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Direct Labor Cost: $10,500 Purchase of Materials: 15,000 Supplies used: 675 Factory Insurance: 350 Advertising: 800 Material Handling: 3,745 Work-in-process inventory, 12/31/2003: 12,500 Work-in-process inventory, 12/31/2004: 14,250 Material Inventory, 12/31/2003: 3,475 Material Inventory, 12/31/2004: 9,500

I have the following problem, that I have done in several ways and I always get an answer that is greater that the correct one. These are the figures (in thousands of dollars): Direct Labor Cost: $10,500 Purchase of Materials: 15,000 Supplies used: 675 Factory Insurance: 350 Advertising: 800 Material Handling: 3,745 Work-in-process inventory, 12/31/2003: 12,500 Work-in-process inventory, 12/31/2004: 14,250 Material Inventory, 12/31/2003: 3,475 Material Inventory, 12/31/2004: 9,500 Finished goods inventory, 12/31/2003: 6,685 Finished goods inventory, 12/31/2004: 4,250 1. Prepare a statement of cost of goods manufactured. (Correct answer is 24720, my answer is 29780) 2. Prepare a statement of cost of goods sold.

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A department store has a budgeted sales of $12,000 men's suits in September. Management wants to have 6,000 suits in inventory at the end fo the month to prepare for the winter season. Beginning inventory for September is expected to be $4,000 suits. What is the dollar amount of purchase of suits? Each suit has a cost of $75.

A department store has a budgeted sales of $12,000 men’s suits in September. Management wants to have 6,000 suits in inventory at the end fo the month to prepare for the winter season. Beginning inventory for September is expected to be $4,000 suits. What is the dollar amount of purchase of suits? Each suit has a cost of $75.

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From the company’s view point, what is the best conclusion? b) What do you think is George Bush’s desired conclusion? Make sure to include the computations of income. c) By incorporating short-run financial methods of accomplishment as incentives for rewards, what do you think would be the motivation difficulties? d) How can the discrepancies in parts (a) and (b), and the motivation difficulties in part (c) be diminished?

Advanced Management Accounting Questions

Question 1) There is a company called Walmart, and it deals with machining work that is conventional. A variety of machines are used within the company, and these machines are frequently restored and changed.

George Bush is the manager of this factory, and he has given permission to acquire an automated machine from Machine Ltd. at a price of $2,000,000. Recently, the new automated machine was set up. It is believed that this new machine will last for 10 years and this new machine will incur operating costs of $700,000 (on a yearly basis). By the end of the 10 years, the machine will be useless.

George Bush’s salary is $75,000 and he also obtains ½ of 1% of the corporate net income as his yearly bonus. Brad thinks he will stay with Walmart for an additional 2 years. Afterwards, he believes that by moving to a different company he will obtain a hefty salary increase and a promotion.

Super Machine Ltd. (another company) is offering a new machine. This machine executes the same jobs as the new machine from Machine Ltd. George Bush has his reservations about this new growth. The machine at Super Machine Ltd. costs $2,500,000 and has the capability of lasting for 10 years. The yearly operating costs are $300,000 and after 10 years the machine will have a nil salvage value. It has caused Walmart’s machine as outdated and the net of salvage, its present amount has gone down to $500,000.

Based on the following questions, ignore income taxes and make the assumption that the company’s compulsory return is 14%. In order to calculate the depreciation, this company uses the straight-line method.

 

a)     From the company’s view point, what is the best conclusion?

b)     What do you think is George Bush’s desired conclusion? Make sure to include the computations of income.

c)      By incorporating short-run financial methods of accomplishment as incentives for rewards, what do you think would be the motivation difficulties?

d)     How can the discrepancies in parts (a) and (b), and the motivation difficulties in part (c) be diminished?

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Seneca Foods is a regional producer of low-priced private-label snack foods. Seneca contracts with local supermarkets to supply good-tasting packaged snack foods that the retailers sell at significantly lower prices to price-sensitive consumers. Because Seneca’s production costs are low, and it spends no money on advertising and promotion, it can sell its products to retailers at much lower prices than can national-brand snack food companies, such as Frito-Lay

Advanced  Management Accounting Questions:

Q1) (ACTIVITY BASED MANAGEMENT)

Seneca Foods is a regional producer of low-priced private-label snack foods. Seneca contracts with local supermarkets to supply good-tasting packaged snack foods that the retailers sell at significantly lower prices to price-sensitive consumers. Because Seneca’s production costs are low, and it spends no money on advertising and promotion, it can sell its products to retailers at much lower prices than can national-brand snack food companies, such as Frito-Lay. The low purchase prices often allow the retailer to mark this product up and earn a gross margin well above what it earns from brand products, while still keeping and selling price to the consumer well below the price of the brand products.

 

Seneca has recently been approached by several large discount food chains who wish to offer their consumers a high-quality but much lower-priced alternative to the heavily advertised and high-priced national brands. But each discount retailer wants the recipe for the snack foods to be customized to its own tastes. Also, each retailer wants its own name and label on the snack foods it sells. Thus, the retailer, not the manufacturer, would be providing the branding for the private-label product. In addition, the retail chains want their own retailer-branded product to offer a full snack product line, just as the national brands do.

 

Seneca’s managers are intrigued with the potential for quantum growth by becoming the prime producer of retailer-brand snack foods to large, national discount chains. As they contemplated this new opportunity. Dale Williams, the senior marketing manager, proposed that if Seneca enters this business, it can think of even higher growth opportunities. Seneca does not have to sell just to the discount chains that have approached it. Local supermarket chains may also be attracted to the idea of having their own brand of high quality but lower-priced snack products that could compete with the national brands, not just be a low-priced alternative for highly price-sensitive consumers. Perhaps Seneca could launch a marketing effort to regional supermarket chains around the country for a retail-brand snack food product line. Williams noted, however, that the local supermarket chains were not as sophisticated as the national discounters in promoting products under their own brand name. Each supermarket chain likely would need extensive assistance and support to learn how to advertise, merchandise, and promote the store-brand products to be competitive with the national-brand products.

 

John Thompson, director of logistics for Seneca Foods, noted another issue. The national-brand producers used their own salespeople to deliver their products directly to the retailer’s store and even stocked their products on the retailer’s shelves. Seneca, in contrast, delivered to the retailer’s warehouse or distribution center, leaving the retailer to move the product to the shelves of its various retail outlets. The national producers were trying to dissuade the large discount chains from following their proposed private-label (retailer-brand) strategy by showing them studies that the apparently higher margins they would earn on the private label would be eaten away by much higher warehousing, distribution, and stocking costs for these products.

 

Heather Gerald, the controller of Seneca, was concerned with the new initiatives. She felt that Seneca’s current success was due to its focus. It currently offered a relatively narrow range of products aimed at the high-volume snack food segments to supermarket chains in its local region. Seneca got good terms from its relatively few supplier because of the high volume of business it did with each of them. Also, the existing production processes were efficient for the products and product range currently produced. She feared that customizing products for each discount or supermarket retailer, plus adding additional products so that they could offer a full product line, would cause problems with both suppliers and the production process. She also wondered about the cost of providing new services, such as consulting and promtoins, to the supermarket chains and of developing some of the new items required for the proposed full product line strategy. Heather was attracted to the growth prospects offered by becoming the preferred supplier to major discount and supermarket chains. But she was not as optimistic as Dale Williams that these retailers truly believed that selling their own private-label foods would be more profitable than selling the national brands. Perhaps they were only using Seneca as a negotiating ploy, threatening to turn to private labels to increase their power in setting terms with the national manufacturers. Once production geared up, how much volume would these retailers provide to Seneca? How could Seneca convince the large retailers about the profitability associated with the new private-label strategy?

