13-1
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number
Content
Time Range
(minutes)
E13-1
Cash Discounts. (Easy) Accounts payable, perpetual inventory
system. Net-of-cash discount approach. Journal entries.
5-10
E13-5
Compensated Absences. (Moderate) No sick leave taken.
Journal entries, balance sheet disclosure.
10-15
E13-6
Sales Taxes. (Easy) Journal entries to record various
transactions.
5-10
E13-7
Payroll. (Easy) Payroll taxes. Journal entries to record payroll
transactions.
5-10
E13-13
Premium Obligation. (Moderate) Journal entries to record sale,
premium plan. Balance sheet disclosure.
10-20
13-2
Number
Content
Time Range
(minutes)
E13-15
Gift Certificates. (Moderate) Journal entries to record
transactions. Balance sheet disclosure.
10-15
E13-19
Short-Term Debt. (Moderate) Expected to be refinanced.
Balance sheet disclosure.
10-15
E13-20
Short-Term Debt. (Moderate) Refinanced. Balance sheet
disclosure.
5-15
P13-4
Compensated Absences. (Challenging) Sick pay, vacation
pay. Journal entries, balance sheet disclosure.
30-40
P13-5
Sales Taxes. (Moderate) Journal entries, balance sheet
disclosure.
10-20
P13-6
Payroll. (Moderate) Payroll taxes. Calculation of tax amount.
Journal entries.
20-30
P13-11
Premium Obligation. (Challenging) Journal entries to record
sales, purchases, redemptions. Closing entries. Month-end
balance sheet disclosures.
30-40
13-3
Number
Content
Time Range
(minutes)
P13-12
Contingencies. (Challenging) Journal entries for various types
of contingencies. Explanations. Account for IFRS differences.
15-25
P13-13
(AICPA adapted). Contingencies. (Challenging) Determine
journal entries or note disclosures for subscriptions, self-
insurance, and two lawsuits. Account for IFRS differences.
20-35
ANSWERS TO QUESTIONS
Q13-1 Liabilities are the probable future sacrifices of economic benefits arising from present
obligations of a company to transfer assets or provide future services to other entities
Q13-2 A legal liability is a liability legally requiring payment to others. These liabilities are
incurred in transactions that are contractual and require payment of cash or
Q13-3 The three characteristics of a liability are:
1. It involves a responsibility of a company that will be settled by the probable future
transfer or use of assets at a specified or determinable date, on occurrence of a
Q13-3 (continued)
Q13-4 False. A company does not need to know the identity of the recipient before the
time of settlement, as long as the three criteria are met.
Q13-5 The primary issues include: (a) the identification of liabilities– the detection of a
company’s obligations; (2) valuation of the liabilities and the measurement of the
Q13-6 The operating cycle of a company is the period of time that elapses between the
use of cash to buy inventory; the sale of this inventory resulting in accounts
receivable; and the collection of these receivables in cash.
Q13-7 The liquidity of liabilities is important in accounting for them because investors,
Q13-8 Conceptually, a company should record and report on its balance sheet all liabilities
at the present value of the future payments they will require; however, in practice
Q13-9 A non-interest-bearing note is an unconditional written agreement whereby the
borrower receives the face value of the note less the interest deducted in advance.
Q13-10 Compensated absences are employee absences including vacation, holiday, illness,
or other personal activities for which a company pays its employees. Items such as
severance pay, share options, and long-term fringe benefits are not included. A
Q13-11 A new current liability arises for a company selling inventory and agreeing to
repurchase it later. A liability is recorded for the proceeds received.
Q13-12 Under the expense warranty accrual method, a company recognizes the estimated
warranty expense and a liability for future performance in the period of sale. Under
Q13-13 A contingency is an existing condition, situation, or set of circumstances involving
uncertainty as to possible gain or loss that will be resolved when a future event
Q13-14 The matching principle refers to the fact that a company should match expenses
arising from an existing condition with current revenues. To wait until the contingency
Q13-15 The two criteria that must be met before a loss contingency is reported in a
Q13-16 The event that results in a possible loss must have occurred by the balance sheet
date. A company has until the date of issuance of the financial statements to assess
the probability of loss.
Q13-17 The conditions that must be met for a company to accrue the loss from an unfiled
lawsuit include:
1. The event resulting in the possible lawsuit must have occurred prior to the date of
Q13-18 A gain contingency is an existing condition involving uncertainty as to a possible gain
that will be resolved when a future event(s) occurs or fails to occur. Resolution of the
13-6
Q13-19 Under IFRS, a provision that has a 51% chance of occurring is accrued because IFRS
use probable to mean the outcome is more likely than not to occur. Under U.S.
Q13-20 Under IFRS, if there is a range of possible outcomes with no amount being more likely
than another, the amount accrued as a provision (loss contingency) would be
measured as the mid-point of the range ($80,000).
