Current Liabilities and Contingencies
13 – 38
b. $15,020.
c. $10,220.
d. $8,540.
142. Yurman Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts
are credited to unearned service contract revenues. This account had a balance of
$960,000 at December 31, 2019 before year-end adjustment. Service contract costs are
charged as incurred to the service contract expense account, which had a balance of
$240,000 at December 31, 2019. Outstanding service contracts at December 31, 2019
expire as follows:
During 2020 During 2021 During 2022
$200,000 $320,000 $140,000
What amount should be reported as unearned service contract revenues in Yurman’s
December 31, 2019 balance sheet?
a. $720,000.
b. $660,000.
c. $480,000.
d. $440,000.
Current Liabilities and Contingencies
13 – 39
143. Core Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Core’s past experience indicates that
only 75% of the stamps sold to licensees will be redeemed. Core’s liability for stamp
redemptions was $7,500,000 at December 31, 2020. Additional information for 2021 is as
follows:
Stamp service revenue from stamps sold to licensees $6,000,000
Cost of redemptions 4,980,000
If all the stamps sold in 2021 were presented for redemption in 2022, the redemption cost
would be $4,500,000. What amount should Core report as a liability for stamp redemptions
at December 31, 2021?
a. $12,480,000.
b. $8,520,000.
c. $5,895,000.
d. $7,020,000.
144. Neer Co. has a probable loss that can only be reasonably estimated within a range of
outcomes. No single amount within the range is a better estimate than any other amount.
The loss accrual should be
a. zero.
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.
145. During 2020, Eaton Co. introduced a new product carrying a two-year warranty against
defects. The estimated warranty costs related to dollar sales are 2% within 12 months
following sale and 4% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2020 and 2021 are as follows:
Actual Warranty
Sales Expenditures
2020 $ 800,000 $12,000
2021 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2021, (assuming the accrual method) Eaton should report an estimated
warranty liability of
a. $0.
b. $25,000.
c. $35,000.
d. $61,000.
Current Liabilities and Contingencies
13 – 40
146. In March 2021, an explosion occurred at Kirk Co.’s plant, causing damage to area
properties. By May 2021, no claims had yet been asserted against Kirk. However, Kirk‘s
management and legal counsel concluded that it was reasonably possible that Kirk would
be held responsible for negligence, and that $5,000,000 would be a reasonable estimate of
the damages. Kirk’s $6,000,000 comprehensive public liability policy contains a $500,000
deductible clause. In Kirk’s December 31, 2020 financial statements, for which the auditor’s
fieldwork was completed in April 2021, how should this casualty be reported?
a. As a note disclosing a possible liability of $5,000,000.
b. As an accrued liability of $500,000.
c. As a note disclosing a possible liability of $500,000.
d. No note disclosure of accrual is required for 2020 because the event occurred in 2021.
Multiple Choice Answers—CPA Adapted
DERIVATIONS — Computational
No. Answer Derivation
Current Liabilities and Contingencies
13 – 41
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Current Liabilities and Contingencies
13 – 42
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Current Liabilities and Contingencies
13 – 43
DERIVATIONS — CPA Adapted (cont.)
No. Answer Derivation
BRIEF EXERCISES
BE. 13-147—Notes payable.
On August 31, Latty Co. partially refunded $900,000 of its outstanding 10% note payable made
one year ago to Dugan State Bank by paying $900,000 plus $90,000 interest, having obtained the
$990,000 by using $262,000 cash and signing a new one-year $800,000 note discounted at 9% by
the bank.
Instructions
(1) Make the entry to record the partial refunding. Assume Latty Co. makes reversing entries when
appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the
discount.
BE. 13-148—Payroll entries.
Total payroll of Walnut Co. was $2,760,000, of which $480,000 represented amounts paid in excess
of $128,400 to certain employees. The amount paid to employees in excess of $7,000 was
$2,160,000. Income taxes withheld were $675,000. The state unemployment tax is 1.2%, the
federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee’s salaries and
wages to $128,400 and 1.45% in excess of $128,400.
Instructions
(a) Prepare the journal entry for the salaries and wages paid.
(b) Prepare the entry to record the employer payroll taxes.
Current Liabilities and Contingencies
13 – 44
Solution 13-148
EXERCISES
Ex. 13-149—Compensated absences.
Snow Co. began operations on January 2, 2020. It employs 15 people who work 8-hour days. Each
employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the
year following the year in which they are earned. The average hourly wage rate was $24.00 in 2020
and $25.50 in 2021. The average vacation days used by each employee in 2021 was 9. Snow Co.
accrues the cost of compensated absences at rates of pay in effect when earned.
