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Exam 9: Current Liabilities and Contingencies

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Question 31

Multiple Choice

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Conceptually, all liabilities should be reported on the balance sheet at

A) the present value of the future outlays they require
B) their maturity value
C) face amount
D) their current cash equivalent amount

E) C) and D)
F) A) and C)

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Question 32

Multiple Choice

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Which of the following statements is not true?

A) Loss contingencies should be disclosed if there is just a reasonable possibility of a loss.
B) Indirect guarantees should normally be disclosed by footnote, not by accrual.
C) In the case of loss contingencies, accrual can be made even if the exact payee and payment date are not known.
D) Losses may be accrued for unasserted claims and other potential unfiled lawsuits.

E) None of the above
F) A) and C)

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Question 33

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Assets and liabilities with differing implication for financial flexibility should be reported together.

On January 1, 2014, Peg, Inc. bought some equipment by signing a non-interest-bearing note for $160,000. The note is to be paid in four equal annual $40,000 payments, beginning on December 31, 2014. Current interest rates were 8%. Actuarial information for 8%, 4 periods follows: $\begin{array}{ll}1.360 & \text { Amount of 1 } \\0.735 & \text { Present value of } 1 \\4.506 & \text { Amount of anmity of } 1 \\3.312 & \text { Present value of anmity of } 1\end{array}$ Required: Prepare the journal entries necessary on January 1, 2014, and December 31, 2014.

All of the following are examples of legal liabilities except

Identify 5 liabilities that are based upon contingent obligations.

A client is involved in several different law suits that are all pending at the end of its fiscal year. The controller wants to know if the cases must be accrued in the accounts, disclosed in the footnotes, or neither of these. Required: Write an explanation of the criteria used to determine whether an accrual or a disclosure is required for loss and gain contingencies.

Which of the following statements does not describe an essential characteristic of a liability?

Exhibit 9-2 In 2013, the Magtag Company sold 16,000 ovens. Magtag estimated that 14% of the machines would require repairs under the two-year warranty at an average cost of $60. During 2013, Magtag had an actual outlay of $62,000 for repairs under warranty. Magtag uses the expense warranty accrual method. -Refer to Exhibit 9-2. At what amount should the company record warranty expense for 2013?

Which of the following contingencies is usually accrued?

In considering contingencies, IFRS and GAAP define the term "probable" as

Listed below are several types of contingencies for the Kellher Company: a. The company has signed as a guarantor of a loan that one of its key suppliers has taken out with a local bank. The probability of the supplier defaulting on the note is remote. b.The company is suing another firm for trademark infringement, and the probability of winning the case is excellent. The amount of any award can be reasonably estimated. c.The company has a significant distribution center in another country where it is reasonably possible that the warehouse will be expropriated. The amount of the loss can be reliably estimated. d.The company has a manufacturing plant in California near a major earthquake fault line. The company has no earthquake insurance, and it is reasonably possible that a quake will occur. The amount of any loss can be reasonably estimated. e.The company is involved in another lawsuit where it is reasonably possible that the company will be found at fault, but the amount of the loss cannot be reasonably estimated. Required: Indicate whether the Kellher Company should make an accrual, a footnote disclosure, or neither of these for each contingency.

The Lawrence Company records its trade accounts payable net of any cash discounts. At the end of 2014, Lawrence had a balance of $300,000 in its trade accounts payable account before any adjustments related to the following items: 1. Goods shipped to Lawrence FOB shipping point were in transit on December 31 . The invoice price of the goods was $\$ 50,000$ , with a $2 \%$ discount allowed for prompt payment. 2. Goods shipped to Lawrence FOB destination on December 29 arrived on January 2, 2015. The invoice price of the goods was $\$ 9$ , 000 ; with a $4 \%$ discount allowed for payment within 20 days. 3. On December 10. Lawrence had recorded a shipment received. The recorded invoice price was $\$ 24.750$ , net, with a $1 \%$ discount allowed for payment within 14 days. At the end of the year, payment had not been made. At what amount should Lawrence report trade accounts payable on its December 31, 2014 balance sheet?

Jennifer Cakes places a coupon in each box of its product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes of product were sold in 2014. It was estimated that 6% of the coupons would be redeemed. During 2014, 8,000 coupons were redeemed. Which entry should be made at December 31, 2014?

The Salty Chip Company includes one coupon having no expiration date with its deluxe snack pack. Upon return of 10 coupons, Salty Chip will send a silver chip clip, which costs Salty Chip $1.50 each. Past experience indicates that 30% of coupons issued will be redeemed. Salty Chip began this promotion in 2013 and sold 1,000,000 deluxe snack packs. During 2013, 90,000 coupons were received and 9,000 chip clips were distributed to customers. The December 31, 2013 balance sheet should include a liability for coupons outstanding of

List 5 liabilities whose amounts are determined by operating activities.

Which of the following statements is true?

Exhibit 9-4 During 2014, the Thomas Company began selling a new type of machine that carries a two-year warranty against all defects. Based on past industry and company experience, estimated warranty costs should total $2,000 per machine sold. During 2014, sales and actual warranty expenditures were $4,000,000 (80 machines) and $44,000, respectively. -Refer to Exhibit 9-4. What amount should Thomas report as its estimated warranty liability at December 31, 2014?

Which of the following is the most appropriate way to display liabilities on the balance sheet?

Concerning accounting for warranties, which of the following statements is false?