This document provides an overview of ACC 304 Week 9 Quiz material covering chapters 13 and 14 on current liabilities and contingencies. It includes true/false and multiple choice questions related to concepts such as current liabilities, short-term debt, payroll taxes, and contingencies.
1. ACC 304 Week 9 Quiz – Strayer NEW
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Week 9 Quiz 5: Chapter 13,
Quiz 6: Chapter 14
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest
expense being recognized.
2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.
3. Magazine subscriptions and airline ticket sales both result in unearned revenues.
4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.
6. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.
7. Many companies do not segregate the sales tax collected and the amount of the sale at the
time of the sale.
8. A company must accrue a liability for sick pay that accumulates but does not vest.
9. Companies report the amount of social security taxes withheld from employees as well as the
companies’ matching portion as current liabilities until they are remitted.
10. Accumulated rights exist when an employer has an obligation to make payment to an
employee even after terminating his employment.
11. Companies should recognize the expense and related liability for compensated absences in
the year earned by employees.
2. Current Liabilities and Contingencies 13 - 2
12. Companies should accrue an estimated loss from a loss contingency if information available
prior to the issuance of financial statements indicates that it is probable that a liability has
been incurred.
13. A company discloses gain contingencies in the notes only when a high probability exists for
realizing them.
14. The expected profit from a sales type warranty that covers several years should all be
recognized in the period the warranty is sold.
15. The fair value of an asset retirement obligation is recorded as both an increase to the related
asset and a liability.
16. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.
17. Under the expense warranty approach, companies charge warranty costs only to the period in
which they comply with the warranty.
18. Prepaid insurance should be included in the numerator when computing the acid-test (quick)
ratio.
19. Paying a current liability with cash will always reduce the current ratio.
20. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
3. Current Liabilities and Contingencies 13 - 3
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
23. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts
Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.
24. Among the short-term obligations of Lance Company as of December 31, the balance sheet
date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-
day notes, renewable for another 90-day period. These notes should be classified on the
balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.
26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven
months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
4. Current Liabilities and Contingencies 13 - 4
28. Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these
30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.
5. Current Liabilities and Contingencies 13 - 5
31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
32. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.
33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
7. Current Liabilities and Contingencies 13 - 7
38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
39. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a
long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year,
otherwise a long-term liability.
d. Current liability.
40. Which of the following is not a condition necessary to exclude a short-term obligation
from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
41. Which of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the
obligation.
42. A company has not declared a dividend on its cumulative preferred stock for the past three
years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis.
8. Current Liabilities and Contingencies 13 - 8
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off
after the balance sheet date and subsequently replaced by long-term debt before the
balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing of a short-term obligation may be demon-
strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of
the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on
a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the
balance sheet but before it is issued.
d. all of these.
46. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an ability to
complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of
directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales
taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
S48. If a short-term obligation is excluded from current liabilities because of refinancing, the
footnote to the financial statements describing this event should include all of the
following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
S49. In accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated
rights.
b. vested rights are not contingent upon an employee's future service.
9. Current Liabilities and Contingencies 13 - 9
c. vested rights are a legal and binding obligation on the company, whereas accumulated
rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee;
accumulated rights do not represent monetary compensation.
P50. An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
51. Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
52. Which of the following is a condition for accruing a liability for the cost of compensation
for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
53. A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
54. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to
compensated absences.
2. the future rates of pay expected to be paid when employees use
compensated time.
3. the present value of the amount expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.
55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
10. Current Liabilities and Contingencies 13 - 10
d. Paid time off.
56. Which gives rise to the requirement to accrue a liability for the cost of compensated
absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.
57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.
11. Current Liabilities and Contingencies 13 - 11
58. Which of the following taxes does not represent a common payroll deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be
resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur.
60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably
estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.
61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64. Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
12. Current Liabilities and Contingencies 13 - 12
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
13. Current Liabilities and Contingencies 13 - 13
65. Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several years
concerning the ownership of a small parcel of land. The representative of the Railroad has
offered to assign any rights which the Railroad may have in the land to Beck in exchange
for a release of his right to reimbursement for the loss he has sustained from the fire. Beck
appears inclined to accept the Railroad's offer. The Railroad's 2012 financial statements
should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has
been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the
amount of the loss cannot be reasonably estimated.
68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.
69. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
70. A company is legally obligated for the costs associated with the retirement of a long-lived
asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the
activities itself.
d. when it is probable the asset will be retired.
15. Current Liabilities and Contingencies 13 - 15
71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy
of guaranteeing new products against defects for three years that has resulted in material
but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial
statements at December 31, 2012. Because of a recently proven health hazard in one of its
paints, the government has clearly indicated its intention of having Ortiz recall all cans of
this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73. Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be reasonably
estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
P74. Espinosa Co. has a loss contingency to accrue. The loss amount 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 amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
S75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.