Instructions
Prepare journal entries to record the transactions related to paid vacation days during 2020 and
2021.
Current Liabilities and Contingencies
13 – 45
Ex. 13-150—Contingent liabilities.
Below are three independent situations.
1. In August, 2021 a worker was injured in the factory in an accident partially the result of his own
negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably
possible that the outcome of the suit will be unfavorable and that the settlement would cost the
company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against
Henderson Co. on October 4, 2021. Henderson’s legal counsel believes that an unfavorable
outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000
and $2,250,000. No amount within this range is a better estimate of potential damages than
any other amount.
3. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be
awarded damages of $1,000,000.
Instructions
Discuss the proper accounting treatment, including any required disclosures, for each situation.
Give the rationale for your answers.
Ex. 13-151—Premiums.
Irwin Music Shop gives its customers coupons redeemable for a poster plus a Bo Diddley CD. One
coupon is issued for each dollar of sales. On the surrender of 100 coupons and $6.00 cash, the
poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented
for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled
420,000. Sales for the second period were $840,000, and the coupons redeemed totaled 750,000.
Irwin Music Shop bought 20,000 posters at $2.50/poster and 20,000 CDs at $7.50/CD.
Current Liabilities and Contingencies
13 – 46
Instructions
Prepare the following entries for the two periods, assuming all the coupons expected to be
redeemed from the first period were redeemed by the end of the second period.
Entry Period 1 Period 2
(a) To record coupons redeemed
———————————————————————————————————————————
(b) To record estimated liability
———————————————————————————————————————————
Ex. 13-152—Premiums.
Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers
receive a dog toy that the company purchases for $1.50 each. Sterling’s experience indicates that
60 percent of the coupons will be redeemed. During 2020, 150,000 bags of dog food were sold,
18,000 toys were purchased, and 60,000 coupons were redeemed. During 2021, 180,000 bags of
dog food were sold, 24,000 toys were purchased, and 90,000 coupons were redeemed.
Instructions
Determine the premium expense to be reported in the income statement and the premium liability
on the balance sheet for 2020 and 2021.
Current Liabilities and Contingencies
13 – 47
Solution 13-152
PROBLEMS
Pr. 13-153—Accounts and Notes Payable.
Described below are certain transactions of Lamar Company for 2021:
1. On May 10, the company purchased goods from Fox Company for $75,000, terms 2/10, n/30.
Purchases and accounts payable are recorded at net amounts. The invoice was paid on May
18.
2. On June 1, the company purchased equipment for $150,000 from Rao Company, paying
$50,000 in cash and giving a one-year, 9% note for the balance.
3. On September 30, the company discounted at 10% its $300,000, one-year zero-interest–
bearing note at Virginia State Bank.
Instructions
(a) Prepare the journal entries necessary to record the transactions above using appropriate
dates.
(b) Prepare the adjusting entries necessary at December 31, 2021 in order to properly report
interest expense related to the above transactions. Assume straight-line amortization of
discounts.
(c) Indicate the manner in which the above transactions should be reflected in the Current
Liabilities section of Lamar Company’s December 31, 2021 balance sheet.
Current Liabilities and Contingencies
13 – 48
Solution 13-153 (cont.)
$382,750
Pr. 13-154—Refinancing of short-term debt.
At the financial statement date of December 31, 2020, the liabilities outstanding of Pollard
Corporation included the following:
1. Cash dividends on common stock, $50,000, payable on January 15, 2021.
2. Note payable to Wabaso State Bank, $470,000, due January 20, 2021.
3. Serial bonds, $1,800,000, of which $450,000 mature during 2021.
4. Note payable to Orlando National Bank, $300,000, due January 27, 2021.
The following transactions occurred early in 2021:
January 15: The cash dividends on common stock were paid.
January 20: The note payable to Wabaso State Bank was paid.
January 25: The corporation entered into a financing agreement with Wabaso State Bank,
enabling it to borrow up to $500,000 at any time through the end of 2023. Amounts
borrowed under the agreement would bear interest at 1% above the bank’s prime
rate and would mature 3 years from the date of the loan. The corporation
immediately borrowed $400,000 to replace the cash used in paying its January 20
note to the bank.
January 26: 40,000 shares of common stock were issued for $350,000. $300,000 of the
proceeds was used to liquidate the note payable to Orlando National Bank.