 

Gerald knew that Seneca’s existing cost systems were adequate for their current strategy. Most expenses were related to materials and machine processing, and these costs were well assigned to products with the conventional standard costing system. But the new strategy would seem to involve a lot more spending in areas other than purchasing materials and running machines. She wished she knew how to provide input into the strategic deliberations now under way at Seneca, but she didn’t know how to quantify all the effects of the proposed strategy.

 

REQUIRED:

a)      How can activity-based costing help Heather Gerald assess the attractiveness of the proposed policy?

b)      Assuming that Seneca starts to supply new customers-large discounters and supermarkets outisde its local region-what ABC systems would be helpful to guide the profitability of the strategy and assist Seneca managers in making decisions?

*NOTE: Make sure to think about the totality of Seneca’s operations, including its relationships with both supplier and customers. (i) Discuss how ABC can be used to manage and controls costs for Seneca’s manufacturing operations. The “whale curve” and some of those concepts can apply to this company. (ii) ABC can be used to measure profitability: internal to the companyand external by modeling the customer. (iii) Finally, use ABC to manage the company’s relationship with suppliers.

 

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Q2) (COST-BASED DECISION MAKING)

COST COMMITMENT

Using published sources, identify the process of cost commitment during various phases of some product’s life cycle. Try to find several  examples so that you can contrast the rate of cost commitment for different products.

*Note: Provide a minimum of two examples and document the process of cost commitment

during various phases of these products’ life cycles. In particular, indicate what

percentage of the costs will be committed at the design stage.

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Q3) (FORMAL MODELS IN BUDGETING AND INCENTIVE CONTRACTS)

THE REVELATION PRINCIPLE IN BUDGET SETTING

Kentville Orchards grows and sells a wide variety of fruits. Norm Wilson, the vice-president-controller of Kentville Orchards, is responsible for all aspects of budgeting and forecasting in the firm. Norm has becoming both disillusioned and dissatisfied with the traditional approach that Kentville Orchards has taken to budgeting. Norm summarized his concerns as follows:

 

“The traditional approach, where we set budget objectives and then evaluate performance relative to those objectives, is not working well. First, the budget is focusing attention on the wrong things. The managers are interested in making short-run profit as large as possible and are not doing things to improve long-run profitability. Second, I do not think that the model of evaluating performance based on profits has the scope to evaluate the jobs that the managers are doing. Their jobs are much more complicated than a simple profit measure implies, and we need a more accurate picture of how well they are doing. Finally, the existing system is motivating the managers to build slack into both their standards and performance targets so that they can make budget and earn bonuses. As a result, our forecasting system is unable to predict either sales levels or input usage accurately.”

 

Norm went on to indicate that he was considering recommending to the senior management committee at Kentville Orchards that the current budgeting system be replaced with a new system using participative budggeting techniques. Specifically, the new system would require that the objectives for each management job in the organization be defined relative to the organization’s strategic goals by negotiations between the job’s incumbent and incumbent’s supervisor. From these general objectives, specific performance objectives would be set for each job each year through negotiations between the incumbent and the incumbent’s supervisor. The objectives would be multidimensional and would include performance objectives for all attributes of the job that are considered important.

 

The annual evaluation would reflect two dimensions of performance appraisal. First, the incumbent would be evaluated for innovation in developing ways of carrying out assigned responsibilities. Second, the incumbent’s performance would be evaluated relative to the targets that were negotiated with the supervisor. Norm summarized his feelings as follows:

 

“The only thing that is holding me back is that I do not think that the proposed changes go far enough. The proposed system deals with the problem of inadequate performance measurement but still provides managers with the incentives to understate their potential, since their performance will be evaluated relative to the targets that each manager negotiates with his supervisor. Moreover, the planned system, like the old system, still has the aspect of checking up on people rather than relying on them to do their jobs. Perhaps we should go even further and implement the proposed system but evaluate managers only on their ability to be innovative in undertaking the tasks that they have been assigned. If they are not evaluated relative to the targets that they set jointly with their supervisors, they will be motivated not to understate their potential. The bottom line is that I think that we should get rid of the concept of standards altogether, irrespective of who sets the standards. As a result of eliminating the concept of standards, the budget will serve to communicate and coordinate rather than be a threat and a means of checking up on the managers.”

 

REQUIRED:

Evaluate the initial proposal for the revision of the budgeting system as well as the proposal that would eliminate the use of standards.

*Note: Start by identifying the problems with the current budgeting and performance

system. Then, comment on the advantages and disadvantages of the proposed new

systems: one in which evaluation is based on participative budgeting and innovation

and the other in which evaluation is based solely on innovation.

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Q4) (FINANCIAL MEASURES OF PERFORMANCE-Internal Transfer Pricing with an Outside Market)

BACKGROUND

The New Brunswick Company is a midsized subsidiary of the Sun Corporation, which manufacturers various textile and similar material composites. Sales are made to affiliate companies within the Sun Corporation, as well as to external companies. Approximately one-half of New Brunswick’s sales are to affiliated companies.

 

New Brunswick’s formal mission statement reads as follows:

“New Brunswick’s mission is to develop and supply unique, cost effective fabrics and related nonconventional structures to proactively support the Sun Corporation’s worldwide consumer and professional markets. An extension of New Brunswick’s mission is to capitalize on the resultant unique product and fabric capabilities by developing profitable franchises in slective growth-oriented consumer and industrial markets. This will be accomplished while satisfying the expectations of the company and fostering commitment, challenge, and reward for our employees.”

 

This statement has received wide approval from the corporate level and from the affiliate management boards. It serves as the driving force for New Brunswick’s management and sets clear objectives.

 

THE PRODUCT

Fifteen years ago, New Brunswick research began evaluating a fabric formation technology (originally developed by the Smith Company, a competitor) called Super Weave. In this technology, fibers are entagled mechanically using water sprayed under high pressure. The resulting fabric is very clothlike in appearance, feel, and comfort. The Smith Company realized early on that this fabric would make an idea barrier in the operating room. The new fabric would provide an effective disposable replacement for operating room drapes and gowns, providing a greater degree of sterility than had been attainable in the past.

Within the Sun Corporation’s family of companies, Sanitech is responsible for asepsis within the operating room. To this end, Sanitech markets operating room apparel, gloves, and disinfectants.

Ten years ago, Sanitech began marketing operating room packs and gowns using the Smith fabric. Although the franchise was successful, the relationship between supplier and customer did have drawbacks, which the Sun Corporation, Sanitech, and New Brunswick fully understood: 1) Product improvements made by Smith might not be exclusive to Sanitech in the future, because Smith could sell to Sanitech’s competitors, 2) Smith’s capacity versus Sanitech’s demand, 3) Lack of a second source, 4) Fear of monopolistic pricing practices.

 

NEW BRUNSWICK’S ENTRY INTO THE MARKET

Six years ago, New Brunswick developed a material equivalent to the Super Weave fabric for sale to Sanitech. Entering this business required New Brunswick to make a significant capital investment in plant and equipment. The total investment would approach $30 million, the largest single investment in the company’s long history. Given the Sun Corporation’s policy of decentralized operating companies and New Brunswick’s mission, New Brunswick’s resources alone were used to fund the project. In addition, Sanitech as the marketing company was at liberty to select the fabric that, from its perspective, would best meet its customers’ requirements at the lowest cost to Sanitech.

New Brunswick’s proposal was presented to the executive committee of the Sun Corporation, who gave final approval for New Brunswick to proceed.