16. Current Liabilities and Contingencies 13 - 16
S76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78. Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79. Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50% discount.
The coupons expire in one year. The store normally recognized a gross profit margin of
40% of the selling price on video games. How would the store account for a purchase
using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized
as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81. What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.
17. Current Liabilities and Contingencies 13 - 17
82. Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
18. Current Liabilities and Contingencies 13 - 18
83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
S85. Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
P86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.
19. Current Liabilities and Contingencies 13 - 19
Multiple Choice Answers—Conceptual
MULTIPLE CHOICE—Computational
90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for the
purchase of $250,000 of inventory. The face value of the note was $253,675. Assuming
Glaus used a “Discount on Note Payable” account to initially record the note and that the
discount will be amortized equally over the 3-month period, the adjusting entry made at
December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.
91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,
discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.
20. Current Liabilities and Contingencies 13 - 20
92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.
93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and principal
to be paid in one year. How much interest is recognized for the period from April 1 to
December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.
94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on
February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses
other cash to pay the balance. How much of the $2 million note is classified as long-term
in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.
96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.
97. Purchase Retailer made cash sales during the month of October of $221,000. The sales are
subject to a 6% sales tax that was also collected. Which of the following would be included
in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.
21. Current Liabilities and Contingencies 13 - 21
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.
22. Current Liabilities and Contingencies 13 - 22
98. On February 10, 2012, after issuance of its financial statements for 2011, House Company
entered into a financing agreement with Lebo Bank, allowing House Company to borrow
up to $6,000,000 at any time through 2014. Amounts borrowed under the agreement bear
interest at 2% above the bank's prime interest rate and mature two years from the date of
loan. House Company presently has $2,250,000 of notes payable with First National Bank
maturing March 15, 2012. The company intends to borrow $3,750,000 under the
agreement with Lebo and liquidate the notes payable to First National. The agreement with
Lebo also requires House to maintain a working capital level of $9,000,000 and prohibits
the payment of dividends on common stock without prior approval by Lebo Bank. From
the above information only, the total short-term debt of House Company as of the
December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.
99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on
February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank
which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used
$1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.
Use the following information for questions 100 and 101.
Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2%
of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $222,600.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May
is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.
23. Current Liabilities and Contingencies 13 - 23
102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012
retail sales. What was Vopat 's March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.
103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what amount of
short-term debt could be excluded from current liabilities?
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0
104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what amount of
short-term debt could be excluded from current liabilities?
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0
105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and state
unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600
106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a
state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and state
unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800
24. Current Liabilities and Contingencies 13 - 24
107. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made
$24 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400
108. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013 they
made $28 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800
109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of
which $150,000 represented amounts paid in excess of $106,800 to certain employees.
$500,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is
.8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and 1.45%
in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.
Use the following information for questions 110 and 111.
Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2011, the company began a program of granting its employees 10 days of paid vacation each year.
Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to these
employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0
25. Current Liabilities and Contingencies 13 - 25
2012 22.50 10 8
2013 23.75 10 10
Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported on
Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.
112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is
the effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.
113. CalCount provides its employees two weeks of paid vacation per year. As of December 31,
65 employees have earned two weeks of vacation time to be taken the following year. If
the average weekly salary for these employees is $1,140, what is the required journal
entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable
for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense
for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable
for $74,100.
114. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.
The company has consulted with its attorney and determined that it is possible that they
may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is
the case, their attorney estimated that the amount of any payment would be $500,000.
What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
26. Current Liabilities and Contingencies 13 - 26
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.
115. Recycle Exploration is involved with innovative approaches to finding energy reserves.
Recycle recently built a facility to extract natural gas at a cost of $15 million. However,
Recycle is also legally responsible to remove the facility at the end of its useful life of
twenty years. This cost is estimated to be $21 million (the present value of which is $8
million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for
$21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for
$6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for
$8,000,000.
116. Warranty4U provides extended service contracts on electronic equipment sold through
major retailers. The standard contract is for three years. During the current year,
Warranty4U provided 42,000 such warranty contracts at an average price of $81 each.
Related to these contracts, the company spent $400,000 servicing the contracts during the
current year and expects to spend $2,100,000 more in the future. What is the net profit that
the company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $300,667.
d. $734,000.
117. Electronics4U manufactures high-end whole home electronic systems. The company
provides a one-year warranty for all products sold. The company estimates that the
warranty cost is $200 per unit sold and reported a liability for estimated warranty costs
$7.8 million at the beginning of this year. If during the current year, the company sold
60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current
and prior year sales, what amount of liability would the company report on its balance
sheet at the end of the current year?
a. $3,000,000.
b. $4,200,000.
c. $10,800,000.
d. $12,000,000.
118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2012.
