sales,
what amount of liability would the company report on its balance sheet at the end of the
current year?
a. $3,733,333.
b. $6,000,000.
c. $16,400,000.
d. $18,000,000.
118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2021.
Historically, 10% of customers mail in the rebate form. During 2021, 3,750,000 packages of
light bulbs are sold, and 200,000 $1 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2021 financial statements dated December
31?
a. $375,000; $375,000
b. $375,000; $175,000
c. $175,000; $175,000
d. $200,000; $175,000
Current Liabilities and Contingencies
13 – 31
119. A company buys an oil rig for $3,000,000 on January 1, 2021. The life of the rig is 10 years
and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value
at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense
should be recorded for 2021 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133
120. Sawyer Company self-insures its property for fire and storm damage. If the company were
to obtain insurance on the property, it would cost them $2,000,000 per year. The company
estimates that on average it will incur losses of $1,600,000 per year. During 2021, $700,000
worth of losses were sustained. How much total expense and/or loss should be recognized
by Sawyer Company for 2021?
a. $700,000 in losses and no insurance expense
b. $700,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,600,000 in insurance expense
d. $0 in losses and $2,000,000 in insurance expense
121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2021.
Historically, 10% of customers mail in the rebate form. During 2021, 5,000,000 packages of
batteries are sold, and 175,000 $2 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2021 financial statements dated December
31?
a. $1,000,000; $1,000,000
b. $1,000,000; $650,000
c. $650,000; $650,000
d. $350,000; $650,000
122. A company buys an oil rig for $5,000,000 on January 1, 2021. The life of the rig is 10 years
and the expected cost to dismantle the rig at the end of 10 years is $1,000,000 (present
value at 10% is $385,550). 10% is an appropriate interest rate for this company. What
expense should be recorded for 2021 as a result of these events?
a. Depreciation expense of $600,000
b. Depreciation expense of $500,000 and interest expense of $38,555
c. Depreciation expense of $500,000 and interest expense of $100,000
d. Depreciation expense of $538,555 and interest expense of $38,555
Current Liabilities and Contingencies
13 – 32
123. During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty
against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows: (assume the accrual method)
Sales Actual Warranty Expenditures
2019 $ 1,600,000 $ 39,000
2020 2,500,000 65,000
2021 2,100,000 135,000
$6,200,000 $239,000
What amount should Rao report as a liability at December 31, 2021?
a. $0
b. $71,000
c. $84,000
d. $319,000
124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in
3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of
the boxtops will be redeemed. In 2021, the company sold 1,350,000 boxes of Frosted
Flakes and customers redeemed 660,000 boxtops receiving 220,000 bowls. If the bowls
cost Palmer Company $3 each, how much liability for outstanding premiums should be
recorded at the end of 2021?
a. $540,000
b. $100,000
c. $150,000
d. $276,000
125. During 2019, Salton Co. introduced a new line of machines that carry a three-year warranty
against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 1% of sales in the year of sale, 2% in the year after sale, and 3% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows:
Sales Actual Warranty Expenditures
2019 $ 1,400,000 $ 26,000
2020 1,000,000 40,000
2021 1,400,000 90,000
$3,800,000 $156,000
What amount should Salton report as a liability at December 31, 2021?
a. $0
b. $14,000
c. $34,000
d. $72,000
Current Liabilities and Contingencies
13 – 33
126. Crispy Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4
boxtops from Crispy Frosted Flakes boxes and $1. The company estimates that 60% of the
boxtops will be redeemed. In 2021, the company sold 800,000 boxes of Frosted Flakes and
customers redeemed 352,000 boxtops receiving 88,000 bowls. If the bowls cost Crispy
Company $2 each, how much liability for outstanding premiums should be recorded at the
end of 2021?
a. $240,000
b. $64,000
c. $96,000
d. $134,400
127. Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45
percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows:
2020 2021
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
The premium expense for 2020 is
a. $250,000.
b. $60,000.
c. $100,000.
d. $112,500.
128. Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45
percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows:
2020 2021
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
The premium liability at December 31, 2020 is
a. $50,000.
b. $72,000.
c. $60,000.
d. $52,500.
129. Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45
percent of the coupons will be redeemed. Data for 2020 and 2021 are as follows:
2020 2021
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
Current Liabilities and Contingencies
13 – 34
The premium liability at December 31, 2021 is
a. $30,000.
b. $52,500.
c. $60,000.
d. $112,500.
130. Wooten 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. Wooten’s lawyer states that it is probable that Wooten will lose the suit and
be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000.
However, the lawyer states that the most probable cost is $5,400,000. As a result of the
above facts, Wooten should accrue
a. a loss contingency of $1,800,000 and disclose an additional contingency of up to
$7,200,000.
b. a loss contingency of $5,400,000 and disclose an additional contingency of up to
$3,600,000.
c. a loss contingency of $5,400,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,800,000 to $9,000,000.
