APPENDIX J
Other Significant Liabilities
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
A
Problems
B
Problems
1. Describe the accounting and
disclosure requirements for
contingent liabilities.
1, 2
1
1A
1B
2. Contrast the accounting for
operating and capital leases.
3, 4, 5
2
1
2A
2B
3. Identify additional fringe
benefits associated with
employee compensation.
6, 7, 8, 9,
10
3
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
J-1A
Prepare current liability entries, adjusting entries, and
current liabilities section.
Moderate
30–40
J-2A
Analyze three different lease situations and prepare
journal entries.
Moderate
20–30
J-1B
Prepare current liability entries, adjusting entries, and
current liabilities section.
Moderate
30–40
J-2B
Analyze three different lease situations and prepare
journal entries.
Moderate
20–30
ANSWERS TO QUESTIONS
1. A contingent liability is a potential liability that may become an actual liability in the future.
2. If the contingency is only reasonably possible, then only note disclosure is required. If the
nor note disclosure is required.
3. (a) A lease is a contractual agreement between a lessor (owner of a property) and a lessee
(renter of the property).
and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase
of the property.
4. This lease would be reported as an operating lease. In an operating lease each payment is
5. In a capital lease agreement the lessee records the present value of the lease payments as an
6. Three additional types of fringe benefits are:
(2) Postretirement healthcare and life insurance benefits.
(3) Pension plan benefits.
7. Paid absences refer to compensation paid by employers to employees for vacations, sick pay
8. Two types of postretirement benefits are: (1) postretirement healthcare and life insurance
years of the employees.
9. The three parties in a pension plan are generally: (1) the employer, (2) the plan administrator,
and (3) the pension recipient. The employer sponsors and makes contributions to the plan. The
plan administrator invests the pension assets and makes the benefit payments to the pension
recipients. The recipients are retired employees who receive the benefit payments.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE J-1
Dec. 31
Warranty Expense …………………………………....
2,800
Warranty Liability
[(1,000 X 4%) X $70] ………………………...
2,800
BRIEF EXERCISE J-2
1.
Rent Expense …………………………………………………...
68,000
Cash ………………………………………………………....
68,000
2.
Leased Asset—Building …………………………………....
900,000
Lease Liability …………………………………………....
900,000
BRIEF EXERCISE J-3
Jan. 31
Vacation Benefits Expense ……………………..
4,200
Vacation Benefits Payable
(35 X $120) ……………………………………
4,200
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! J-1
(a) Leased Asset—Equipment ………………………………… 178,000
company may be unable to meet its maturing obligations.
SOLUTIONS TO EXERCISES
EXERCISE J-1
(a)
Estimated warranties outstanding:
Month
Estimate
Units Defective
Outstanding
November
840
600
240
December
960
500
460
Total
1,800
1,100
700
Estimated warranty liability—700 X $15 = $10,500.
(b)
Warranty Expense (1,800 X $15) …………………………..
27,000
Warranty Liability ……………………………………….
27,000
Warranty Liability …………………………..……………………
16,500
Repair Parts ……………………………………………….
16,500
(c)
Warranty Liability (500 X $15) …………………………..….
7,500
Repair Parts ……………………………………………….
7,500
EXERCISE J-2
(a) HARVEY ONLINE COMPANY
Partial Balance Sheet
Current liabilities
Accounts payable ………………………………………………….
$ 63,000
Long-term debt due within one year ………………………..
40,000
Unearned ticket revenue …………………………………………
21,000
Warranty liability …………………………………………………..
18,000
Sales taxes payable ……………………………………………….
10,000
Interest payable …………………………………………………….
8,000
Total current liabilities …………………………………….
$160,000
EXERCISE J-2 (Continued)
(b) Harvey Online Company’s working capital is $140,000 and its current
ratio is 1.88:1. Although a current ratio of 2:1 has been considered the
standard for a good credit rating, many companies operate successfully
with a current ratio below 2:1.
EXERCISE J-3
(a)
Rent Expense …………………………………….
720
Cash ………………………………………….
720
(b)
Jan. 1
Leased Asset-Equipment ……………………
99,474
Lease Liability …………………………...
99,474
EXERCISE J-4
Mar. 31
Vacation Benefits Expense ……………………..
1,920
Vacation Benefits Payable
(10 X 2 X $96) ……………………………..
1,920
31
Pension Expense ($30,000 X 8%) ……………..
2,400
Pension Liability ………………………..
2,400
SOLUTIONS TO PROBLEMS
PROBLEM J-1A
(a)
Jan. 1
Cash …………………………………………………..
15,000
Notes Payable ……………………………..
15,000
5
Cash …………………………………………………..
9,540
Sales Revenue ($9,540 ÷ 106%) …….
9,000
Sales Taxes Payable
($9,540 – $9,000) ………………………
540
12
Unearned Service Revenue ………………….
9,000
Service Revenue ………………………….
9,000
14
Sales Taxes Payable …………………………...
5,800
Cash …………………………………………..
5,800
20
Accounts Receivable …………………………..
38,584
Sales Revenue …………………………….
36,400
Sales Taxes Payable
(700 X $52 X 6%) ……………………..
2,184
25
Cash …………………………………………………..
13,144
Sales Revenue ($13,144 ÷ 106%) …..
12,400
Sales Taxes Payable
($13,144 – $12,400) ………………….
744
(b)
(1) Jan. 31
Interest Expense …………………………..
100
Interest Payable
($15,000 X 8% X 1/12) ………………
100
(2) Jan. 31
Warranty Expense ………………………..…
1,820
Warranty
Liability ($36,400 X 5%) …….
1,820
PROBLEM J-1A (Continued)
(c)
Current liabilities
Notes payable ………………………………………………………….
$15,000
Accounts payable …………………………………………………….
42,500
Unearned service revenue ($15,000 – $9,000) …………….
6,000
Sales taxes payable ($540 + $2,184 + $744) ………………..
3,468
Warranty liability ……………………………………………………...
1,820
Interest payable ……………………………………………………….
100
Total current liabilities ……………………………………..
$68,888