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CMA Exam Questions
1. b. If an enterprise intends to refinance short-term obligations on a long-
term basis and demonstrates an ability to consummate the refinancing,
2. d. There are four requirements that must be met before a liability is accrued
3. c. GAAP requires a contingent liability to be recorded, along with the
4. c. The likelihood of contingencies is divided into three categories:
statement that an estimate cannot be made.
13–42 Intermediate Accounting, 8/e
PROBLEMS
Problem 13–1
Requirement 1
Blanton Plastics
Requirement 2
Adjusting entries (December 31, 2016)
Blanton Plastics
Problem 13–1 (concluded)
Requirement 3
a.
Issuance of note (October 1, 2016)
Cash (difference) ........................................................ 13,440,000
b.
Effective interest rate:
Discount ($14,000,000 x 12% x 4/12) $ 560,000
13–44 Intermediate Accounting, 8/e
Problem 13–2
Requirement 1
2016
a. No entry is made for a line of credit until a loan actually is made. It
would be described in a disclosure note.
2017
f. Cash ................................................................... 10,000,000
Problem 13–2 (concluded)
Requirement 2
CURRENT LIABILITIES:
Accounts payable $ 252,000
13–46 Intermediate Accounting, 8/e
Problem 13–3
Requirement 1
a. The requirement to classify currently maturing debt as a current liability
b. $5 million can be reported as long term, but $1 million must be reported as
Problem 13–3 (concluded)
Requirement 2
December 31, 2016
($ in millions)
Current Liabilities
Accounts payable and accruals $ 22
13–48 Intermediate Accounting, 8/e
Problem 13–4
Requirement 1
a. Interest expense ($600,000 x 10% x 5/12) ...................... 25,000
Interest payable ................................................ 25,000
Requirement 2
CURRENT LIABILITIES:
Accounts payable $ 35,000
Problem 13–5
Requirement 1
B = .10 ($150,000 – B – T), where B = the bonus
Requirement 3
Bonus compensation expense ............................. 9,813
13–50 Intermediate Accounting, 8/e
Problem 13–6
a. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. It is unlikely that
Eastern would choose to accrue the $122 million loss because the judgment
will be appealed and that outcome is uncertain. A disclosure note is
appropriate:
_______________________________
Note X: Contingency
In a lawsuit resulting from a dispute with a supplier, a judgment was rendered
against Eastern Manufacturing Corporation in the amount of $107 million plus
b. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. Eastern should accrue
A disclosure note also is appropriate:
_________________________________
Notes: Litigation
In November 2015, the State of Nevada filed suit against the Company, seeking
civil penalties and injunctive relief for violations of environmental laws
13–52 Intermediate Accounting, 8/e
Problem 13–6 (concluded)
c. This is a gain contingency. Gain contingencies are not accrued even if the gain
is probable and reasonably estimable. The gain should be recognized only
when realized.
Though gain contingencies are not recorded in the accounts, they should be
disclosed in notes to the financial statements.
_______________________________
Note X: Contingency
Eastern is the plaintiff in a pending lawsuit filed against United Steel for
Problem 13–7
Requirement 1
Item (a): Because the loss is probable and can be reasonably estimated,
HW would be required to accrue a liability under both U.S. GAAP and
IFRS, but the amount of the liability would differ between the two.
Requirement 2
Total liabilities under U.S. GAAP equal $5,000,000 + 5,000,000 + 0 +
10,000,000 = $20,000,000.
13–54 Intermediate Accounting, 8/e
Problem 13–8
Requirement 1
By the traditional approach, Heinrich would accrue the more-likely-than-not
(more than 50%) amount, $30 million:
Requirement 2
Heinrich would record a contingent liability (and loss) of $27,619,020, calculated
as follows:
$40,000,000 x 20% = $ 8,000,000
Requirement 3
Requirement 4
The difference between $29,000,000 and the initial value of the liability of
$27,619,020 represents interest expense, which Heinrich will accrue during 2017
as follows:
Problem 13–8 (concluded)
Requirement 5
Interest increases the liability to $29 million at the end of 2017. Since there is
13–56 Intermediate Accounting, 8/e
Problem 13–9
Case 1
Note Only. When a contingency comes into existence after the year-end, a
Case 2
Note Only. Since an unasserted claim or assessment is probable, the likelihood
Case 3
Accrual and Disclosure Note. When the cause of a loss contingency occurs
Case 4
Problem 13–10
Requirement 1
Portion of the notes payable not refinanced
on a long-term basis through the stock sale .................. $3,000,000
Requirement 2
Portion of the notes payable refinanced
13–58 Intermediate Accounting, 8/e
Problem 13–10 (concluded)
Requirement 3
If the settlement agreement had occurred on March 15, 2017, instead, the
Requirement 4
If the work-site injury had occurred on January 3, 2017, instead, the
Problem 13–11
List A List B
j_ 1. Face amount x Interest rate x Time a. Informal agreement
g 2. Payable with current assets b. Secured loan
13–60 Intermediate Accounting, 8/e
Problem 13–12
Requirement 1
The requirement to classify currently maturing debt as a current liability
Requirement 2
The entire $30 million loan should be reported as a long-term liability because
that amount is payable in 2022. The current liability classification includes (a)
Requirement 3
The intent of management is to refinance all $45,000,000 of the 7% notes, but
the refinancing agreement demonstrates the ability only for $40,000,000. $40
Requirement 4
