Accounting Chapter 13 Homework The Low End The Range Accrued

Chapter 13 Current Liabilities and Contingencies

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 13–1

A liability involves the past, the present, and the future. It is a present

responsibility, to sacrifice assets in the future, caused by a transaction or other

event that already has happened. Specifically, “Elements of Financial Statements,”

Statement of Financial Accounting Concepts No. 6, par. 36, describes three

essential characteristics: Liabilities–

Question 13–2

Liabilities traditionally are classified as either current liabilities or long-term

Question 13–3

In concept, liabilities should be reported at their present values; that is, the

valuation amount is the present value of all future cash payments resulting from the

debt, usually principal and/or interest payments. In this case, the amount would be

13–2 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 13–4

Lines of credit permit a company to borrow cash from a bank up to a

prearranged limit at a predetermined, usually floating, rate of interest. The interest

rate often is based on current rates of the prime London interbank borrowing,

Question 13–5

When interest is “discounted” from the face amount of a note at the time it is

Question 13–6

Commercial paper represents loans from other corporations. It refers to

unsecured notes sold in minimum denominations of $25,000 with maturities

Answers to Questions (continued)

Question 13–7

This is an example of an accrued expense—an expense incurred during the

current period, but not yet paid. The expense and related liability should be

recorded as follows:

Question 13–8

An employer should accrue an expense and the related liability for employees’

compensation for future absences, like vacation pay, if the obligation meets each of

four conditions: (1) the obligation is attributable to employees’ services already

performed, (2) the paid absence can be taken in a later year—the benefit vests (will

be compensated even if employment is terminated) or the benefit can be

13–4 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 13–9

When a company collects cash from a customer as a refundable deposit or as

Question 13–10

Gift cards are a particular form of advance collection of revenues. When the

Question 13–11

Examples of amounts collected for third parties that represent liabilities until

Question 13–12

Question 13–13

Question 13–14

Under U.S. GAAP, ability to finance must be demonstrated by securing

Answers to Questions (continued)

Question 13–15

A loss contingency is an existing situation or set of circumstances involving

Question 13–16

The likelihood that the future event(s) will confirm the incurrence of the

liability must be categorized as:

PROBABLE—the confirming event is likely to occur.

Question 13–17

Question 13–18

Under U.S. GAAP, the term “contingent liability” is used to refer generally to

13–6 Intermediate Accounting, 8/e

Answers to Questions (concluded)

Question 13–19

If one or both of the accrual criteria is not met, but there is at least a

Question 13–20

1. Manufacturers’ product warranties—these inevitably involve expenditures, and

2. Cash rebates and other premium offers—these inevitably involve expenditures,

Question 13–21

The contingent liability for warranties and guarantees usually is accrued. The

estimated warranty (guarantee) liability is credited and warranty (guarantee)

Question 13–22

Several weeks usually pass between the end of a company’s fiscal year and

Answers to Questions (continued)

Question 13–23

When a contingency comes into existence only after the year-end, a liability

cannot be accrued because none existed at the end of the year. Yet, if the loss is

Question 13–24

Question 13–25

Question 13–26

When an assessment is probable, reporting the possible obligation would be

warranted if an unfavorable settlement is at least reasonably possible. This means

1. Is the assessment probable? If it is not, no disclosure is warranted.

13–8 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 13–27

You should not accrue your gain. A gain contingency should not be accrued.

Question 13–28

BRIEF EXERCISES

Brief Exercise 13–1

Cash ………………………………………………………. 60,000,000

Brief Exercise 13–2

Cash (difference) …………………………………………………. 54,600,000

Brief Exercise 13–3

a.

December 31

13–10 Intermediate Accounting, 8/e

Brief Exercise 13–4

Cash (difference) …………………………………………………. 11,190,000

Brief Exercise 13–5

Cash (difference) …………………………………………………. 9,550,000

Effective interest rate:

Discount ($10,000,000 x 6% x 9/12) $ 450,000

Brief Exercise 13–6

December 12

Cash …………………………………………………………….. 24,000

Brief Exercise 13–7

In 2016 Lizzie would recognize $11,500 of revenue ($4,000 + 3,000 + 2,500

Brief Exercise 13–8

Brief Exercise 13–9

1. Current liability—The requirement to classify currently maturing debt as a current liability

13–12 Intermediate Accounting, 8/e

Brief Exercise 13–10

Under U.S. GAAP, the debt would be classified as long-term for both

Brief Exercise 13–11

Brief Exercise 13–12

This is a loss contingency and the estimated warranty liability is credited and

Brief Exercise 13–13

This is a loss contingency and should be accrued because it is both probable

A disclosure note also is appropriate.

Brief Exercise 13–14

Brief Exercise 13–15

Brief Exercise 13–16

Brief Exercise 13–17

Brief Exercise 13–18

EXERCISES

Exercise 13–1

Requirement 1

Cash ………………………………………………………. 16,000,000

Exercise 13–2

1. Interest rate Fiscal year-end

2. Interest rate Fiscal year-end

3. Interest rate Fiscal year-end

4. Interest rate Fiscal year-end

13–16 Intermediate Accounting, 8/e

Exercise 13–3

2016

Jan. 13 No entry is made for a line of credit until a loan actually is made. It

would be described in a disclosure note.

Feb. 1

Exercise 13–3 (concluded)

2017

13–18 Intermediate Accounting, 8/e

Exercise 13–4

Wages expense (increases wages expense to $410,000) ……….. 6,000

Liability—compensated future absences ……………….. 6,000*

Exercise 13–5

Requirement 1

Exercise 13–6

Requirement 1

Cash …………………………………………………………………. 5,200

Deferred revenue …………………………………………… 5,200

Requirement 2

Gift certificates sold $5,200

Requirement 3

The sales tax liability is a current liability because it is payable in

January.

13–20 Intermediate Accounting, 8/e

Exercise 13–7

Requirement 1

Deposits Collected

Cash ………………………………………………………… 850,000

Liability—refundable deposits ……………….. 850,000

Requirement 2

Balance on January 1 $530,000