Historically, 10% of customers mail in the rebate form. During 2012, 3,000,000 packages
of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2012 financial statements dated
December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000
27. Current Liabilities and Contingencies 13 - 27
119. A company buys an oil rig for $2,000,000 on January 1, 2012. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present
value at 10% is $154,220). 10% is an appropriate interest rate for this company. What
expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,420 and interest expense of $15,422
120. Ziegler Company self insures its property for fire and storm damage. If the company were
to obtain insurance on the property, it would cost them $1,500,000 per year. The company
estimates that on average it will incur losses of $1,200,000 per year. During 2012,
$525,000 worth of losses were sustained. How much total expense and/or loss should be
recognized by Ziegler Company for 2012?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense
121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2012.
Historically, 10% of customers mail in the rebate form. During 2012, 6,000,000 packages
of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2012 financial statements dated
December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000
122. A company buys an oil rig for $3,000,000 on January 1, 2012. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present
value at 10% is $231,330). 10% is an appropriate interest rate for this company. What
expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133
123. During 2011, Vanpelt Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows:
Sales Actual Warranty Expenditures
2011 $ 600,000 $ 9,000
2012 1,500,000 65,000
2013 2,100,000 135,000
28. Current Liabilities and Contingencies 13 - 28
$4,200,000 $209,000
What amount should Vanpelt report as a liability at December 31, 2013?
a. $0
b. $12,000
c. $54,000
d. $169,000
124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3
boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the
boxtops will be redeemed. In 2012, the company sold 675,000 boxes of Frosted Flakes and
customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer
Company $3 each, how much liability for outstanding premiums should be recorded at the
end of 2012?
a. $270,000
b. $50,000
c. $75,000
d. $138,000
29. Current Liabilities and Contingencies 13 - 29
125. During 2011, Stabler Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows:
Sales Actual Warranty Expenditures
2011 $ 400,000 $ 6,000
2012 1,000,000 40,000
2013 1,400,000 90,000
$2,800,000 $136,000
What amount should Stabler report as a liability at December 31, 2013?
a. $0
b. $28,000
c. $36,000
d. $116,000
126. LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4
boxtops from LeMay Frosted Flakes boxes and $1. The company estimates that 60% of the
boxtops will be redeemed. In 2012, the company sold 500,000 boxes of Frosted Flakes and
customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost LeMay
Company $3 each, how much liability for outstanding premiums should be recorded at the
end of 2012?
a. $150,000
b. $40,000
c. $60,000
d. $84,000
Use the following information for questions 127, 128, and 129.
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40 percent of the
coupons will be redeemed. Data for 2012 and 2013 are as follows:
2012 2013
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
127. The premium expense for 2012 is
a. $37,500.
b. $45,000.
c. $52,500.
d. $75,000.
128. The premium liability at December 31, 2012 is
a. $11,250.
b. $15,000.
c. $26,250.
31. Current Liabilities and Contingencies 13 - 31
129. The premium liability at December 31, 2013 is
a. $16,875
b. $31,875.
c. $33,750.
d. $63,750.
130. Winter Co. is being sued for illness caused to local residents as a result of negligence on
the company's part in permitting the local residents to be exposed to highly toxic chemicals
from its plant. Winter's lawyer states that it is probable that Winter will lose the suit and be
found liable for a judgment costing Winter anywhere from $1,600,000 to $8,000,000.
However, the lawyer states that the most probable cost is $4,800,000. As a result of the
above facts, Winter should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to
$6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to
$3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.
131. Nance Company estimates its annual warranty expense as 2% of annual net sales. The
following data relate to the calendar year 2012:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2012 $10,000 debit before adjustment
Balance, Dec. 31, 2012 50,000 credit after adjustment
Which one of the following entries was made to record the 2012 estimated warranty
expense?
a. Warranty Expense ................................................................. 30,000
Retained Earnings (prior-period adjustment) ............. 5,000
Warranty Liability ...................................................... 25,000
b. Warranty Expense ................................................................. 25,000
Retained Earnings (prior-period adjustment) ........................ 5,000
Warranty Liability ...................................................... 30,000
c. Warranty Expense ................................................................. 20,000
Warranty Liability ...................................................... 20,000
d. Warranty Expense ................................................................. 30,000
Warranty Liability ...................................................... 30,000
132. In 2012, Payton Corporation began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the estimated
warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2012 and 2013 are presented below:
2012 2013
32. Current Liabilities and Contingencies 13 - 32
Sales $600,000 $800,000
Actual warranty expenditures 20,000 40,000
33. Current Liabilities and Contingencies 13 - 33
What is the estimated warranty liability at the end of 2013?
a. $38,000.
b. $58,000.
c. $98,000.
d. $16,000.
