Current Liabilities and Contingencies
13 – 21
94. Craig borrowed $350,000 on October 1, 2014 and is required to pay $360,000 on March
1, 2015. What amount is the note payable recorded at on October 1, 2014 and how much
interest is recognized from October 1 to December 31, 2014?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
95. Parton owes $2 million that is due on February 28. The company borrows $1,600,000 on
February 25 (5-year note) and uses the proceeds to pay down the $2 million note and
uses other cash to pay the balance. How much of the $2 million note is classified as long-
term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.
96. Venible newspapers sold 6,000 of annual subscriptions at $125 each on June 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $312,500.
c. $375,000.
d. $750,000.
97. Bargain Surplus made cash sales during the month of October of $225,000. 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 $225,000.
b. Credit Sales Taxes Payable for $12,736.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,500.
98. On February 10, 2014, after issuance of its financial statements for 2013, Higgins
Company entered into a financing agreement with Cleveland Bank, allowing Higgins
Company to borrow up to $6,000,000 at any time through 2016. 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 $2,250,000 of notes payable
with Star National Bank maturing March 15, 2014. The company intends to borrow
$3,750,000 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 $9,000,000 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, 2013 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 22
99. On December 31, 2014, Isle Co. has $4,000,000 of short-term notes payable due on
February 14, 2015. On January 10, 2013, Isle arranged a line of credit with Beach Bank
which allows Isle to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 2015, Isle borrowed $2,400,000 from Beach Bank and used
$1,000,000 additional cash to liquidate $3,400,000 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, 2014 balance sheet which is issued on March 5, 2015 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.
Use the following information for questions 100 and 101.
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 $251,450.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $20,762.
b. $16,450.
c. $22,631.
d. $17,602.
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of
May is
a. $12,573.
b. $16,121.
c. $20,762.
d. $17,250.
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, 2014, Valley remitted $135,800 tax to the state tax division for March 2014
retail sales. What was Valley’s March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.
103. Jump Corporation has $2,500,000 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 $20 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. $1,700,000
b. $2,500,000
c. $800,000
d. $0
Current Liabilities and Contingencies
13 – 23
104. Elmer Corporation has $1,800,000 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 $20 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. $1,000,000
b. $1,800,000
c. $800,000
d. $0
105. Palco Co., which has a taxable payroll of $900,000, is subject to FUTA tax of 6.2% and 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. $104,400
b. $73,800
c. $36,000
d. $25,200
106. Roxy Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and 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. $70,200
b. $49,200
c. $24,000
d. $16,800
107. A company gives each of its 50 employees (assume they were all employed continuously
through 2014 and 2015) 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 2014, they made $21 per hour and in 2015 they
made $24 per hour. During 2015, 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 2014 and 2015
balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400
108. A company gives each of its 50 employees (assume they were all employed continuously
through 2014 and 2015) 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 2014, they made $24.50 per hour and in 2015
they made $28 per hour. During 2015, 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 2014 and
2015 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 24
109. The total payroll of Trolley Company for the month of October, 2014 was $800,000, of
which $150,000 represented amounts paid in excess of $106,800 to certain employees.
$500,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $150,000 of federal income taxes and $15,000 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 $106,800 and
1.45% in excess of $106,800. What amount should Trolley record as payroll tax
expense?
a. $72,800.
b. $66,300.
c. $57,300.
d. $61,200.
Use the following information for questions 110 and 111.
Vanco Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2013, the company began a program of granting its employees 10 days of paid vacation each
year. Vacation days earned in 2013 may first be taken on January 1, 2014. Information relative to
these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2013 $20.50 10 0
2014 22.50 10 8
2015 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 2013?
a. $0.
b. $71,400.
c. $63,000.
d. $57,400.
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2015?
a. $84,000.
b. $197,400.
c. $71,400.
d. $96,600.
112. Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the
effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.
Current Liabilities and Contingencies
13 – 25
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 $1,140, what is the required journal
entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages
Payable for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages
Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages
Payable for $74,100.
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
$500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.
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 $15 million. However, Xtra is also
legally responsible to remove the facility at the end of its useful life of twenty years. This
cost is estimated to be $21 million (the present value of which is $8 million). What is the
journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for
$21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for
$6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for
$8,000,000.
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 $81 each. Related to
these contracts, the company spent $400,000 servicing the contracts during the current
year and expects to spend $2,100,000 more in the future. What is the net profit that the
company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $400,000.
d. $450,500.
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 26
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
$225 per unit sold and reported a liability for estimated warranty costs $7.8 million at the
beginning of this year. If during the current year, the company sold 60,000 units for a total
of $243 million and paid warranty claims of $9,000,000 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? (assume accrual method)
a. $2,800,000.
b. $4,500,000.
c. $12,300,000.
d. $13,500,000.