131. Holland Company estimates its annual warranty expense as 3% of annual net sales. The
following data relate to the calendar year 2021:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2021 $10,000 debit before adjustment
Balance, Dec. 31, 2021 20,000 credit after adjustment
Which one of the following entries was made to record the 2021 estimated warranty
expense?
a. Warranty Expense ……………………………………………………… 45,000
Retained Earnings (prior-period adjustment) ………… 7,500
Warranty Liability ……………………………………………… 37,500
b. Warranty Expense ……………………………………………………… 37,500
Retained Earnings (prior-period adjustment) …………………. 7,500
Warranty Liability ……………………………………………… 45,000
c. Warranty Expense ……………………………………………………… 30,000
Warranty Liability ……………………………………………… 30,000
d. Warranty Expense ……………………………………………………… 45,000
Warranty Liability ……………………………………………… 45,000
Current Liabilities and Contingencies
13 – 35
132. In 2020, Pollard Corporation began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the estimated
warranty costs related to dollar sales are as follows:
First year of warranty 3%
Second year of warranty 5%
Sales and actual warranty expenditures for 2020 and 2021 are presented below:
2020 2021
Sales $750,000 $1,050,000
Actual warranty expenditures 45,000 75,000
What is the estimated warranty liability at the end of 2021?(assume the accrual method)
a. $24,000.
b. $96,000.
c. $144,000.
d. $30,000.
133. On January 3, 2021, Benton Corp. owned a machine that had cost $400,000. The
accumulated depreciation was $240,000, estimated salvage value was $24,000, and fair
value was $640,000. On January 4, 2021, this machine was irreparably damaged by Pogo
Corp. and became worthless. In October 2021, a court awarded damages of $480,000
against Pogo in favor of Benton. At December 31, 2021, the final outcome of this case was
awaiting appeal and was, therefore, uncertain. However, in the opinion of Benton’s attorney,
Pogo’s appeal will be denied. At December 31, 2021, what amount should Benton accrue
for this gain contingency?
a. $640,000.
b. $520,000.
c. $400,000.
d. $0.
134. Flavor Food Company distributes to consumers coupons which may be presented (on or
before a stated expiration date) to grocers for discounts on certain products of Flavor. The
grocers are reimbursed when they send the coupons to Flavor. In Flavor’s experience, 50%
of such coupons are redeemed, and generally one month elapses between the date a
grocer receives a coupon from a consumer and the date Flavor receives it. During 2021
Flavor issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/21
1/1/21 $500,000 6/30/21 $236,000
7/1/21 840,000 12/31/21 350,000
The only journal entry recorded to date is: debit to coupon expense and credit to cash of
$815,000. The December 31, 2021 balance sheet should include a liability for unredeemed
coupons of:
a. $0.
b. $70,000.
c. $184,000.
d. $420,000.
Current Liabilities and Contingencies
13 – 36
135. Presented below is information available for Marley Company.
Current Assets
Cash $ 4,000
Short-term investments 55,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $260,000
Total current liabilities are $100,000. The acid-test ratio for Marley is:
a. 2.60 to 1
b. 2.30 to 1
c. 1.20 to 1
d. 0.59 to 1
MULTIPLE CHOICE—CPA Adapted
136. Which of the following is generally associated with payables classified as accounts
payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes
137. On January 1, 2021, Bacon Co. leased a building to Horner Corp. for a ten-year term at an
annual rental of $175,000. At inception of the lease, Bacon received $700,000 covering the
first two years’ rent of $350,000 and a security deposit of $350,000. This deposit will not be
returned to Horner upon expiration of the lease but will be applied to payment of rent for the
last two years of the lease. What portion of the $700,000 should be shown as a current and
long-term liability, respectively, in Bacon’s December 31, 2021 balance sheet?
Current Liabilities and Contingencies
13 – 37
Current Liability Long-term Liability
a. $0 $700,000
b. $175,000 $350,000
c. $350,000 $350,000
d. $350,000 $175,000
138. On September 1, 2020, Halley Co. issued a note payable to Fidelity Bank in the amount of
$2,700,000, bearing interest at 10%, and payable in three equal annual principal payments
of $900,000. On this date, the bank’s prime rate was 11%. The first payment for interest
and principal was made on September 1, 2021. At December 31, 2021, Halley should
record accrued interest payable of
a. $99,000.
b. $90,000.
c. $60,000.
d. $198,000.
139. This question has been determined to not match the 17th edition, so has been removed.
140. Ebbert Company’s salaried employees are paid biweekly. Occasionally, advances made to
employees are paid back by payroll deductions. Information relating to salaries for the
calendar year 2021 is as follows:
12/31/20 12/31/21
Employee advances $24,000 $ 36,000
Accrued salaries payable 160,000 ?
Salaries expense during the year 1,400,000
Salaries paid during the year (gross) 1,250,000
At December 31, 2021, what amount should Ebbert report for accrued salaries payable?
a. $310,000.
b. $182,000.
c. $134,000.
d. $170,000.
141. Roasten Corp.’s payroll for the pay period ended October 31, 2021 is summarized as follows:
Federal Amount of Wages Subject
Department Total Income Tax to Payroll Taxes
Payroll Wages Withheld F.I.C.A. Unemployment
Factory $ 75,000 $ 9,000 $70,000 $32,000
Sales 22,000 3,000 16,000 2,000
Office 18,000 2,000 8,000 —
$115,000 $14,000 $94,000 $34,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee 8% each
Unemployment 3%
What amount should Roasten accrue as its share of payroll taxes in its October 31, 2021
balance sheet?
a. $22,540.