133. On January 3, 2012, Boyer Corp. owned a machine that had cost $300,000. The
accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair
value was $480,000. On January 4, 2012, this machine was irreparably damaged by Pine
Corp. and became worthless. In October 2012, a court awarded damages of $480,000
against Pine in favor of Boyer. At December 31, 2012, the final outcome of this case was
awaiting appeal and was, therefore, uncertain. However, in the opinion of Boyer’s
attorney, Pine’s appeal will be denied. At December 31, 2012, what amount should Boyer
accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.
134. Fuller Food Company distributes to consumers coupons which may be presented (on or
before a stated expiration date) to grocers for discounts on certain products of Fuller. The
grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50%
of such coupons are redeemed, and generally one month elapses between the date a grocer
receives a coupon from a consumer and the date Fuller receives it. During 2012 Fuller
issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/12
1/1/12 $500,000 6/30/12 $236,000
7/1/12 720,000 12/31/12 300,000
The only journal entries to date recorded debits to coupon expense and credits to cash of
$715,000. The December 31, 2012 balance sheet should include a liability for unredeemed
coupons of
a. $0.
b. $60,000.
c. $124,000.
d. $360,000.
135. Presented below is information available for Morton Company.
Current Assets
Cash $ 4,000
Short-term investments 75,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $280,000
Total current liabilities are $110,000. The acid-test ratio for Morton is
34. Current Liabilities and Contingencies 13 - 34
a. 2.55 to 1.
b. 2.27 to 1.
c. 1.27 to 1.
d. 0.72 to 1.
Multiple Choice Answers—Computational
35. Current Liabilities and Contingencies 13 - 35
MULTIPLE CHOICE—CPA Adapted
136. Which of the following is generally associated with payables classified as accounts
payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes
137. On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an
annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the
first two years' rent of $280,000 and a security deposit of $280,000. This deposit will not
be returned to Heins upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $560,000 should be shown as a current
and long-term liability, respectively, in Beyer's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $560,000
b. $140,000 $280,000
c. $280,000 $280,000
d. $280,000 $140,000
138. On September 1, 2012, Herman Co. issued a note payable to National Bank in the amount
of $1,800,000, bearing interest at 12%, and payable in three equal annual principal
payments of $600,000. On this date, the bank's prime rate was 11%. The first payment for
interest and principal was made on September 1, 2013. At December 31, 2013, Herman
should record accrued interest payable of
a. $72,000.
b. $66,000.
c. $48,000.
d. $44,000.
139. Included in Vernon Corp.'s liability account balances at December 31, 2012, were the
following:
7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000
8% note payable issued April 1, 2012, payable in six equal annual
installments of $150,000 beginning April 1, 2013 600,000
Vernon's December 31, 2012 financial statements were issued on March 31, 2013. On
January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by issuance
of a long-term obligation payable in a lump sum. In addition, on March 10, 2013, Vernon
consummated a noncancelable agreement with the lender to refinance the 7%, $250,000
note on a long-term basis, on readily determinable terms that have not yet been
implemented. On the December 31, 2012 balance sheet, the amount of the notes payable
that Vernon should classify as short-term obligations is
a. $175,000.
36. Current Liabilities and Contingencies 13 - 36
b. $125,000.
c. $50,000.
d. $0.
140. Edge Company’s salaried employees are paid biweekly. Occasionally, advances made to
employees are paid back by payroll deductions. Information relating to salaries for the
calendar year 2013 is as follows:
12/31/12 12/31/13
Employee advances $24,000 $ 36,000
Accrued salaries payable 130,000 ?
Salaries expense during the year 1,300,000
Salaries paid during the year (gross) 1,250,000
At December 31, 2013, what amount should Edge report for accrued salaries payable?
a. $180,000.
b. $168,000.
c. $144,000.
d. $50,000.
141. Risen Corp.'s payroll for the pay period ended October 31, 2012 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 7% each
Unemployment 3%
What amount should Risen accrue as its share of payroll taxes in its October 31, 2012
balance sheet?
a. $21,600.
b. $15,020.
c. $14,180.
d. $7,600.
142. Felton 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 $720,000
at December 31, 2011 before year-end adjustment. Service contract costs are charged as
incurred to the service contract expense account, which had a balance of $180,000 at
December 31, 2011. Outstanding service contracts at December 31, 2011 expire as
follows:
During 2012 During 2013 During 2014
$150,000 $240,000 $105,000
37. Current Liabilities and Contingencies 13 - 37
What amount should be reported as unearned service contract revenues in Felton's
December 31, 2011 balance sheet?
a. $540,000.
b. $495,000.
c. $360,000.
d. $330,000.
143. Yount Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Yount's past experience indicates that
only 80% of the stamps sold to licensees will be redeemed. Yount's liability for stamp
redemptions was $6,000,000 at December 31, 2011. Additional information for 2012 is as
follows:
Stamp service revenue from stamps sold to licensees $4,000,000
Cost of redemptions 2,720,000
If all the stamps sold in 2012 were presented for redemption in 2013, the redemption cost
would be $2,000,000. What amount should Yount report as a liability for stamp redemptions
at December 31, 2012?
a. $7,280,000.
b. $5,280,000.
c. $4,880,000.
d. $3,280,000.
