Chapter 13: Characteristics of a Liability

The most common type of liability is:
D. One to be paid in cash and for which the amount and timing are known.
Which of the following is not a characteristic of a liability?
B. It must be payable in cash.
Which of the following is the best definition of a current liability?
D. An obligation expected to be satisfied with current assets or by the creation of other current liabilities.
Which of the following is not a liability?
A. An unused line of credit.
Current liabilities normally are recorded at their:
C. Maturity amount.
Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:
C. Materiality.
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The key accounting considerations relating to accounts payable are:
A. Determining their existence and ensuring that they are recorded in the appropriate accounting period.
Classifying liabilities as either current or long-term helps creditors assess:
B. The relative risk of a firm’s liabilities.
When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:
A. A current liability.
A discount on a non-interest bearing note payable is classified in the balance sheet as:
D. A contra liability.
The rate of interest printed on the face of a note payable is called the:
D. Stated rate.
The rate of interest that actually is incurred on a note payable is called the:
C. Effective rate.
On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky’s effective interest rate on this loan is:
A. More than the stated discount rate of 8%.
Jane’s Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this note, Jane’s should report interest expense at December 31, 2011, in the amount of:
B. $24,000.
What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?
A. 12.4%.
On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker’s effective interest rate on this loan (rounded) is:
C. 9.6%.
Universal Travel Inc. borrowed $500,000 on November 1, 2011, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2012. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2011, in the amount of:
C. $5,000.
Knique Shoes issued a $100,000, 8-month, “noninterest-bearing note.” The loan was made by Second Commercial Bank whose stated “discount rate” is 9%. The effective interest rate on this loan (rounded) is:
D. 9.57%
Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year?
B. $660,000
On June 1, 2011, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2011?
C. $495,000
At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:
A. Liabilities until the product or service is provided.
M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2011, M’s unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2011. M’s employees earn an average of $150 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is M required to report?
B. $30,000.
Which of the following generally is associated with accounts payable?
A. Option A
What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2011, balance sheet?
B. $80.
All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?
B. Customer deposits.
When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:
D. An increase in revenue.
B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2011, B’s unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B’s employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report?
A. $60,000.
On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G’s employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G’s 2012 wages expense related to 2011 vacation time?
B. $20,000
Revenue associated with gift card sales should be recognized:
C. When the probability of gift card redemption is viewed as remote.
All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?
A. Large increase, because unearned revenue becomes revenue when revenue is earned.
Peterson Photoshop sold $1000 of gift cards on a special promotion on October 15, 2011, and sold $1500 of gift cards on another special promotion on November 15, 2011. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2011, Peterson would show an unearned revenue account for their gift cards with a balance of:
B. $1000.
When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:
D. A debit to a liability and a credit to a revenue account.
Clark’s Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2011. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?
C. $10,000.
In May of 2011, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2011, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2011 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2011, balance sheet of:
B. $900,000.
Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2011. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?
B. $7,500.
Which of the following is not a current liability?
B. A note payable due in 2 years.
Short-term obligations can be reported as long-term liabilities if:
C. The firm intends to and has the ability to refinance as long-term.
Of the following, which typically would not be classified as a current liability?
D. A six-month bank loan to be paid with the proceeds from the sale of common stock.
Large, highly rated firms sometimes sell commercial paper.
A. To borrow funds at a lower rate than through a bank.
Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?
D. All of the above require the current classification.
A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt
A. is callable by the creditor.
On December 31, 211, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet?
B. $500,000
Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under
A. US GAAP.
Kline Company refinanced current debt as long-term debt on January 5, 2012. Kline’s fiscal year ended on December 31, 2011, and its financial statements will be issued sometime in early March, 2012. Under IFRS, how would Kline classify the debt on its December 31, 2011 balance sheet?
