Chapter 13 Current Liabilities and Contingencies
109. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Disclosure notes
Present value of interest plus present value
of principal.
____
2. Commercial paper
Required for contingencies.
____
3. Current liabilities
Payable with current assets.
____
4. Usual valuation of liabilities
Short-term debt to be refinanced with long–
term bonds payable.
____
5. Long-term liabilities
Avoids registration with SEC.
____
TERM
PHRASE
NUMBER
1. Disclosure notes
Present value of interest plus present value
of principal.
2. Commercial paper
Required for contingencies.
3. Current liabilities
Payable with current assets.
4. Usual valuation of liabilities
Short-term debt to be refinanced with long–
5. Long-term liabilities
Avoids registration with SEC.
110. Indicate (by number) the way each of the items listed below should be reported in a balance
sheet at December 31, 2016. Match each phrase with the number for the correct term.
Chapter 13 Current Liabilities and Contingencies
TERM
PHRASE
NUMBER
1. Accrue liability
A material gain contingent on a future event that appears
exceedingly likely.
___
2. Disclosure note only
A penalty assessment that probably will be asserted by
the EPA, in which case a determinable payment is
probable.
___
3. Not reported
Unassessed penalty with a reasonable possibility of
being asserted, in which case a determinable payment is
probable.
___
An extremely likely loss due to an event that occurred
previously and whose amount is unknown but
estimable.
___
Answer:
TERM
NUMBER
2. Disclosure note only
111. Listed below are five terms followed by a list of phrases that describe or characterize five of
the terms related to accounting for contingent liabilities under IFRS. Match each phrase with
the number for the most correct term.
TERM
PHRASE
NUMBER
1. contingent gains are not
accrued unless virtually certain
How present values affect the measurement
of contingent liabilities under IFRS.
___
2. more likely than not
Definition of “probable” under IFRS.
___
3. mid-point of the range
How IFRS refers to an accrued liability that
would generally be referred to as an “accrued
contingent loss” under U.S. GAAP.
___
4. report at present value whenever
time value of money is material
The amount IFRS would accrue given a
range of equally likely outcomes.
___
5. provision
Treatment of contingent gains under IFRS.
___
Chapter 13 Current Liabilities and Contingencies
Answer:
Chapter 13 Current Liabilities and Contingencies
112. Indicate (by number) the way each of the items listed below should be reported in a balance
sheet at December 31, 2016. Match each phrase with the number of the term for the accounting
treatment.
TERM
PHRASE
NUMBER
1. Disclosure note only
Estimated cost of quality-assurance warranty.
____
2. Not reported
A material gain contingent on a future event that
appears extremely likely to occur in three months.
____
3. Current liability
Unasserted assessment of penalty that probably will be
asserted, in which case there would probably be a loss
in six months.
____
Unasserted assessment of penalty with a reasonable
possibility of being asserted, in which case there would
probably be a loss in 13 months.
____
A determinable loss from a past event that is contingent
on a future event that appears extremely likely to occur
in three months.
____
Answer:
TERM
1. Disclosure note only
2. Not reported
3. Current liability
4. Current liability
5. Current liability
Chapter 13 Current Liabilities and Contingencies
113. Indicate (by letter) the way each of the items listed below should be reported in a balance
sheet at December 31, 2016.
Item Reporting Method
___ 1 Customer advances. N. Not reported
___ 2 Noncommitted line of credit. C. Current liability
___ 3 Commercial paper. L. Long-term liability
___ 4 Note due June 9, 2017. D. Disclosure note only
___ 5 Accounts payable.
___ 6 Interest accrued on note, Dec. 31, 2016.
___ 7 Short-term bank loan to be paid with proceeds of sale of common stock.
Chapter 13 Current Liabilities and Contingencies
114. Indicate (by letter) the way each of the items listed below should be reported in a balance
sheet at December 31, 2016.
Item Reporting Method
___ 1 Customer advances. N. Not reported
___ 2 Noncommitted line of credit. C. Current liability
___ 3 Commercial paper. L. Long-term liability
___ 4 Note due June 9, 2017. D. Disclosure note only
___ 5 Accounts payable.
___ 6 Long-term bonds that will be callable by the creditor in the upcoming year unless an
existing violation is not corrected (there is a reasonable possibility the violation will
be corrected within the grace period).
___ 7 Long-term bonds callable by the creditor in the upcoming year that are not expected to
be called.
___ 8 Estimated cost of quality-assurance warranty.
___ 9 Interest accrued on note, Dec. 31, 2016.
___ 10 Short-term bank loan to be paid with proceeds of sale of common stock.
___ 11 A material gain contingent on a future event that appears extremely likely to
occur in three months.
___ 12 Unasserted assessment of penalty that probably will be asserted, in which case there
would probably be a loss in six months.