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 2012, 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 3% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2012 and 2013 are as follows:
Actual Warranty
Sales Expenditures
2012 $ 800,000 $12,000
2013 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2013, Eaton should report an estimated warranty liability of
a. $0.
b. $15,000.
c. $35,000.
d. $43,000.
38. Current Liabilities and Contingencies 13 - 38
146. In March 2013, an explosion occurred at Kirk Co.'s plant, causing damage to area
properties. By May 2013, 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 $4,000,000 would be a reasonable estimate of
the damages. Kirk's $5,000,000 comprehensive public liability policy contains a $400,000
deductible clause. In Kirk's December 31, 2012 financial statements, for which the
auditor's fieldwork was completed in April 2013, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2012 because the event occurred in 2013.
Multiple Choice Answers—CPA Adapted
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.
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 liablities 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 “contigent” for assets and liabilities not recognized in the financial
statement.
Answers to True / False:
CHAPTER 14
39. Current Liabilities and Contingencies 13 - 39
LONG-TERM LIABILITIES
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. Companies usually make bond interest payments semiannually, although the interest rate is
generally expressed as an annual rate.
2. A mortgage bond is referred to as a debenture bond.
3. Bond issues that mature in installments are called serial bonds.
4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.
5. The interest rate written in the terms of the bond indenture is called the effective yield or
market rate.
6. The stated rate is the same as the coupon rate.
7. Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense.
8. A bond may only be issued on an interest payment date.
9. The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond.
10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life
of the bond issue.
11. The replacement of an existing bond issue with a new one is called refunding.
12. If a long-term note payable has a stated interest rate, that rate should be considered to be
the effective rate.
13. The implicit interest rate is the rate that equates the cash received with the amounts
received in the future.
14. An unrealized holding gain or loss is the net change in the fair value of the liability from
one period to another, exclusive of interest expense recognized but not recorded.
15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the
reporting of debt on the balance sheet.
40. Current Liabilities and Contingencies 13 - 40
16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are
added to the balance sheet.
17. If a company plans to retire long-term debt from a bond retirement fund, it should report
the debt as current.
18. The times interest earned ratio is computed by dividing income before interest expense by
interest expense.
*19. The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22. The covenants and other terms of the agreement between the issuer of bonds and the lender
are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P24. Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
41. Current Liabilities and Contingencies 13 - 41
S25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
S26. If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
28. The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
Use the following information for questions 29 and 30:
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.
29. One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
30. Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. none of these.
42. Current Liabilities and Contingencies 13 - 42
31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from
date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
43. Current Liabilities and Contingencies 13 - 43
32. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been
used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortiza-
tion been used.
d. be less than the stated (nominal) rate of interest.
33. Under the effective-interest method of bond discount or premium amortization, the
periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35. If bonds are issued between interest dates, the entry on the books of the issuing corporation
could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
37. Theoretically, the costs of issuing bonds could be
a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
44. Current Liabilities and Contingencies 13 - 44
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
45. Current Liabilities and Contingencies 13 - 45
39. Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
40. An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
41. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.
P42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased
securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
P43. A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security for
the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the
loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
S44. A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
46. Current Liabilities and Contingencies 13 - 46
b. it should not be recorded on the books of either party until the fair value of the property
becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
45. When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46. When a note payable is exchanged for property, goods, or services, the stated interest rate
is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current fair value of the note.
d. any of these.
47. If a company chooses the fair value option, a decrease in the fair value of the liability is
recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these.
48. Which of the following is an example of "off-balance-sheet financing"?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."
S49. When a business enterprise enters into what is referred to as off-balance-sheet financing,
the company
a. is attempting to conceal the debt from shareholders by having no information about the
debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the
statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be
obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.
47. Current Liabilities and Contingencies 13 - 47
S50. Long-term debt that matures within one year and is to be converted into stock should be
reported
a. as a current liability.
b. in a special section between liabilities and stockholders’ equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation.
48. Current Liabilities and Contingencies 13 - 48
51. Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of the
next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
52. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53. The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.
54. The debt to total assets ratio is computed by dividing
a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.
*55. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*56. A troubled debt restructuring will generally result in a
a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.
*57. In a troubled debt restructuring in which the debt is restructured by a transfer of assets with
a fair value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the restructuring.
b. a gain on the restructuring.
c. a loss on the restructuring.
50. Current Liabilities and Contingencies 13 - 50
*58. In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future cash
flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.