D. As a current liability.
Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2012. At December 31, 2011, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2011, financial statements, the value Branch’s collateral was $20,000,000. On its December 31, 2011, balance sheet, Branch should classify the notes as follows:
A. $15,000,000 long-term and $3,000,000 current liabilities.
Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:
C. Higher working capital and a higher current ratio.
Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:
D. Even if the amount is not reasonably estimable.
Gain contingencies usually are recognized in a company’s income statement when:
A. Realized.
A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:
D. Probable and the amount of the loss can be reasonably estimated.
A contingent loss should be reported in a footnote to the financial statements rather than being accrued if:
B. The incurrence of a loss is reasonably possible.
Which of the following is a contingency that should be accrued?
C. The company offers a two-year warranty and the expenses can be reasonably estimated.
A loss contingency should be accrued in a company’s financial statements only if the likelihood that a liability has been incurred is:
D. probable and the amount of the loss can be reasonably estimated.
Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:
C. To accrue the liability and explain it in a footnote.
Accounting for costs of incentive programs for customer purchases:
D. All of the above are correct.
Providing a monetary rebate program for purchasing a product:
D. All of the above are correct.
The main difference between accounting for rebate and cash discount coupons is:
C. The expense for the latter is usually deferred until redemption of the coupon.
Which of the following entail essentially the same accounting treatment?
A. Coupons for cash rebates and coupons for other premiums.
Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company’s assets in that country. If the likelihood of expropriation is remote, a loss contingency should be
D. Neither accrued as a liability nor disclosed.
Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company’s assets in that country. If expropriation is reasonably possible, a loss contingency should be
A. Disclosed but not accrued as a liability.
Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company’s assets in that country. If expropriation is probable, a loss contingency should be
B. Disclosed and accrued as a liability.
Z Co. filed suit against W, Inc. in 2011 seeking damages for patent infringement. At December 31, 2011, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2012. Z should report this award in its 2011 financial statements, issued in March, 2012 as
D. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.
When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:
C. Disclosed, but not recognized in the income statement.
Which of the following is a contingency that would most likely require accrual?
B. Customer premium offers.
The cost of customer premium offers should be charged to expense:
A. When the related product is sold.
The accounting concept that requires recognition of a liability for customer premium offers is
D. The matching principle.
Accounting for costs of incentive programs for frequent customer purchases involves:
A. Recording an expense and a liability each period.
A customer of RoughEdge Sharpeners alleges that RoughEdge’s new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:
A. $0.
A customer of RoughEdge Sharpeners alleges that RoughEdge’s new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, RoughEdge should accrue a liability in the amount of:
C. $2,000,000.
Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:
A. When the equipment is sold.
Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2011, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2011, income statement?
C. $800,000.
Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2011, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2011, balance sheet?
B. $150,000.
At the beginning of 2011, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2011 were $180 million. Fifteen percent of the units sold were returned in 2011 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel’s 2011 income statement is:
B. $7.2 million.
During 2011, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2011. At December 31, 2011, Deluxe should report a liability for unredeemed coupons of:
B. $1,050,000.
What is the expense that Holyoak should report for its promotional rebates in its 2011 income statement?
C. $170,000
What is the rebate promotion liability that Holyoak should report in its December 31, 2011 balance sheet?
B. $28,000
In the current year, Hanna Company reported warranty expense of $190,000 and the warranty liability account increased by $20,000. What were warranty expenditures during the year?
B. $170,000.
Panther Co. had a warranty liability of $350,000 at the beginning of 2011, and $310,000 at end of 2011. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2011?
D. $2,040,000.
Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2010. In 2011, Carpenter’s warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2011 were $40 million. What was the balance in the warranty liability account as of December 31, 2011?
A. $35,000.
What was General’s coupon liability as of December 31, 2011?
A. $7.5 million.
What was General’s coupon promotion expense in 2011?
B. $21.0 million.
What was General’s coupon promotional expense in 2012?
B. $1.5 million.
During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $4.00 cash rebate. L&M estimates that 70% of the coupons will be redeemed, even though only 500,000 coupons had been processed during the year. At December 31, L&M should report a liability for unredeemed coupons of:
B. $800,000
Which of the following may create employer liabilities in connection with their payrolls?
D. All of the above are correct.
Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January, 2011, the first month of BMS’s fiscal year. The journal entry to record payroll for the January 2011 pay period will include a debit to payroll tax expense of
C. $11,080