 

SMITH’S RESPONSE

Three years ago, New Brunswick began making fabric of a quality comparable to Smith’s. However, New Brunswick found itself in a significantly changed market environment: 1) Concurrent with New Brunswick’s entry, Smith’s prices to Sanitech immediately dropped, 2) Smith introduced pricing strategies that rewarded Sanitech for high volume and provided multiyear incentives, 3) With the exception of price escalation, Sanitech and smith had developed an effective partnership since 1975, 4) After several years of manufacturing, Smith had been able to maximize manufacturing efficiencies and achieve lower cost. New Brunswick realized it was at a cost disadvantage and could not price on the basis of intercompany transfer formulas (normally, full cost plus a percent return on invested capital and working capital).

 

New Brunswick understood very quickly and clearly that, in order to be successful, it must beat Smith’s pricing and in the long run minimize manufacturing costs or New Brunswick would have to be content as a secondary source of supply.

 

NEW BRUNSWICK’S PROBLEM

The vice president of affiliate marketing at New Brunswick requested the assistance of the chief financial officer in developing a plan that would enable New Brunswick to sell itsproduct to Sanitech while achieving the following objectives: 1) Establish a price that is competitive while recovering the capital investment in a reasonable number of years, 2) Establish the longer-term profitability for New Brunswick, 3) Provide the corporation with the lowest-cost product over the long run.

 

REQUIRED:

a)      How should New Brunswick develop its pricing strategy?

b)      How should the benefit to the Sun Corporation be measured?

c)       What might Smith’s reaction be to your strategy?

d)      Should vertically integrated corporations be forced to procure raw materials from other divisions?

e)      Should intercompany pricing policy be inflexible?

*NOTE: This case involves a basic transfer pricing problem—an external supplier offers a

price that is lower than the full costs of producing the product inside. The questions

in this case are fairly straightforward. For (a), review the case and

recommend a pricing strategy. Provide clear reasons why your pricing strategy would

be most effective. For (b), comment on how each department should be

evaluated, and overall, how the company will be evaluated, based on the strategy

you suggested in (a). Consider whether the total company effect of a

transfer price is important, and think about the financial and non-financial benefits of

producing a product inside. For (c), describe how Smith will respond to the

the pricing strategy suggested in (a). Parts (d) and (e) are general

questions that can be applied to all vertically integrated companies.

 

 

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Social security taxes as liabilities. Definition of accumulation rights. Recognizing compensated absences expense. Accruing estimated loss contingency. Disclosing gain contingencies. Sales-type warranty profit. Fair value of asset retirement obligation. Reporting a litigation liability. Expense warranty approach. Acid-test ratio components. Affect on current ratio. Reporting current liabilities