*59. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
MULTIPLE CHOICE—Computational
Use the following information for questions 60 through 62:
On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% ............................................ .627
Present value of 1 for 8 periods at 8% ............................................ .540
Present value of 1 for 16 periods at 3% .......................................... .623
Present value of 1 for 16 periods at 4% .......................................... .534
Present value of annuity for 8 periods at 6% .................................. 6.210
Present value of annuity for 8 periods at 8% .................................. 5.747
Present value of annuity for 16 periods at 3% ................................ 12.561
Present value of annuity for 16 periods at 4% ................................ 11.652
60. The present value of the principal is
a. $1,068,000.
b. $1,080,000.
c. $1,246,000.
d. $1,254,000.
61. The present value of the interest is
a. $689,640.
b. $699,120.
c. $745,200.
51. Current Liabilities and Contingencies 13 - 51
d. $753,660.
62. The issue price of the bonds is
a. $1,767,120.
b. $1,769,640.
c. $1,779,120.
d. $1,999,200.
63. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on January
1, 2012. The bonds pay interest semiannually on June 30 and December 31. The bonds are
issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $3,000,000
b. $3,129,896
c. $3,131,285
d. $3,130,385
64. Feller Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus
accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $9,700,000
b. $10,225,000
c. $9,850,000
d. $9,550,000
52. Current Liabilities and Contingencies 13 - 52
65. Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on
January 1, 2012. The bonds pays interest semiannually on June 30 and December 31. The
bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $15,000,000
b. $15,649,482
c. $15,656,427
d. $15,651,924
66. Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus
accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $19,400,000
b. $20,450,000
c. $19,700,000
d. $19,100,000
67. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$14,703,109. Using effective-interest amortization, how much interest expense will be
recognized in 2012?
a. $585,000
b. $1,170,000
c. $1,176,374
d. $1,176,249
68. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$14,703,109. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2012 balance sheet?
a. $14,709,482
b. $15,000,000
c. $14,718,844
d. $14,706,232
69. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$14,703,109. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2013?
a. $14,752,673
b. $14,955,466
53. Current Liabilities and Contingencies 13 - 53
c. $14,725,375
d. $14,747,642
70. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$14,703,109. What is interest expense for 2013, using straight-line amortization?
a. $1,540,207
b. $1,170,000
c. $1,176,894
d. $1,184,845
71. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
Using effective-interest amortization, how much interest expense will be recognized in
2012?
a. $390,000
b. $780,000
c. $784,248
d. $784,166
72. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
Using effective-interest amortization, what will the carrying value of the bonds be on the
December 31, 2012 balance sheet?
a. $9,806,320
b. $10,000,000
c. $9,812,562
d. $9,804,154
73. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
Using straight-line amortization, what is the carrying value of the bonds on December 31,
2013?
a. $9,835,116
b. $9,970,312
c. $9,816,916
d. $9,831,762
74. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
What is interest expense for 2013, using straight-line amortization?
a. $770,104
b. $780,000
c. $784,596
d. $789,896
54. Current Liabilities and Contingencies 13 - 54
75. On January 1, 2012, Huber Co. sold 12% bonds with a face value of $800,000. The bonds
mature in five years, and interest is paid semiannually on June 30 and December 31. The
bonds were sold for $861,600 to yield 10%. Using the effective-interest method of
amortization, interest expense for 2012 is
a. $80,000.
b. $85,914.
c. $86,160.
d. $96,000.
76. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of
$900,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $830,400 to yield 10%. Using the effective-
interest method of computing interest, how much should be charged to interest expense in 2012?
a. $72,000.
b. $83,040.
c. $83,316.
d. $90,000.
The following information applies to both questions 77 and 78.
On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of
$2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts
amortized on a straight-line basis.
77. The entry to record the issuance of the bonds would include a credit of
a. $50,000 to Interest Payable.
b. $80,000 to Discount on Bonds Payable.
c. $1,920,000 to Bonds Payable.
d. $80,000 to Premium on Bonds Payable.
78. Bond interest expense reported on the December 31, 2012 income statement of Macklin
Corporation would be
a. $23,000
b. $25,000
c. $27,000
d. $46,000
The following information applies to both questions 79 and 80.
On October 1, 2012 Bartley Corporation issued 5%, 10-year bonds with a face value of
$3,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts
amortized on a straight-line basis.
79. The entry to record the issuance of the bonds would include a
a. credit of $75,000 to Interest Payable.
b. credit of $120,000 to Premium on Bonds Payable.
c. credit of $2,880,000 to Bonds Payable.
d. debit of $120,000 to Discount on Bonds Payable.