___ 13 Unasserted assessment of penalty with a reasonable possibility of being asserted, in
which case there would probably be a loss in 13 months.
___ 14 A determinable loss from a past event that is contingent on a future event that appears
extremely likely to occur in three months.
Chapter 13 Current Liabilities and Contingencies
Chapter 13 Current Liabilities and Contingencies
Problems
115. Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1,
2016, to fund a geological survey. The loan was made by Quebec Banque under a short-term
financing arrangement. Ontario Resources issued a 9-month, 12% promissory note with
interest payable at maturity. Ontario Resources’ fiscal period is the calendar year.
Required:
1. Prepare the journal entry for the issuance of the note by Ontario Resources.
2. Prepare the appropriate adjusting entry for the note by Ontario Resources on December
31, 2016. Show calculations.
3. Prepare the journal entry for the payment of the note at maturity. Show calculations.
Answer:
116. On September 1, 2016, Triton Entertainment borrowed $24 million cash to fund a new Fun
Park. The loan was made by Nevada Bank under a noncommitted short-term financing
arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity.
Triton’s fiscal period is the calendar year.
Required:
1. Prepare the journal entry for the issuance of the note by Triton.
2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2016.
3. Prepare the journal entry for the payment of the note at maturity.
Answer:
Chapter 13 Current Liabilities and Contingencies
117. On May 1, Lectric Industries issued 9-month notes in the amount of $60 million. Interest is
payable at maturity.
Required:
Determine the amount of interest expense that should be recorded in a year-end adjusting
entry under each of the following independent assumptions:
Interest rate Fiscal Year-End
1. 8% January 31
2. 10% October 31
3. 9% June 30
4. 13% December 31
Answer:
Chapter 13 Current Liabilities and Contingencies
118. Grossman Products began operations in 2016. The following selected transactions occurred
from September 2016 through March 2017. Grossman’s fiscal year ends on December 31.
2016:
(a.) On September 5, Grossman opened a checking account and negotiated a short-term line of
credit of up to $10,000,000 at 10% interest. The company is not required to pay any
commitment fees.
(b.) On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory
note with 10% interest payable at maturity.
(c.) Grossman received $3,000 of refundable deposits in December for reusable containers.
(d.) For the September through December period, sales totaled $5,000,000. The state sales tax
rate is 4% and 75% of sales are subject to sales tax.
(e.) Grossman recorded accrued interest.
2017:
(f.) Grossman paid the promissory note on the March 1 due date.
(g.) Half of the storage containers are returned in March, with the other half expected to be
returned over the next 6 months.
Required:
1. Prepare the appropriate journal entries for the 2016 transactions.
2. Prepare the liability section of the balance sheet at December 31, 2016, based on the data
supplied.
3. Prepare the appropriate journal entries for the 2017 transactions.
Chapter 13 Current Liabilities and Contingencies
119. Bencorp issues a $90,000, 6-month, noninterest-bearing note that the bank discounted at a
10% discount rate.
Required:
1. Prepare the appropriate journal entry to record the issuance of the note.
2. Determine the effective interest rate.
Answer:
Chapter 13 Current Liabilities and Contingencies
120. On November 1, 2016, a $216,000, 9-month, noninterest-bearing note is issued at a 10%
discount rate.
Required: Prepare the appropriate journal entry to record the issuance of the note.
1. Determine the effective interest rate.
2. Prepare the appropriate journal entry on December 31, 2016, to record interest on the note
for the 2016 financial statements.
3. Prepare the appropriate journal entry(s) on July 31, 2017, to record interest and the
payment of the note.
121. On November 1, 2016, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note
to the bank. Interest was discounted at a 12% discount rate.
Required:
1. Prepare the appropriate journal entry by Ziegler to record the issuance of the note.
2. Determine the effective interest rate.
3. Suppose the note had been structured as a 12% note with interest and principal payable at
maturity. Prepare the appropriate journal entry to record the issuance of the note by
Ziegler.
4. Prepare the appropriate journal entry on December 31, 2016, to accrue interest expense on
the note described in number 3 for the 2016 financial statements.
Answer:
122. On October 1, 2016, Home Builders Company issued to Carlton Bank a $600,000, 8-month,
noninterest-bearing note. Interest was discounted by the bank at a 12% discount rate.
Required:
1. Prepare the appropriate journal entry by Home Builders to record the issuance of the note.
2. Determine the effective interest rate.
3. Suppose the note had been structured as a 12% note with interest and principal payable at
maturity. Prepare the appropriate journal entry to record the issuance of the note by Home
Builders.
4. Prepare the appropriate journal entry on December 31, 2016, to accrue interest expense on
the note described in number 3 for the 2016 financial statements.