118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014.
Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages
of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the
rebate expense and liability, respectively, shown on the 2014 financial statements dated
December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000
119. A company buys an oil rig for $2,000,000 on January 1, 2014. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $400,000
(present value at 10% is $154,220). 10% is an appropriate interest rate for this company.
What expense should be recorded for 2014 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,422 and interest expense of $15,422
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 $1,500,000 per year. The
company estimates that on average it will incur losses of $1,200,000 per year. During
2014, $525,000 worth of losses were sustained. How much total expense and/or loss
should be recognized by Sawyer Company for 2014?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense
121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2014.
Historically, 10% of customers mail in the rebate form. During 2014, 6,000,000 packages
of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2014 financial statements dated
December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000
Current Liabilities and Contingencies
13 – 27
122. A company buys an oil rig for $3,000,000 on January 1, 2014. 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 2014 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
123. During 2013, 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 5% 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
2013 $ 1,600,000 $ 39,000
2014 2,500,000 65,000
2015 2,100,000 135,000
$6,200,000 $239,000
What amount should Rao report as a liability at December 31, 2015?
a. $0
b. $134,000
c. $105,000
d. $381,000
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 2014, the company sold 675,000 boxes of Frosted
Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls
cost Palmer Company $3 each, how much liability for outstanding premiums should be
recorded at the end of 2014?
a. $270,000
b. $50,000
c. $75,000
d. $138,000
125. During 2013, 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, 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
2013 $ 1,400,000 $ 26,000
2014 1,000,000 40,000
2015 1,400,000 90,000
$3,800,000 $156,000
What amount should Salton report as a liability at December 31, 2015?
a. $0
b. $14,000
c. $22,000
d. $148,000
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 28
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 2014, the company sold 500,000 boxes of Frosted
Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls
cost Crispy Company $3 each, how much liability for outstanding premiums should be
recorded at the end of 2014?
a. $150,000
b. $40,000
c. $60,000
d. $84,000
Use the following information for questions 127, 128, and 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 $3 each. Muggs estimates that 45 percent of
the coupons will be redeemed. Data for 2014 and 2015 are as follows:
2014 2015
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
127. The premium expense for 2014 is
a. $187,500.
b. $45,000.
c. $75,000.
d. $84,375.
128. The premium liability at December 31, 2014 is
a. $37,500.
b. $54,000.
c. $45,000.
d. $39,375.
129. The premium liability at December 31, 2015 is
a. $22,500.
b. $39,375.
c. $45,000.
d. $84,375.
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 $1,600,000 to
$8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a
result of the above facts, Wooten should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to
$6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to
$3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.
Current Liabilities and Contingencies
13 – 29
131. Holland Company estimates its annual warranty expense as 2% of annual net sales. The
following data relate to the calendar year 2014:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2014 $10,000 debit before adjustment
Balance, Dec. 31, 2014 20,000 credit after adjustment
Which one of the following entries was made to record the 2014 estimated warranty
expense?(assume the accrual method)
a. Warranty Expense ……………………………………………………. 30,000
Retained Earnings (prior-period adjustment) ……….. 5,000
Warranty Liability …………………………………………….. 25,000
b. Warranty Expense ……………………………………………………. 25,000
Retained Earnings (prior-period adjustment) …………………. 5,000
Warranty Liability …………………………………………….. 30,000
c. Warranty Expense ……………………………………………………. 20,000
Warranty Liability …………………………………………….. 20,000
d. Warranty Expense ……………………………………………………. 30,000
Warranty Liability …………………………………………….. 30,000
132. In 2014, 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 2014 and 2015 are presented below:
2014 2015
Sales $500,000 $700,000
Actual warranty expenditures 30,000 50,000
What is the estimated warranty liability at the end of 2015?(assume the accrual method)
a. $16,000.
b. $64,000.
c. $96,000.
d. $20,000.
133. On January 3, 2014, Benton Corp. owned a machine that had cost $300,000. The
accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair
value was $480,000. On January 4, 2014, this machine was irreparably damaged by Pogo
Corp. and became worthless. In October 2014, a court awarded damages of $480,000
against Pogo in favor of Benton. At December 31, 2014, 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, 2014, what amount should
Benton accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 30
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 2014 Flavor issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/14
1/1/14 $500,000 6/30/14 $236,000
7/1/14 720,000 12/31/14 300,000
The only journal entry recorded to date is: debit to coupon expense and credit to cash of
$715,000. The December 31, 2014 balance sheet should include a liability for
unredeemed coupons of:
a. $0.
b. $60,000.
c. $124,000.
d. $360,000.