55. Current Liabilities and Contingencies 13 - 55
80. Bond interest expense reported on the December 31, 2012 income statement of Bartley
Corporation would be
a. $40,500
b. $69,000
c. $34,500
d. $37,500
81. At the beginning of 2012, Wallace Corporation issued 10% bonds with a face value of
$1,500,000. These bonds mature in the five years, and interest is paid semiannually on
June 30 and December 31. The bonds were sold for $1,389,600 to yield 12%. Wallace uses
a calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2012? (Round your answer to the nearest
dollar.)
a. $172,080
b. $167,255
c. $166,750
d. $166,250
82. On January 1, Patterson Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate
of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson
uses the effective-interest method of amortizing bond discount. At the end of the first year,
Patterson should report unamortized bond discount of
a. $164,700.
b. $171,300.
c. $154,830.
d. $153,000.
83. On January 1, Martinez Inc. issued $4,000,000, 11% bonds for $4,260,000. The market
rate of interest for these bonds is 10%. Interest is payable annually on December 31.
Martinez uses the effective-interest method of amortizing bond premium. At the end of the
first year, Martinez should report unamortized bond premium of:
a. $246,840
b. $246,000
c. $231,400
d. $220,000
84. At the beginning of 2012, Winston Corporation issued 10% bonds with a face value of
$1,200,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $1,111,680 to yield 12%. Winston uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2012? (Round your answer to the nearest
dollar.)
a. $133,000
b. $133,400
c. $133,804
d. $137,664
56. Current Liabilities and Contingencies 13 - 56
85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $481,250.
The entry to record the redemption will include a
a. credit of $18,750 to Loss on Bond Redemption.
b. credit of $18,750 to Discount on Bonds Payable.
c. debit of $28,750 to Gain on Bond Redemption.
d. debit of $10,000 to Premium on Bonds Payable.
86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $518,725.
The entry to record the redemption will include a
a. credit of $18,725 to Loss on Bond Redemption.
b. debit of $18,725 to Premium on Bonds Payable.
c. credit of $6,275 to Gain on Bond Redemption.
d. debit of $25,000 to Premium on Bonds Payable.
87. At December 31, 2012 the following balances existed on the books of Foxworth
Corporation:
Bonds Payable $3,000,000
Discount on Bonds Payable 240,000
Interest Payable 75,000
Unamortized Bond Issue Costs 180,000
If the bonds are retired on January 1, 2013, at 102, what will Foxworth report as a loss on
redemption?
a. $555,000
b. $480,000
c. $405,000
d. $300,000
88. At December 31, 2012 the following balances existed on the books of Rentro Corporation:
Bonds Payable $2,500,000
Discount on Bonds Payable 200,000
Interest Payable 60,000
Unamortized Bond Issue Costs 150,000
If the bonds are retired on January 1, 2013, at 102, what will Rentro report as a loss on
redemption?
a. $250,000
b. $337,500
c. $400,000
d. $460,000
89. The December 31, 2012, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2021 $2,000,000
Unamortized premium on bonds payable 54,000
57. Current Liabilities and Contingencies 13 - 57
The bonds were issued on December 31, 2011, at 103, with interest payable on July 1 and
December 31 of each year. Hess uses straight-line amortization. On March 1, 2013, Hess
retired $800,000 of these bonds at 98 plus accrued interest. What should Hess record as a
gain on retirement of these bonds? Ignore taxes.
a. $37,600.
b. $21,600.
c. $37,200.
d. $40,000.
90. On January 1, 2006, Hernandez Corporation issued $3,600,000 of 10% ten-year bonds at
103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded
amortization of the bond premium on the straight-line method (which was not materially
different from the effective-interest method).
On December 31, 2012, when the fair value of the bonds was 96, Hernandez repurchased
$800,000 of the bonds in the open market at 96. Hernandez has recorded interest and
amortization for 2012. Ignoring income taxes and assuming that the gain is material,
Hernandez should report this reacquisition as
a. a loss of $39,200.
b. a gain of $39,200.
c. a loss of $48,800.
d. a gain of $48,800.
58. Current Liabilities and Contingencies 13 - 58
91. The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on
December 31, 2012. The bonds, which had a face value of $800,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2013, several years before their maturity, Nixon retired the bonds at 102. The
interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon
should record on the early retirement of the bonds on July 2, 2013? Ignore taxes.
a. $16,000.
b. $50,400.
c. $44,800.
d. $56,000.
92. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of $600,000. To extinguish this debt, the company
had to pay a call premium of $200,000. Ignoring income tax considerations, how should
these amounts be treated for accounting purposes?
a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over
four years.
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately,
whichever management selects.
93. The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on
December 31, 2012. The bonds, which had a face value of $2,000,000, were issued at a
premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is
paid on June 30 and December 31. On June 30, 2013, several years before their maturity,
Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes,
is
a. $0.
b. $16,000.
c. $24,800.
d. $80,000.