13 CHAPTER CURRENT LIABILITIES AND CONTINGENCIES TRUE-FALSE Conceptual Answer F F T T F F T F T F T F T F T T F F F T No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Description Zero-interest-bearing note payable. Dividends in arrears. Examples of unearned revenues. Reporting discount on Notes Payable. Currently maturing long-term debt. Excluding short-term debt refinanced. Accounting for sales tax collected. Accounting for sick pay. Social security taxes as liabilities. Definition of accumulation rights. Recognizing compensated absences expense. Accruing estimated loss contingency. Disclosing gain contingencies. Sales-type warranty profit. Fair value of asset retirement obligation. Reporting a litigation liability. Expense warranty approach. Acid-test ratio components. Affect on current ratio. Reporting current liabilities. MULTIPLE CHOICE Conceptual Answer d d a a b d c d c d c d d d d a No. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Description Definition of a liability. Nature of current liabilities. Recording of accounts payable. Classification of notes payable. Classification of discounts on notes payable. Identify current liability. Bonds reported as current liability. Identify item which is not a current liability. Dividends reported as current liability. Classification of stock dividends distributable. Identify item which is not a current liability. Identify current liability. Short-term obligations expected to be refinanced. Ability to consummate refinancing of short-term obligations. Determine what is a liability. Classification of sales taxes. 13 – 2 Test Bank for Intermediate Accounting, Twelfth Edition MULTIPLE CHOICE Conceptual (cont.) Answer d b d d d c d d d b a c d b c c c a b d d c a d d d P S No. S S Description Disclosure for short-term debt refinanced. Vested rights vs. accumulated rights. Deductions in computing net pay. Employer’s payroll tax expense. Accrual of a liability for compensated absences. Accrual of a liability for compensated absences. Accrual of a liability for compensated absences. Disclosure of a gain contingency. Disclosure of contingencies. Accrual of loss contingency. Litigation and loss contingencies. Accrual of a contingent liability. Source of a contingent liability. Asset retirement obligation. Asset retirement obligation. Classification of warranty liability. Liability accrual due to governmental action. Accrual of product warranties. Determining loss amount to report. Reporting lawsuit loss and liability. Accrual method for warranty costs. Presentation of current liabilities. Current ratio formula. Disclosure of accrued liabilities. Acid-test ratio elements. Methods of calculating employee bonuses. 37. 38. P 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. P 55. S 56. S 57. S 58. P 59. 60. 61. *62. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. MULTIPLE CHOICE Computational Answer b d b d b b c a a d d c c c No. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. Description Adjusting entry involving discount on short-term note payable. Calculate effective interest on discounted note. Determine amount of short-term debt to be reported. Determine amount of short-term debt to be reported. Calculate sales taxes for the month. Calculate amount of sales taxes payable. Determine amount of sales subject to sales tax. Short-term debt to be excluded. Short-term debt to be excluded. Federal/state unemployment taxes. Federal/state unemployment taxes. Vacation liability accrual. Vacation liability accrual. Calculate payroll tax expense. Current Liabilities and Contingencies 13 – 3 MULTIPLE CHOICE Computational (cont.) Answer d a b d a b d d b d b d d d b d a d b c c c b No. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. *97. *98. *99. Description Calculation of vacation expense to be recognized. Calculation of accrued liability to be recognized for compensated balances. Calculate rebate expense and liability. Asset retirement obligation. Calculate insurance expense and loss. Calculate rebate expense and liability. Asset retirement obligation. Calculate warranty liability. Calculate liability for premiums. Calculate warranty liability. Calculate liability for premiums. Determine premiums expense for the year. Calculate estimated liability for premiums. Calculate estimated liability for premiums. Determine amount to accrue as a loss contingency. Accrue warranty expense for the year. Calculate warranty liability. Determine amount to accrue as a gain contingency. Calculate liability for unredeemed coupons. Calculate the quick (acid-test) ratio. Calculate amount of bonus to be recognized. Calculate amount of bonus to be recognized. Calculate amount of bonus to be recognized. MULTIPLE CHOICE CPA Adapted Answer a b c d a d b c d d c No. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. Description Knowledge of accounts payable. Determine current and long-term portions of debt. Determine accrued interest payable. Determine amount of short-term debt to be reported. Calculate accrued salaries payable. Accrual of payroll taxes. Calculate unearned service contract revenue. Determine liability from unredeemed trading stamps. Determine range of loss accrual. Calculate the estimated warranty liability. Disclosure of a casualty claim. EXERCISES Item E13-111 E13-112 E13-113 E13-114 E13-115 E13-116 *E13-117 Description Notes payable. Payroll entries. Compensated absences. Contingent liabilities. Premiums. Premiums. Bonus calculation. 13 – 4 Test Bank for Intermediate Accounting, Twelfth Edition PROBLEMS Item P13-118 P13-119 P13-120 P13-121 Description Accounts and notes payable. Refinancing of short-term debt. Premiums. Warranties. CHAPTER LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. *7. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short-term debt expected to be refinanced. Identify types of employee-related liabilities. Identify the criteria used to account for and disclose gain and loss contingencies. Explain the accounting for different types of loss contingencies. Indicate how to present and analyze liabilities and contingencies. Compute employee bonuses under differing arrangements. Current Liabilities and Contingencies 13 – 5 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 50. 51. 18. 19. 62. Note: Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC TF TF MC Item 21. 22. 23. 24. 33. 34. 35. 35. 38. P 39. 40. S Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC TF MC MC Item 25. 26. 27. 28. 36. 37. 65. Type Item Type Item Type MC MC MC MC MC MC MC MC MC MC MC MC E MC MC MC MC MC MC P P E Item 102. 111. 118. Type MC E P Item Type S 41. 42. 43. 72. 45. 46. 79. 80. 81. 82. 83. 84. P 35. 44. 52. 53. 54. P 55. S 56. S 57. 20. 58. 97. S 59. 60. 98. Learning Objective 1 MC 29. MC 63. MC 30. MC 64. MC 31. MC 100. MC 32. MC 101. Learning Objective 2 MC 66. MC 69. MC 67. MC 70. MC 68. MC 71. Learning Objective 3 MC 73. MC 77. MC 74. MC 78. MC 75. MC 104. MC 76. MC 105. Learning Objective 4 MC 47. MC 49. MC 48. MC 114. Learning Objective 5 MC 85. MC 91. MC 86. MC 92. MC 87. MC 93. MC 88. MC 94. MC 89. MC 95. MC 90. MC 106. Learning Objective 6 MC 61. MC 118. MC 96. MC 119. Learning Objective *7 MC 99. MC 117. E = Exercise P = Problem 103. 119. MC P 112. 113. E E 107. 108. 109. 110. 115. 116. 120. MC MC MC MC E E P 120. 121. P P TF = True-False MC = Multiple Choice 13 – 6 Test Bank for Intermediate Accounting, Twelfth Edition 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. 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. Current Liabilities and Contingencies 13 – 7 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 Item 1. 2. 3. 4. 5. Ans. F F T T F Item 6. 7. 8. 9. 10. Ans. F T F T F Item 11. 12. 13. 14. 15. Ans. T F T F T Item 16. 17. 18. 19. 20. Ans. T F F F T 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. 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 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 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. b. c. d. 1 2 3 Both 2 and 3 are true. 22. 23. 13 – 8 24. Test Bank for Intermediate Accounting, Twelfth Edition 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. 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. 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 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. 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 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 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. 25. 26. 27. 28. 29. 30. Current Liabilities and Contingencies 31. 13 – 9 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. 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. 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. 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. The ability to consummate the refinancing of a short-term obligation may be demonstrated 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. 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. 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. 32. 33. 34. 35. 36. 13 – 10 Test Bank for Intermediate Accounting, Twelfth Edition S 37. 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. 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. 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. 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. 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 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. 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. S 38. P 39. 40. 41. 42. Current Liabilities and Contingencies 43. The amount of the liability for compensated absences should be based on 13 – 11 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. b. c. d. 44. 1. 2. 3. Either 1 or 2 is acceptable. 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. 