135. Presented below is information available for Marley Company.
Current Assets
Cash $ 4,000
Short-term investments 65,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $270,000
Total current liabilities are $100,000. The acid-test ratio for Marley is:
a. 2.80 to 1
b. 2.40 to 1
c. 1.30 to 1
d. 0.69 to 1
Multiple Choice Answers—Computational
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Current Liabilities and Contingencies
13 – 31
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, 2012, Bacon Co. leased a building to Horner Corp. for a ten-year term at
an annual rental of $140,000. At inception of the lease, Bacon received $560,000 covering
the first two years’ rent of $280,000 and a security deposit of $280,000. 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 $560,000 should be shown as
a current and long-term liability, respectively, in Bacon’s December 31, 2012 balance
sheet?
Current Liability Long–term Liability
a. $0 $560,000
b. $140,000 $280,000
c. $280,000 $280,000
d. $280,000 $140,000
138. On September 1, 2014, Halley Co. issued a note payable to Fidelity Bank in the amount of
$1,800,000, bearing interest at 10%, and payable in three equal annual principal
payments of $600,000. On this date, the bank’s prime rate was 11%. The first payment for
interest and principal was made on September 1, 2015. At December 31, 2015, Halley
should record accrued interest payable of
a. $66,000.
b. $60,000.
c. $40,000.
d. $132,000.
139. Included in Vernon Corp.’s liability account balances at December 31, 2014, were the
following:
7% note payable issued October 1, 2014, maturing September 30, 2015 $250,000
8% note payable issued April 1, 2014, payable in six equal annual
installments of $150,000 beginning April 1, 2015 600,000
Vernon’s December 31, 2014 financial statements were issued on March 31, 2015. On
January 15, 2015, the entire $600,000 balance of the 8% note was refinanced by
issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2015,
Vernon consummated a noncancelable agreement with the lender to refinance the 7%,
$250,000 note on a long-term basis, on readily determinable terms that have not yet been
implemented. On the December 31, 2014 balance sheet, the amount of the notes payable
that Vernon should classify as short-term obligations is
a. $175,000.
b. $125,000.
c. $50,000.
d. $0.
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 32
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 2015 is as follows:
12/31/14 12/31/15
Employee advances $24,000 $ 36,000
Accrued salaries payable 140,000 ?
Salaries expense during the year 1,400,000
Salaries paid during the year (gross) 1,250,000
At December 31, 2015, what amount should Ebbert report for accrued salaries payable?
a. $290,000.
b. $162,000.
c. $114,000.
d. $150,000.
141. Roasten Corp.‘s payroll for the pay period ended October 31, 2014 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 7% each
Unemployment 3%
What amount should Roasten accrue as its share of payroll taxes in its October 31, 2014
balance sheet?
a. $21,600.
b. $15,020.
c. $14,180.
d. $7,600.
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
$720,000 at December 31, 2013 before year-end adjustment. Service contract costs are
charged as incurred to the service contract expense account, which had a balance of
$180,000 at December 31, 2013. Outstanding service contracts at December 31, 2013
expire as follows:
During 2014 During 2015 During 2016
$150,000 $240,000 $105,000
What amount should be reported as unearned service contract revenues in Yurman’s
December 31, 2013 balance sheet?
a. $540,000.
b. $495,000.
c. $360,000.
d. $330,000.
Current Liabilities and Contingencies
13 – 33
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 $5,000,000 at December 31, 2013. Additional information for 2014 is as
follows:
Stamp service revenue from stamps sold to licensees $4,000,000
Cost of redemptions 3,320,000
If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost
would be $3,000,000. What amount should Core report as a liability for stamp redemptions
at December 31, 2014?
a. $8,320,000.
b. $5,680,000.
c. $3,930,000.
d. $4,680,000.
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 2014, 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 3% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2014 and 2015 are as follows:
Actual Warranty
Sales Expenditures
2014 $ 800,000 $12,000
2015 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2015, (assuming the accrual method) Eaton should report an estimated
warranty liability of
a. $0.
b. $15,000.
c. $35,000.
d. $43,000.
146. In March 2015, an explosion occurred at Kirk Co.’s plant, causing damage to area
properties. By May 2015, 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 $4,000,000 would be a reasonable estimate
of the damages. Kirk’s $5,000,000 comprehensive public liability policy contains a
$400,000 deductible clause. In Kirk’s December 31, 2014 financial statements, for which
the auditor’s fieldwork was completed in April 2015, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2014 because the event occurred in 2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
13 – 34
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
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