Answer:
123. The following selected transactions relate to liabilities of Rose Dish Corporation. Rose’s fiscal
year ends on December 31.
Required:
Prepare the appropriate journal entries through the maturity of each liability.
2016
Feb. 3 Negotiated a revolving credit agreement with Second Bank, which can be
renewed annually upon bank approval. The amount available under the line of
credit is $30,000,000 at the bank’s prime rate.
April 1 Arranged a 3-month bank loan of $12 million with Second Bank under the line of
credit agreement. Interest at the prime rate of 8% was payable at maturity.
July 1 Paid the 8% loan at maturity.
Nov. 1 Supported by the credit agreement, issued $20 million of commercial paper on a
9-month note. Interest was discounted at issuance at a 6% discount rate.
Dec. 31 Recorded any necessary adjusting entry(s).
2017
Aug. 1 Paid the commercial paper at maturity.
Chapter 13 Current Liabilities and Contingencies
124. Stern Corporation borrowed $10 million cash on September 1, 2016, to provide additional
working capital for the year’s production. Stern issued a 6-month, 10% promissory note to
Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar
year as the fiscal year.
Required:
1. Prepare all journal entries from issuance to maturity for Stern Corporation.
2. Prepare all journal entries from issuance to maturity for Second State Bank.
Chapter 13 Current Liabilities and Contingencies
125. Hot Springs Marine borrowed $20 million cash on December 1, 2016, to provide working
capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to
Third Bank under a prearranged short-term financing arrangement. Interest on the note was
payable at maturity. Each firm’s fiscal period is the calendar year.
Required:
1. Prepare the journal entries to record (a) the issuance of the note by Hot Springs Marine and
(b) Third Bank’s receivable on December 1, 2016.
2. Prepare the journal entries by both firms to record all subsequent events related to the note
through March 31, 2017.
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing
note) and 9% is the bank’s stated “discount rate.” Prepare the journal entries to record the
issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2016.
What would be the effective interest rate?
Answer:
Chapter 13 Current Liabilities and Contingencies
126. On June 30, 2016, Chu Industries issued 9-month notes in the amount of $700,000. Assume
that interest is payable at maturity in the following three independent cases:
Interest rate
Fiscal Year-End
1.
9%
December 31
2.
6%
August 31
3.
12%
October 31
Required:
Determine the amount of interest expense that should be accrued in a year-end adjusting entry
under each assumption:
Answer:
1.
Interest rate
Fiscal Year-End
9%
December 31
2.
Interest rate
Fiscal Year-End
8%
August 31
Chapter 13 Current Liabilities and Contingencies
127. The following selected transactions relate to liabilities of Chicago Glass Corporation for 2016.
Chicago’s fiscal year ends on December 31.
1. On January 15, Chicago received $7,000 from Henry Construction toward the purchase of
$66,000 of plate glass to be delivered on February 6.
2. On February 3, Chicago received $6,700 of refundable deposits relating to containers used
to transport glass components.
3. On February 6, Chicago delivered the plate glass to Henry Construction and received the
balance of the purchase price.
4. First quarter credit sales totaled $700,000. The state sales tax rate is 4% and the local sales
tax rate is 2%.
Required:
Prepare journal entries for the above transactions.
Chapter 13 Current Liabilities and Contingencies
128. In its 2016 annual report to shareholders, Ank-Morpork Times Inc. included the following
disclosure:
Revenue Recognition
• Advertising revenue is recognized when advertisements are published, are broadcast, or
when placed on the Company’s websites, net of provisions for estimated rebates, credit
and rate adjustments and discounts.
• Circulation revenue includes single copy and home-delivery subscription revenue. Single
copy revenue is recognized based on date of publication, net of provisions for related
returns. Proceeds from home-delivery subscriptions and related costs, principally agency
commissions, are deferred at the time of sale and are recognized in earnings on a pro rata
basis over the terms of the subscriptions.
• Other revenue is recognized when the related service or product has been delivered.
Also, the following information on its current liabilities was included in its comparative
balance sheets:
2016
2015
CURRENT LIABILITIES
Commercial paper outstanding
$158,300,000
$291,251,000
Accounts payable
$170,950,000
$174,552,000
Accrued payroll and other related liabilities
$81,299,000
$126,983,000
Accrued expenses
$160,867,000
$190,748,000
Accrued income taxes
$225,220,000
$ 9,852,000
Unexpired subscriptions
$61,706,000
$ 81,385,000
Current portion of long-term debt and
capital lease obligations
$ 2,534,000
$ 2,599,000
Total current liabilities
$860,876,000
$877,370,000
Required:
Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home-delivery
subscriptions during fiscal year 2016, what amount of revenue did it recognize during 2016
from this source? Show the relevant T-account information to support your answer.