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 c. Guarantees of indebtedness of others d. All of these must be disclosed. 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. Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward 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 Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad’s offer. The Railroad’s 2007 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. 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. 45. 46. 47. 48. 13 – 12 Test Bank for Intermediate Accounting, Twelfth Edition 49. 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. 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. 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. 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. Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez 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 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. 50. 51. 52. 53. 54. Current Liabilities and Contingencies P 13 – 13 55. Mayberry 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. Marx 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 Marx 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. 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. 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 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. 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. 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. S 56. S 57. S 58. P 59. 60. 61. 13 – 14 Test Bank for Intermediate Accounting, Twelfth Edition *62. Which of the following is not a permissible method of calculating a bonus to an employee? a. The bonus is based on income before deductions for the bonus and income taxes. b. The bonus is based on income after deduction of the bonus but before deduction of income taxes. c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible. Multiple Choice Answers Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. 22. 23. 24. 25. 26. d d a a b d 27. 28. 29. 30. 31. 32. c d c d c d 33. 34. 35. 36. 37. 38. d d d a d b 39. 40. 41. 42. 43. 44. d d d c d d 45. 46. 47. 48. 49. 50. d b a c d b 51. 52. 53. 54. 55. 56. c c c a b d 57. 58. 59. 60. 61. *62. d c a d d d Solutions to those Multiple Choice questions for which the answer is none of these. 22. A long-term debt maturing currently to be paid with current assets is a current liability. 32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities. 33. The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities. MULTIPLE CHOICE Computational 63. Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 2007 for the purchase of $150,000 of inventory. The face value of the note was $152,205. Assuming Edson 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, 2007 will include a a. debit to Discount on Note Payable for $735. b. debit to Interest Expense for $1,470. c. credit to Discount on Note Payable for $735. d. credit to Interest Expense for $1,470. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 10% is a. 10.87%. b. 10%. c. 9.09%. d. 11.11%. 64. Current Liabilities and Contingencies 65. 13 – 15 On February 10, 2007, after issuance of its financial statements for 2006, Flynn Company entered into a financing agreement with Lebo Bank, allowing Flynn Company to borrow up to $4,000,000 at any time through 2009. 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. Flynn Company presently has $1,500,000 of notes payable with First National Bank maturing March 15, 2007. The company intends to borrow $2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires Flynn to maintain a working capital level of $6,000,000 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 Flynn Company as of the December 31, 2007 balance sheet date is a. $0. b. $1,500,000. c. $2,000,000. d. $4,000,000. On December 31, 2006, Frye Co. has $2,000,000 of short-term notes payable due on February 14, 2007. On January 10, 2007, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $1,500,000 at one percent above the prime rate for three years. On February 2, 2007, Frye borrowed $1,200,000 from County Bank and used $500,000 additional cash to liquidate $1,700,000 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, 2006 balance sheet which is issued on March 5, 2007 is a. $0. b. $300,000. c. $500,000. d. $800,000. 66. Use the following information for questions 67 and 68. Raney 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. Raney Co. records the sales tax in the Sales account. The amount recorded in the Sales account during May was $148,400. 67. The amount of sales taxes (to the nearest dollar) for May is a. $8,726. b. $8,400. c. $8,904. d. $9,438. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is a. $8,551. b. $8,232. c. $8,726. d. $9,249. 68. 13 – 16 Test Bank for Intermediate Accounting, Twelfth Edition 69. Trent, 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, 2007, Trent remitted $81,480 tax to the state tax division for March 2007 retail sales. What was Trent ‘s March 2007 retail sales subject to sales tax? a. $1,629,600. b. $1,596,000. c. $1,680,000. d. $1,645,000. Holbert Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 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. $1,500,000 b. $2,500,000 c. $1,000,000 d. $0 Grogan Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 60,000 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. $1,200,000 b. $1,800,000 c. $600,000 d. $0 Timmons Co., which has a taxable payroll of $500,000, 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 Timmons Co.? a. $58,500 b. $41,000 c. $20,000 d. $14,000 Unruh Co., which has a taxable payroll of $400,000, 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 Unruh Co.? a. $46,800 b. $32,800 c. $16,000 d. $11,200 70. 71. 72. 73. Current Liabilities and Contingencies 74. 13 – 17 A company gives each of its 50 employees (assume they were all employed contin
uously through 2007 and 2008) 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 2007, they made $14 per hour and in 2008 they made $16 per hour. During 2008, 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 2007 and 2008 balance sheets, respectively? a. $67,200; $93,600 b. $76,800; $96,000 c. $67,200; $96,000 d. $76,800; $93,600 A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 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 2007, they made $17.50 per hour and in 2008 they made $20 per hour. During 2008, 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 2007 and 2008 balance sheets, respectively? a. $84,000; $117,000 b. $96,000; $120,000 c. $84,000; $120,000 d. $96,000; $117,000 The total payroll of Waters Company for the month of October, 2007 was $360,000, of which $90,000 represented amounts paid in excess of $90,000 to certain employees. $300,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $90,000 of federal income taxes and $9,000 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 $90,000 and 1.45% in excess of $90,000. What amount should Waters record as payroll tax expense? a. $118,620. b. $113,040. c. $23,040. d. $28,440. 75. 76. Use the following information for questions 77 and 78. Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007. Information relative to these employees is as follows: Year 2006 2007 2008 Hourly Wages $25.80 27.00 28.50 Vacation Days Earned by Each Employee 10 10 10 Vacation Days Used by Each Employee 0 8 10 Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. 13 – 18 Test Bank for Intermediate Accounting, Twelfth Edition 77. What is the amount of expense relative to compensated absences that should be reported on Simson s income statement for 2006? a. $0. b. $68,880. c. $75,600. d. $72,240. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2008? a. $94,920. b. $90,720. c. $79,800. d. $95,760. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31? a. $400,000; $400,000 b. $400,000; $260,000 c. $260,000; $260,000 d. $140,000; $260,000 A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events? a. Depreciation expense of $120,000 b. Depreciation expense of $100,000 and interest expense of $7,711 c. Depreciation expense of $100,000 and interest expense of $20,000 d. Depreciation expense of $107,710 and interest expense of $7,711 Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,000,000 per year. The company estimates that on average it will incur losses of $800,000 per year. During 2007, $350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2007? a. $350,000 in losses and no insurance expense b. $350,000 in losses and $450,000 in insurance expense c. $0 in losses and $800,000 in insurance expense d. $0 in losses and $1,000,000 in insurance expense A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31? a. $600,000; $600,000 b. $600,000; $390,000 c. $390,000; $390,000 d. $210,000; $390,000 78. 79. 80. 81. 82. Current Liabilities and Contingencies 83. 13 – 19 A company buys an oil rig for $2,000,000 on January 1, 2007. 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 2007 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 During 2006, Younger 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, 4% in the year after sale, and 6% in the second year after sale. Sales and actual expenditures warranty for the first three-year period were as follows: 2006 2007 2008 Sales $ 600,000 1,500,000 2,100,000 $4,200,000 Actual Warranty Expenditures $ 9,000 45,000 135,000 $189,000 84. What amount should Younger report as a liability at December 31, 2008? a. $0 b. $15,000 c. $204,000 d. $315,000 85. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Milner Frosted Flakes boxes and $1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Milner Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2007? a. $25,000 b. $37,500 c. $62,500 d. $87,500 During 2006, Venable 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, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: 2006 2007 2008 Sales $ 400,000 1,000,000 1,400,000 $2,800,000 Actual Warranty Expenditures $ 6,000 30,000 90,000 $126,000 86. What amount should Venable report as a liability at December 31, 2008? a. $0 b. $10,000 c. $136,000 d. $210,000 13 – 20 Test Bank for Intermediate Accounting, Twelfth Edition 87. Pryor Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Pryor Frosted Flakes boxes and $1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost Pryor Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2007? a. $20,000 b. $30,000 c. $50,000 d. $70,000 Use the following information for questions 88, 89, and 90. Kent Co. includes one coupon in each bag of dog food it sells. In return for eight co
