Test Bank for Intermediate Accounting, Sixteenth Edition
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141. Roasten Corp.’s payroll for the pay period ended October 31, 2018 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, 2018
balance sheet?
a. $22,540.
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, 2016 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, 2016. Outstanding service contracts at December 31, 2016
expire as follows:
During 2017 During 2018 During 2019
$200,000 $320,000 $140,000
What amount should be reported as unearned service contract revenues in Yurman’s
December 31, 2016 balance sheet?
a. $720,000.
b. $660,000.
c. $480,000.
d. $440,000.
Current Liabilities and Contingencies
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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, 2017. Additional information for 2018 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 2018 were presented for redemption in 2019, the redemption cost
would be $4,500,000. What amount should Core report as a liability for stamp redemptions
at December 31, 2018?
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 2017, 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, 2017 and 2018 are as follows:
Actual Warranty
Sales Expenditures
2017 $ 800,000 $12,000
2018 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2018, (assuming the accrual method) Eaton should report an estimated
warranty liability of
a. $0.
b. $25,000.
c. $35,000.
d. $61,000.
Test Bank for Intermediate Accounting, Sixteenth Edition
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146. In March 2018, an explosion occurred at Kirk Co.’s plant, causing damage to area
properties. By May 2018, 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, 2017 financial statements, for which
the auditor’s fieldwork was completed in April 2018, 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 2017 because the event occurred in 2018.
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
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DERIVATIONS — Computational
No. Answer Derivation
Current Liabilities and Contingencies
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Sixteenth Edition
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Current Liabilities and Contingencies
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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 $118,500 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 $118,500 and 1.45% in excess of $118,500.
Instructions
(a) Prepare the journal entry for the salaries and wages paid.
Test Bank for Intermediate Accounting, Sixteenth Edition
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Solution 13-148
EXERCISES
Ex. 13-149—Compensated absences.
Snow Co. began operations on January 2, 2017. 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
2017 and $25.50 in 2018. The average vacation days used by each employee in 2018 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 2017 and
2018.
Current Liabilities and Contingencies
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Ex. 13-150—Contingent liabilities.
Below are three independent situations.
1. In August, 2018 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, 2018. 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
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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.
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 2017, 150,000 bags of dog
food were sold, 18,000 toys were purchased, and 60,000 coupons were redeemed. During 2018,
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 2017 and 2018.
Current Liabilities and Contingencies
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Solution 13-152
PROBLEMS
Pr. 13-153—Accounts and Notes Payable.
Described below are certain transactions of Lamar Company for 2018:
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, 2018 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, 2018 balance sheet.
Test Bank for Intermediate Accounting, Sixteenth Edition
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Solution 13-153 (cont.)
Pr. 13-154—Refinancing of short-term debt.
At the financial statement date of December 31, 2017, the liabilities outstanding of Pollard
Corporation included the following:
1. Cash dividends on common stock, $50,000, payable on January 15, 2018.
2. Note payable to Wabaso State Bank, $470,000, due January 20, 2018.
3. Serial bonds, $1,800,000, of which $450,000 mature during 2018.
4. Note payable to Orlando National Bank, $300,000, due January 27, 2018.
The following transactions occurred early in 2018:
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 2020. 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 2017 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, 2017. The liabilities should be properly classified
between current and long-term, and appropriate note disclosure should be included.
Current Liabilities and Contingencies
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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
2017 and 2018 are as follows (assume all purchases and sales are for cash):
2017 2018
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
Wrappers redeemed 2,800,000 4,200,000
2017 wrappers expected to be redeemed in 2018 2,000,000
2018 wrappers expected to be redeemed in 2019 2,700,000
Instructions
(a) Prepare the general journal entries that should be made in 2017 and 2018 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 2017 and 2018.
Test Bank for Intermediate Accounting, Sixteenth Edition
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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 2017, 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, 2017.)
Current Liabilities and Contingencies
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In 2018, Merritt incurred actual warranty costs relative to 2017 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 2017 and
2018.
(b) The transactions of part (a) create what balance under current liabilities in the 2017 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.
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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.
Answers to True / False:
Current Liabilities and Contingencies
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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.
Test Bank for Intermediate Accounting, Sixteenth Edition
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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.
1. Among the similarities are: (1) IFRS requires that companies present current and non–
current liabilities on the face of the statement of financial position, with current liabilities
generally presented in order of liquidity, (2) Both prohibit the recognition of liabilities for
future losses; (3) IFRS and GAAP are similar in the treatment of asset retirement
obligations (AROs), and (4) IFRS and GAAP are similar in their treatment of
contingencies.
Although the two standards are similar with respect to the above topics, there are
differences, including: (1) Under IFRS, the measurement of a provision related to a
contingency is based on the best estimate of the expenditure required to settle the
obligation. If a range of estimates is predicted and no amount in the range is more likely
than any other amount in the range, the ‘mid–point’ of the range is used to measure the
liability. In GAAP, the minimum amount in a range is used; (2) IFRS permits recognition of
a restructuring liability, once a company has committed to a restructuring plan. GAAP has
additional criteria (i.e., related to communicating the plan to employees), before a
restructuring liability can be established; (3) the recognition criteria for an asset retirement
obligation are more stringent under GAAP—the ARO is not recognized unless there is a
present legal obligation and the fair value of the obligation can be reasonably estimated;
and (4) the criteria for recognizing contingent assets for insurance recoveries are
recognized if probable; IFRS requires the recovery be “virtually certain,” before recognition
of an asset is permitted.