Q13-21 The two criteria that must be met before a company can classify a short-term debt
Q13-22 A company demonstrates the ability to refinance currently maturing short-term debt
in one of two ways:
1. The company has issued long-term debt or equity for the short-term debt after
Q13-23 This question could be answered in two different ways. First, the student could agree
with GAAP on the legal basis that the payments can in fact be required to be made
ANSWERS TO MULTIPLE CHOICE
SOLUTIONS TO REVIEW EXERCISES
RE13-1
October 1:
RE13-2
October 1:
Inventory 11,700
RE13-3
July 1:
RE13-4
August 20:
13-8
RE13-5
May 31:
RE13-6
To record salaries and employee withholding items (payment of payroll):
Office Salaries Expense 70,000
To record employer payroll taxes:
(5.4% x $70,000) 3,780
RE13-7
B = 0.12 ($565,000 – B – T)
RE13-8
RE13-8 (continued)
RE13-9
Sale of toasters:
RE13-10
Sale of machines:
Cash or Accounts Receivable 150,000
RE13-11
RE13-12
SOLUTIONS TO EXERCISES
E13-1
2010
Jan. 4 Inventory [(2,000 x $500) – (2,000 x $500 x 2%)] 980,000
E13-2
2010
Dec. 1 Inventory 25,000
2011
E13-3
1. 2010
Nov. 16 Cash 19,400
E13-3 (continued)
1. (continued)
2011
2. CLEAR GLASS COMPANY
Partial Balance Sheet
December 31, 2010
Current liabilities
E13-4
1. 2010
Oct. 30 Machinery 21,779.37*
Discount on Notes Payable 2,220.63
2011
Jan. 31 Interest Expense (1/3 x $871.17,
E13-4 (continued)
1. (continued)
July 31 Interest Expense (see schedule) 452.66
Schedule of Interest Expense
and Obligation Reduction
Date
Payment
4% Quarterly
Interest Expense
Reduction of
Obligation
Net
Obligation
2010
2. SANCHEZ COMPANY
Partial Balance Sheet
December 31, 2010
Property, Plant, and Equipment
E13-5
1. 2010
Mar. 31 Salaries and Wages Expense–
Compensated Absences for
Sick Leave 1,600
2. BETTINGHAUS CORPORATION
Partial Balance Sheet
March 31, 2010
E13-6
1. Cash 222,600
Sales 210,000
13-14
E13-7
Salaries and Wages Expense 500,000
Employees’ Income Taxes
Withholding Payable 85,000
E13-8
Substituting equation 2 for the T in equation 1:
13-15
E13-9
Four monthly entries: May 31 through Aug. 31, 2010
Sept. 30, 2010 (and at end of each of next 3 months)
E13-10
Two monthly entries: May 31 and June 30, 2010
Two monthly entries: July 31 and Aug. 31, 2010
E13-11
1. 2010
2011
Estimated Warranty Liability 1,000
Cash 1,000
2. CAROLINA ELECTRONICS COMPANY
Partial Balance Sheet
December 31, 2010
E13-12
1. Sale of 1,600 instruments during August-December, 2010
Earnings of Warranty Revenue for August-December, 2010
13-17
E13-12 (continued)
1. (continued)
Earnings of Warranty Revenue in 2011
2. PEREIRA CORPORATION
Partial Balance Sheet
December 31, 2010
E13-13
1. Inventory of Premium Glass Bowls 324,000
Cash (360,000 x $0.90) 324,000
2. SWEET DATES COMPANY
Partial Balance Sheet
December 31, 2010
Current Assets
13-18
E13-14
1. Inventory of Premium Toy Trucks 300,000
Cash (240,000 x $1.25) 300,000
*Total coupons outstanding in 2010 5,000,000
Estimated percent redeemed 0.60
2. TIGER CEREAL COMPANY
Partial Balance Sheet
December 31, 2010
Current Assets
E13-15
1. 2010
Dec. 5 Cash 4,000
13-19
E13-15 (continued)
2. SUPER CIRCUIT STORE
Partial Balance Sheet
December 31, 2010
E13-16
1. Since (1) the accident occurred prior to the date of the financial statements, (2) it is
probable that Farmers Products will suffer a loss from Johnson’s accident, and (3)
E13-17
The Braino Tech circumstances fit the requirements of a gain contingency. Gain
E13-18
RAMDEN COMPANY
Partial Balance Sheet
December 31, 2010 and 2011
2010 2011
E13-19
EXCELLO ELECTRIC COMPANY
Partial Balance Sheet
December 31, 2010
E13-20
CARRBORO TEXTILE COMPANY
Partial Balance Sheet
December 31, 2010
Note 1. On February 1, 2011, Carrboro entered into an agreement with Worldwide
Life Insurance Company whereby Worldwide would lend Carrboro $450,000,