upons, customers receive a leash. The leashes cost Kent $2.00 each. Kent estimates that 40 percent of the coupons will be redeemed. Data for 2006 and 2007 are as follows: Bags of dog food sold Leashes purchased Coupons redeemed 88. The premium expense for 2006 is a. $25,000. b. $30,000. c. $35,000. d. $50,000. The estimated liability for premiums at December 31, 2006 is a. $7,500. b. $10,000. c. $17,500. d. $20,000. The estimated liability for premiums at December 31, 2007 is a. $11,250. b. $21,250. c. $22,500. d. $42,500. Vernon 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. Vernon’s lawyer states that it is probable that Vernon will lose the suit and be found liable for a judgment costing Vernon anywhere from $1,200,000 to $6,000,000. However, the lawyer states that the most probable cost is $3,600,000. As a result of the above facts, Vernon should accrue a. a loss contingency of $1,200,000 and disclose an additional contingency of up to $4,800,000. b. a loss contingency of $3,600,000 and disclose an additional contingency of up to $2,400,000. c. a loss contingency of $3,600,000 but not disclose any additional contingency. d. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000. 2006 500,000 18,000 120,000 2007 600,000 22,000 150,000 89. 90. 91. Current Liabilities and Contingencies 92. 13 – 21 Moore Company estimates its annual warranty expense as 4% of annual net sales. The following data relate to the calendar year 2007: Net sales Warranty liability account Balance, Dec. 31, 2007 Balance, Dec. 31, 2007 $1,500,000 $10,000 50,000 debit before adjustment credit after adjustment Which one of the following entries was made to record the 2007 estimated warranty expense? a. Warranty Expense ……………………………………………………… 60,000 Retained Earnings (prior-period adjustment) ………… 10,000 Warranty Liability ……………………………………………… 50,000 b. Warranty Expense ……………………………………………………… 50,000 Retained Earnings (prior-period adjustment) …………………. 10,000 Warranty Liability ……………………………………………… 60,000 c. Warranty Expense ……………………………………………………… 40,000 Warranty Liability ……………………………………………… 40,000 d. Warranty Expense ……………………………………………………… 60,000 Warranty Liability ……………………………………………… 60,000 93. In 2006, Slimon 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 2006 and 2007 are presented below: 2006 2007 Sales $300,000 $400,000 Actual warranty expenditures 10,000 20,000 What is the estimated warranty liability at the end of 2007? a. $19,000. b. $29,000. c. $49,000. d. $8,000. 94. On January 3, 2007, Alton Corp. owned a machine that had cost $200,000. The accumulated depreciation was $120,000, estimated salvage value was $12,000, and fair market value was $320,000. On January 4, 2007, this machine was irreparably damaged by Reed Corp. and became worthless. In October 2007, a court awarded damages of $320,000 against Reed in favor of Alton. At December 31, 2007, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Alton s attorney, Reed s appeal will be denied. At December 31, 2007, what amount should Alton accrue for this gain contingency? a. $320,000. b. $260,000. c. $200,000. d. $0. 13 – 22 Test Bank for Intermediate Accounting, Twelfth Edition 95. Horton 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 Horton. The grocers are reimbursed when they send the coupons to Horton. In Horton’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 Horton receives it. During 2007 Horton issued two separate series of coupons as follows: Issued On 1/1/07 7/1/07 Total Value $375,000 540,000 Consumer Expiration Date 6/30/07 12/31/07 Amount Disbursed as of 12/31/07 $177,000 225,000 The only journal entries to date recorded debits to coupon expense and credits to cash of $536,000. The December 31, 2007 balance sheet should include a liability for unredeemed coupons of a. $0. b. $45,000. c. $93,000. d. $270,000. 96. Presented below is information available for Norton Company. Current Assets Cash Short-term investments Accounts receivable Inventories Prepaid expenses Total current assets 4,000 75,000 61,000 110,000 30,000 $280,000 $ Total current liabilities are $120,000. The acid-test ratio for Norton is a. 2.33 to 1. b. 2.08 to 1. c. 1.17 to 1. d. .54 to 1. Use the following information for questions *97 and *98. Norris Co. has a contract with its president to pay her a 5% bonus for 2006 and 2007. The federal income tax rate is 30% during these two years. *97. In 2006, income before deductions for the bonus and federal income taxes was $600,000. If the bonus is based on income before deduction of the bonus but after deduction of income tax, the bonus (to the nearest dollar) is a. $20,690. b. $21,000. c. $21,320. d. $30,000. In 2007, income before deductions for the bonus and federal income taxes was $800,000. If the bonus is based on income after deductions for the bonus and income tax, the bonus (to the nearest dollar) is a. $26,292. b. $26,666. c. $27,053. d. $40,000. *98. Current Liabilities and Contingencies *99. 13 – 23 Farr Products Corp. provides an incentive compensation plan under which its president receives a bonus equal to 20% of the corporation’s income in excess of $300,000 before income tax but after the bonus. If income before tax and bonus is $1,200,000 and the effective tax rate is 30%, the amount of the bonus would be a. $126,000. b. $150,000. c. $180,000. d. $240,000. Multiple Choice Answers Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 63. 64. 65. 66. 67. 68. b d b d b b 69. 70. 71. 72. 73. 74. c a a d d c 75. 76. 77. 78. 79. 80. c c d a b d 81. 82. 83. 84. 85. 86. a b d d b d 87. 88. 89. 90. 91. 92. b d d d b d 93. 94. 95. 97. *97. *98. a d b c c c *99. b MULTIPLE CHOICE CPA Adapted 100. 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 On January 1, 2007, Didde Co. leased a building to Ellis Corp. for a ten-year term at an annual rental of $80,000. At inception of the lease, Didde received $320,000 covering the first two years’ rent of $160,000 and a security deposit of $160,000. This deposit will not be returned to Ellis 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 $320,000 should be shown as a current and long-term liability, respectively, in Didde’s December 31, 2007 balance sheet? Current Liability Long-term Liability a. $0 $320,000 b. $80,000 $160,000 c. $160,000 $160,000 d. $160,000 $80,000 On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of $1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of $400,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Looper should record accrued interest payable of a. $48,000. b. $44,000. c. $32,000. d. $29,334. 101. 102. 13 – 24 Test Bank for Intermediate Accounting, Twelfth Edition 103. Included in Sauder Corp.’s liability account balances at December 31, 2006, were the following: 7% note payable issued Oc
tober 1, 2006, maturing September 30, 2007 8% note payable issued April 1, 2006, payable in six equal annual installments of $150,000 beginning April 1, 2007 $250,000 600,000 Sauder ‘s December 31, 2006 financial statements were issued on March 31, 2007. On January 15, 2007, 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, 2007, Sauder 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, 2006 balance sheet, the amount of the notes payable that Sauder should classify as short-term obligations is a. $175,000. b. $125,000. c. $50,000. d. $0. 104. Barr 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 2007 is as follows: 12/31/06 12/31/07 Employee advances $12,000 $ 18,000 Accrued salaries payable 65,000 ? Salaries expense during the year 650,000 Salaries paid during the year (gross) 625,000 At December 31, 2007, what amount should Barr report for accrued salaries payable? a. $90,000. b. $84,000. c. $72,000. d. $25,000. 105. Quirk Corp.’s payroll for the pay period ended October 31, 2007 is summarized as follows: Department Total Payroll Wages Factory $ 75,000 Sales 22,000 Office 18,000 $115,000 Federal Income Tax Withheld $ 9,000 3,000 2,000 $14,000 Amount of Wages Subject to Payroll Taxes F.I.C.A. Unemployment $70,000 $22,000 16,000 2,000 8,000 $94,000 $24,000 7% each 3% Assume the following payroll tax rates: F.I.C.A. for employer and employee Unemployment What amount should Quirk accrue as its share of payroll taxes in its October 31, 2007 balance sheet? a. $21,300. b. $14,720. c. $13,880. d. $7,300. Current Liabilities and Contingencies 106. 13 – 25 Dexter 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 $480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows: During 2007 During 2008 During 2009 $100,000 $160,000 $70,000 What amount should be reported as unearned service contract revenues in Dexter’s December 31, 2006 balance sheet? a. $360,000. b. $330,000. c. $240,000. d. $220,000. 107. Utley Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Utley’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Utley’s liability for stamp redemptions was $7,500,000 at December 31, 2005. Additional information for 2006 is as follows: Stamp service revenue from stamps sold to licensees Cost of redemptions $5,000,000 3,400,000 If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be $2,500,000. What amount should Utley report as a liability for stamp redemptions at December 31, 2006? a. $9,100,000. b. $6,600,000. c. $6,100,000. d. $4,100,000. 