February 1: The financial statements for 2020 were issued.
Instructions
Prepare a partial balance sheet for Pollard Corporation, showing the manner in which the above
liabilities should be presented at December 31, 2020. The liabilities should be properly classified
between current and long-term, and appropriate note disclosure should be included.
Current Liabilities and Contingencies
13 – 49
Solution 13-154
Pr. 13-155—Premiums.
Kane Candy Company offers a coffee mug as a premium for every ten $1 candy bar wrappers
presented by customers together with $2. The purchase price of each mug to the company is $2.40;
in addition it costs $1.60 to mail each mug. The results of the premium plan for the years 2020 and
2021 are as follows (assume all purchases and sales are for cash):
2020 2021
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
Wrappers redeemed 2,800,000 4,200,000
2020 wrappers expected to be redeemed in 2021 2,000,000
2021 wrappers expected to be redeemed in 2022 2,700,000
Instructions
(a) Prepare the general journal entries that should be made in 2020 and 2021 related to the above
plan by Kane Candy.
(b) Indicate the account names, amounts, and classifications of the items related to the premium
plan that would appear on the Kane Candy Company balance sheet and income statement at
the end of 2020 and 2021.
Current Liabilities and Contingencies
13 – 50
Solution 13-155 (cont.)
Pr. 13-156—Warranties.
Merritt Equipment Company sells computers for $1,500 each and also gives each customer a 2–
year warranty that requires the company to perform periodic services and to replace defective
parts. During 2020, the company sold 1,200 computers.
Based on past experience, the company has estimated the total 2-year warranty costs as $40 for
parts and $60 for labor per unit.
(Assume sales all occur at December 31, 2020.)
Current Liabilities and Contingencies
13 – 51
In 2021, Merritt incurred actual warranty costs relative to 2020 computer sales of $16,000 for parts
and $24,000 for labor.
Instructions
(a) Record give the entries to reflect the above transactions (accrual method) for 2020 and 2021.
(b) The transactions of part (a) create what balance under current liabilities in the 2020 balance
sheet?
IFRS QUESTIONS
True / False Questions
1. Short-term debt obligations are classified as current liabilities unless an agreement to
refinance is completed before the financial statements are issued.
2. For purposes of recognizing a provision “probable” is defined as more likely than not.
3. A provision differs from other liabilities in that there is greater uncertainty about the timing
and amount of settlement.
4. IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase
the company`s chance of losing a lawsuit.
Current Liabilities and Contingencies
13 – 52
5. Contingent liabilities are not reported in the financial statements but may be disclosed in
the notes to the financial statements if the likelihood of an unfavorable outcome is possible.
6. A company can exclude a short-term obligation from current liabilities if it intends to
refinance the obligation and has an unconditional right to defer settlement of the obligation
for at least 12 months following the due date.
7. Provisions are only recorded if it is likely that the company will have to settle an obligation at
some point in the future.
8. An onerous contract is one in which the unavoidable costs of satisfying the obligations
outweigh the economic benefits to be received.
9. Contingent assets are not reported in the statement of financial position.
10. IFRS uses the term “contingent” for assets and liabilities not recognized in the financial
statement.
IMA: Reporting, IFRS
Answers to True / False:
10. True
Current Liabilities and Contingencies
13 – 53
Multiple Choice:
11. Under IFRS, which of the following is used to measure a liability, if a range of estimates is
predicted and no amount in the range is more likely than any other amount in the range?
a. Minimum of the range
b. Maximum of the range
c. Mid-point of the range
d. Average of the range
12. Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent
if the refinancing is completed:
a. by the financial reporting date.
b. by issue date of the financial statement.
c. either by the financial statement date or before the date the financial statement is issued.
d. after the maturity date of the obligation.
13. Examples of contingent assets include all of the following except:
a. unrealized gain on the sale of investments.
b. pending lawsuit with a probable favorable outcome.
c. possible refunds from the government in tax disputes.
d. promise of land to be donated by city as an enticement to move manufacturing facilities.
14. Contingent assets need not be disclosed in the financial statements or in the notes if they are:
a. virtually certain to occur.
b. probable to occur.
c. likely to occur.
d. possible but not probable to occur.
Current Liabilities and Contingencies
13 – 54
15. For which of the following areas a provision may be recognized in the financial statement?
a. Possibility of war
b. Business recession
c. Warranties
d. Strike
IFRS Short Answer:
16. Briefly describe some of the similarities and differences between GAAP and IFRS with
respect to the accounting for liabilities.