94. Didde Company issues $15,000,000 face value of bonds at 96 on January 1, 2011. The
bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2014, $9,000,000 of the bonds are called at 102 plus accrued
interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $900,000 loss
b. $408,000 loss
c. $540,000 loss
d. $680,000 loss
59. Current Liabilities and Contingencies 13 - 59
95. Cortez Company issues $3,000,000 face value of bonds at 96 on January 1, 2011. The
bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2014, $1,800,000 of the bonds are called at 102 plus accrued
interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $180,000 loss
b. $81,600 loss
c. $108,000 loss
d. $136,000 loss
96. On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note
(face amount, $120,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest
for a loan of this type is 10%. The present value of $120,000 at 10% for three years is
$90,156. What amount of interest income should Ms. Price recognize in 2012?
a. $9,016.
b. $12,000.
c. $36,000.
d. $27,048.
97. On January 1, 2012, Jacobs Company sold property to Dains Company which originally
cost Jacobs $950,000. There was no established exchange price for this property. Danis
gave Jacobs a $1,500,000 zero-interest-bearing note payable in three equal annual
installments of $500,000 with the first payment due December 31, 2012. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present
value of a $1,500,000 note payable in three equal annual installments of $500,000 at a 10%
rate of interest is $1,243,500. What is the amount of interest income that should be
recognized by Jacobs in 2012, using the effective-interest method?
a. $0.
b. $50,000.
c. $124,350.
d. $150,000.
98. On January 1, 2012, Crown Company sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $3,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $600,000, with the first
payment due December 31, 2012. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $2,163,000 at January 1, 2012. What should
be the balance of the Discount on Notes Payable account on the books of Leary at
December 31, 2012 after adjusting entries are made, assuming that the effective-interest
method is used?
a. $0
b. $642,330
c. $669,600
d. $837,000
60. Current Liabilities and Contingencies 13 - 60
99. Putnam Company’s 2012 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2012 is
a. 3.0 times
b. 3.4 times.
c. 4.0 times.
d. 5.0 times.
100. In the recent year Hill Corporation had net income of $280,000, interest expense of
$60,000, and tax expense of $80,000. What was Hill Corporation's times interest earned
ratio for the year?
a. 7.0
b. 5.0
c. 4.7
d. 3.7
101. In recent year Cey Corporation had net income of $350,000, interest expense of $70,000,
and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for
the year?
a. $700,000
b. $630,000
c. $560,000
d. None of the above.
102. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012,
contained the following accounts.
5-year Bonds Payable 8% $2,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and wages Payable 18,000
Income Taxes Payable (due 3/15 of 2013) 25,000
The total long-term liabilities reported on the balance sheet are
a. $2,365,000.
b. $2,350,000.
c. $2,465,000.
d. $2,450,000.
Use the following information for questions *103 through *105:
61. Current Liabilities and Contingencies 13 - 61
On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is
a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to accept
from Nolte equipment that has a fair value of $580,000, an original cost of $960,000, and
accumulated depreciation of $460,000. Piper also forgives the accrued interest, extends the
maturity date to December 31, 2013, reduces the face amount of the note to $500,000, and reduces
the interest rate to 6%, with interest payable at the end of each year.
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.
*104. Nolte should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.
*105. Nolte should record interest expense for 2013 of
a. $0.
b. $30,000.
c. $60,000.
d. $90,000.
Multiple Choice Answers—Computational
MULTIPLE CHOICE—CPA Adapted
106. On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable
semiannually on April 1 and October 1. What amount did Spear receive from the bond
issuance?
a. $3,045,000
b. $3,000,000
c. $2,970,000
d. $2,895,000
62. Current Liabilities and Contingencies 13 - 62
107. On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000,
which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%,
resulting in bond premium of $540,000. Solis uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2012, Solis's adjusted unamortized bond premium should be
a. $540,000.
b. $503,200.
c. $486,000.
d. $406,000.
108. On July 1, 2011, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which
mature on July 1, 2017. The bonds were issued for $9,390,000 to yield 10%, resulting in a
bond discount of $610,000. Noble uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2013, Noble's unamortized
bond discount should be
a. $528,100.
b. $510,000.
c. $488,000.
d. $430,000.
109. On January 1, 2012, Huff Co. sold $3,000,000 of its 10% bonds for $2,655,888 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff
report as interest expense for the six months ended June 30, 2012?
a. $132,798
b. $150,000
c. $159,353
d. $180,000
110. On January 1, 2013, Doty Co. redeemed its 15-year bonds of $3,500,000 par value for 102.
They were originally issued on January 1, 2001 at 98 with a maturity date of
January 1, 2016. The bond issue costs relating to this transaction were $210,000. Doty
amortizes discounts, premiums, and bond issue costs using the straight-line method. What
amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?
a. $126,000
b. $84,000
c. $70,000
d. $0
111. On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of
$9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been
issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at par
plus a call premium of $105,000. What amount should Emig report in its 2013 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $105,000
c. $240,000
d. $345,000