108. Lett 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. During 2006, Blass 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 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows: Sales $ 800,000 1,000,000 $1,800,000 Actual Warranty Expenditures $12,000 30,000 $42,000 109. 2006 2007 At December 31, 2007, Blass should report an estimated warranty liability of 13 – 26 Test Bank for Intermediate Accounting, Twelfth Edition a. b. c. d. 110. $0. $10,000. $30,000. $66,000. In March 2007, an explosion occurred at Howe Co.’s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe’s management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe’s December 31, 2006 financial statements, for which the auditor’s fieldwork was completed in April 2007, 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 2006 because the event occurred in 2007. Multiple Choice Answers CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 100. 101. a b 102. 103. c d 104. 105. a d 106. 107. b c 108. 109. d d 110. c DERIVATIONS Computational No. 63. Answer b Derivation $152,205 $150,000 = $2,205. $2,205 2/3 = $1,470. $30,000 ($300,000 $30,000) = 0.1111 = 11.11%. $1,500,000. $2,000,000 $1,200,000 = $800,000. S + .06S = $148,400, S = $140,000. $148,400 $140,000 = $8,400. $8,400 .98 = $8,232. .05S .97 = $81,480, S = $1,680,000. 75,000 $20 = $1,500,000. 60,000 $20 = $1,200,000. [(.062 .054) + .02] $500,000 = $14,000. 64. 65. 66. 67. d b d b 68. 69. 70. 71. 72. b c a a d Current Liabilities and Contingencies 13 – 27 DERIVATIONS Computational (cont.) No. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. Answer d c c c d a b d a b d d b d b d d d Derivation [(.062 .054) + .02] $400,000 = $11,200. 50 12 8 $14 = $67,200; 50 15 8 $16 = $96,000. 50 12 8 $17.50 = $84,000; 50 15 8 $20 = $120,000. ($270,000 7.65%) + ($90,000 1.45%) + ($60,000 1.8%) = $23,040. $25.80 8 10 35 = $72,240. ($28.50 8 10 35) + ($27.00 8 2 35) = $94,920. 4,000,000 .10 $1 = $400,000; $400,000 $140,000 = $260,000. ($1.000,000 + $77,110) 10 = $107,710; $77,110 .10 = $7,711. 6,000,000 .10 $1 = $600,000; $600,000 $210,000 = $390,000. ($2,000,000 + $154,220) 10 = $215,420; $154,220 .10 = $15,422. ($4,200,000 .12) $189,000 = $315,000. {[(675,000 .60) 330,000] 3} $1.50 = $37,500. ($2,800,000 .12) $126,000 = $210,000. {[(500,000 .60) 220,000] 4} $1.50 = $30,000. [(500,000 .4) 8] $2 = $50,000. [(200,000 120,000) 8] $2 = $20,000. {[(600,000 .4) 150,000] 8} $2 = $22,500. $22,500 + $20,000 = $42,500. $3,600,000 and $2,400,000. $1,500,000 .04 = $60,000. [($300,000 + $400,000) .07] $30,000 = $19,000. $0, gain contingencies are not accrued. ($540,000 .5) $225,000 = $45,000. 91. 92. 93. 94. 95. b d a d b 13 – 28 Test Bank for Intermediate Accounting, Twelfth Edition DERIVATIONS Computational (cont.) No. 96. *97. Answer c c Derivation $4,000 + $75,000 + $61,000 = 1.17 to 1. $120,000 B = {$600,000 [($600,000 B) .3]} .05 B = $21,320. B = .05 {$800,000 B [($800,000 B) .3]} B = $27,053. B = .20 [($1,200,000 $300,000) B] B = $150,000. *98. c *99. b DERIVATIONS CPA Adapted No. 100. Answer a Derivation Conceptual accounts payable generally are zero-interest-bearing and unsecured. $80,000 and $160,000. 4 $800,000 .12 = $32,000. 12 Conceptual both notes have been refinanced by long-term obligations. $650,000 + $65,000 $625,000 = $90,000. ($94,000 .07) + ($24,000 .03) = $7,300. $100,000 + $160,000 + $70,000 = $330,000. ($2,500,000 .8) + $7,500,000 $3,400,000 = $6,100,000. Conceptual. ($1,800,000 .06) $42,000 = $66,000. Conceptual. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. b c d a d b c d d c Current Liabilities and Contingencies 13 – 29 EXERCISES Ex. 13-111 Notes payable. On August 31, Grant Co. partially refunded $180,000 of its outstanding 10% note payable made one year ago to Arma State Bank by paying $180,000 plus
$18,000 interest, having obtained the $198,000 by using $52,400 cash and signing a new one-year $160,000 note discounted at 9% by the bank. Instructions (1) Make the entry to record the partial refunding. Assume Grant Co. makes reversing entries when appropriate. (2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount. Solution 13-111 (1) Notes Payable…………………………………………………………………. Interest Expense ……………………………………………………………… Discount on Notes Payable (9% $160,000) ………………………. Notes Payable ………………………………………………………. Cash ……………………………………………………………………. (2) Interest Expense (1/3 $14,400)……………………………………….. Discount on Notes Payable …………………………………….. 180,000 18,000 14,400 160,000 52,400 4,800 4,800 Ex. 13-112 Payroll entries. Total payroll of Thames Co. was $920,000, of which $160,000 represented amounts paid in excess of $90,000 to certain employees. The amount paid to employees in excess of $7,000 was $720,000. Income taxes withheld were $225,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee s wages to $90,000 and 1.45% in excess of $90,000. Instructions (a) Prepare the journal entry for the wages and salaries paid. (b) Prepare the entry to record the employer payroll taxes. Solution 13-112 (a) Wages and Salaries Expense ……………………………………………. Withholding Taxes Payable…………………………………….. FICA Taxes Payable ……………………………………………… Cash ……………………………………………………………………. * [($920,000 $160,000) 7.65%] + ($160,000 1.45%) 920,000 225,000 60,460* 634,540 13 – 30 Test Bank for Intermediate Accounting, Twelfth Edition Solution 13-112 (cont.) (b) Payroll Tax Expense ………………………………………………………. FICA Taxes Payable ($760,000 7.65%) + ($160,000 1.45%) ………….. Federal Unemployment Tax Payable [($920,000 $720,000) .8%] ………………………….. State Unemployment Tax Payable ($200,000 1.2%) . 64,460 60,460 1,600 2,400 Ex. 13-113 Compensated absences. Wolff Co. began operations on January 2, 2006. It employs 15 people who work 8-hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The average hourly wage rate was $24.00 in 2006 and $25.50 in 2007. The average vacation days used by each employee in 2007 was 9. Wolff Co. accrues the cost of compensated absences at rates of pay in effect when earned. Instructions Prepare journal entries to record the transactions related to paid vacation days during 2006 and 2007. Solution 13-113 2006 Wages Expense …………………………………………………………. 28,800 (1) Vacation Wages Payable…………………………………… (1) 15 8 $24.00 = $2,880; $2,880 10 = $28,800. 2007 Wages Expense …………………………………………………………. 1,620 Vacation Wages Payable …………………………………………….. 25,920 (2) Cash ………………………………………………………………. Wages Expense …………………………………………………………. 30,600 (4) Vacation Wages Payable…………………………………… (2) $2,880 9 = $25,920. (3) 15 8 $25.50 = $3,060; $3,060 9 = $27,540. (4) $3,060 10 = $30,600. 28,800 27,540 (3) 30,600 Ex. 13-114 Contingent liabilities. Below are three independent situations. 1. In August, 2007 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Rooney Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. Current Liabilities and Contingencies Ex. 13-114 (cont.) 13 – 31 2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Early Co. on October 4, 2007. Early’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount. 3. Peete is involved in a pending court case. Peete s lawyers believe it is probable that Peete will be awarded damages of $1,000,000. Instructions Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. Solution 13-114 1. Rooney Co. should disclose in the notes to the financial statements the existence of a possible contingent liability related to the law suit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss is not probable. 2. The probable award should be accrued by a charge to an estimated loss and a credit to an estimated liability of $600,000. Early Co. should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the contingency, the reason for the accrual, and the range of the possible loss. The accrual is made because it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The lowest amount of the range of possible losses is used when no amount is a better estimate than any other amount. 3. Peete should not record the gain contingency until it s realized. Usually, gain contingencies are neither accrued nor disclosed. The $1,000,000 gain contingency should be disclosed only if the probability that it will be realized is very high. Ex. 13-115 Premiums. Farley Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 340,000. Sales for the second period were $840,000, and the coupons redeemed totaled 850,000. Farley Music Shop bought 20,000 posters at $2.00/poster and 20,000 CDs at $6.00/CD. Instructions Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period. 13 – 32 Test Bank for Intermediate Accounting, Twelfth Edition Ex. 13-115 (cont.) Entry Period 1 Period 2 (a) To record coupons redeemed (b) To record estimated liability Solution 13-115 Entry Period 1 Period 2 (a) Estimated Liability for Premiums 6,600 Premium Expense [(340,000 100) ($8.00 $5)] 10,200 18,900 Cash (340,000 100) $5 17,000 42,500 Inventory of Premium Posters and CDs 27,200 68,000 (b) Premium Expense Estimated Liability for Premiums *[(700,000 .80) 340,000] 100 $3.00 6,600* 6,600 1,260 1,260 Ex. 13-16 Premiums. Barkley Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.20 each. Barkley’s experience indicates that 60 percent of the coupons will be redeemed. During 2006, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 2007, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed. Instructions Determine the premium expense to be reported in the income statement and the estimated liability for premiums on the balance sheet for 2006 and 2007. Solution 13-116 Premium expense Estimated liability for premiums (1) (2) (3) (4) 2006 $18,000 (1) 6,000 (2) 2007 $21,600 (3) 9,600 (4) 100,000 .6 = 60,000; 60,000 4 = 15,000; 15,000 $1.20 = $18,000. 40,000 4 = 10,000; 15,000 10,000 = 5,000; 5,000 $1.20 = $6,00
0. 120,000 .6 = 72,000; 72,000

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John Roberts is 55 years old and has been asked to accept an early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: 1. $180,000 acsh payment to be paid immediately. 2. a 20 year annuity of $16,000 beginning immediately. 3. a 1o year annuity of $50,000 beginning at age 65

John Roberts is 55 years old and has been asked to accept an early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: 1. $180,000 acsh payment to be paid immediately. 2. a 20 year annuity of $16,000 beginning immediately. 3. a 1o year annuity of $50,000 beginning at age 65. Which alternative should John choose assuming that he is able to invest funds at a 7% rate?

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On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is

On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is….

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journal entry for E 16 25 (LO1) Flow of Manufacturing Costs Raw Materials Inventory Manufacturing Overhead Beg. Bal. 9,000 (b) 50,000 (d) 7,000 (i) 40,000 (a) 60,000 (d) 7,000 (f) 12,000 (c) 9,000 (h) 25,000 Work-in-Process Inventory Finished Goods Inventory Beg. Bal. 30,000 (j) 120,000 Beg. Bal. 20,000 (k) 135,000 (b) Direct (j) 120,000 materials 50,000 (e) Direct labor 60,000 (i) Mfg. over- head 40,000 Cash (Accounts Payable) Wages Payable (a) 60,000 (e) 60,000 (c) 9,000 (f) 12,000 (g) 32,000 (h) 25,000 Cost of Goods Sold Selling and Administrative Expenses (k) 135,000 (g) 32,000

journal entry for E 16 25 (LO1) Flow of Manufacturing Costs Raw Materials Inventory Manufacturing Overhead Beg. Bal. 9,000 (b) 50,000 (d) 7,000 (i) 40,000 (a) 60,000 (d) 7,000 (f) 12,000 (c) 9,000 (h) 25,000 Work-in-Process Inventory Finished Goods Inventory Beg. Bal. 30,000 (j) 120,000 Beg. Bal. 20,000 (k) 135,000 (b) Direct (j) 120,000 materials 50,000 (e) Direct labor 60,000 (i) Mfg. over- head 40,000 Cash (Accounts Payable) Wages Payable (a) 60,000 (e) 60,000 (c) 9,000 (f) 12,000 (g) 32,000 (h) 25,000 Cost of Goods Sold Selling and Administrative Expenses (k) 135,000 (g) 32,000

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Rory Co. s prepaid insurance was $50,000 at December 31, 2007, and $25,000 at December 31, 2006. Insurance expense was $20,000 for 2007 and $15,000 for 2006. What amount of cash disbursements for insurance would be reported in Rory s 2007 net cash flows from operating activities presented on a direct basis?

Rory Co. s prepaid insurance was $50,000 at December 31, 2007, and $25,000 at December 31, 2006. Insurance expense was $20,000 for 2007 and $15,000 for 2006. What amount of cash disbursements for insurance would be reported in Rory s 2007 net cash flows from operating activities presented on a direct basis?

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Ex. 16-120 Convertible Bonds. Dahl Co. issued $5,000,000 of 12%, 5-year convertible bonds on December 1, 2006 for $5,020,800 plus accrued interest. The bonds were dated April 1, 2006 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Dahl Co. has a fiscal year end of September 30

Ex. 16-120 Convertible Bonds. Dahl Co. issued $5,000,000 of 12%, 5-year convertible bonds on December 1, 2006 for $5,020,800 plus accrued interest. The bonds were dated April 1, 2006 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Dahl Co. has a fiscal year end of September 30. On October 1, 2007, $2,500,000 of these bonds were converted into 35,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion. Instructions (a) Prepare the entry to record the interest expense at April 1, 2007. Assume that interest payable was credited when the bonds were issued (round to nearest dollar). (b) Prepare the entry to record the conversion on October 1, 2007. Assume that the entry to record amortization of the bond premium and interest payment has been made. Ex. 16-121 Convertible Bonds. Linn Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value common stock that had a market price of $40 per share. How should Linn Co. account for the conversion of the bonds into common stock under the book value method? Discuss the rationale for this method. Ex. 16-122 Convertible Debt and Debt with Warrants (Essay). What accounting treatment is required for convertible debt? Why? What accounting treatment is required for debt issued with stock warrants? Why? Ex. 16-123 Stock options. Prepare the necessary entries from 1/1/07-2/1/09 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary." 1. On 1/1/07, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 12,000 shares of common stock at $40 per share. The par value is $10 per share. 2. On 2/1/07, options were granted to each of five executives to purchase 12,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/09. It is assumed that the options were for services performed equally in 2007 and 2008. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000. 3. At 2/1/09, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited. Ex. 16-124 Weighted average shares outstanding. On January 1, 2007, Yarrow Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 600,000 of its own outstanding shares and retired them. Instructions Compute the weighted average number of shares to be used in computing earnings per share for 2007. Ex. 16-125 Earnings Per Share. (Essay) Define the following: (a) The computation of earnings per common share (b) Complex capital structure (c) Basic earnings per share (d) Diluted earnings per share Ex. 16-126 Earnings per share. Ramirez Corporation has 400,000 shares of common stock outstanding throughout 2007. In addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2005. Each $1,000 bond is convertible into 20 shares of common stock after 9/23/08. During the year 2007, the corporation earned $600,000 after deducting all expenses. The tax rate was 30%. Instructions Compute the proper earnings per share for 2007. Ex. 16-127 Diluted earnings per share. Brewer Company had 400,000 shares of common stock outstanding during the year 2007. In addition, at December 31, 2007, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2005). The average market price during 2007 was $50. Instructions Compute the number of shares to be used in determining diluted earnings per share for 2007. *Ex. 16-128 Stock appreciation rights. On January 1, 2006, Rye Co. established a stock appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $16 on 300,000 SARs. The market price is as follows: 12/31/06 $21; 12/31/07 $18; 12/31/08 $19; 12/31/09 $20. On December 31, 2008, 50,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2009. Instructions (a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2006. (b) Prepare the journal entry at 12/31/07 to record compensation expense. (c) Prepare the journal entry at 12/31/09 to record the exercise of the remaining SARs. PROBLEMS Pr. 16-129 Convertible bonds and stock warrants. For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions. 1. On August 1, 2007, Ryan Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On August 1, there was $700,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments. 2. Garnett, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94. 3. Lopez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101. Pr. 16-130 Earnings per share. Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2007. The tax rate is 40%. During 2007, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock. Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 30 shares of common stock. Instructions Compute diluted earnings per share for 2007. Complete the schedule and show all computations. Net Adjust- Adjusted Adjust- Adjusted Security Income ment Net Income Shares ment Shares EPS Pr. 16-131 Basic and diluted EPS. Assume that the following data relative to Eddy Company for 2007 is available: Net Income $2,100,000 Transactions in Common Shares Change Cumulative Jan. 1, 2007, Beginning number 700,000 Mar. 1, 2007, Purchase of treasury shares (60,000) 640,000 June 1, 2007, Stock split 2-1 640,000 1,280,000 Nov. 1, 2007, Issuance of shares 120,000 1,400,000 8% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2007, $30 (market price and option price adjusted for split). 60,000 shares Instructions (a) Compute the basic earnings per share for 2007. (Round to the nearest penny.) (b) Compute the diluted earnings per share for 2007. (Round to the nearest penny.) Pr. 16-132 Basic and diluted EPS. Presented below is information related to Berry Company. 1. Net Income [including an extraordinary gain (net of tax) of $70,000] $230,000 2. Capital Structure a. Cumulative 8% preferred stock, $100 par, 6,000 shares issued and outstanding $600,000 b. $10 par common stock, 74,000 shares outstanding on January 1. On April 1, 40,000 shares were
issued for cash. On October 1, 16,000 shares were purchased and retired. $1,000,000 c. On January 2 of the current year, Berry purchased Raye Corporation. One of the terms of the purchase was that if Berry ‘s net income for the following year is $2400,000 or more, 50,000 additional shares would be issued to Raye stockholders next year. 3. Other Information a. Average market price per share of common stock during entire year $30 b. Income tax rate 30% Instructions Compute earnings per share for the current year. Pr. 16-133 Basic and diluted EPS. The following information was taken from the books and records of Simonic, Inc.: 1. Net income $ 280,000 2. Capital structure: a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible into 50 shares of common stock at the present date and for the next 10 years. 300,000 b. $10 par common stock, 200,000 shares issued and outstanding during the entire year. 2,000,000 c. Stock warrants outstanding to buy 16,000 shares of common stock at $20 per share. 3. Other information: a. Bonds converted during the year None b. Income tax rate 30% c. Convertible debt was outstanding the entire year d. Average market price per share of common stock during the year $32 e. Warrants were outstanding the entire year f. Warrants exercised during the year None Instructions Compute basic and diluted earnings per share

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