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Exam 13: Current Liabilities and Contingencies

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Question 1

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Muller Corp. pays its employees monthly. The payroll information listed below is for January 2013, the first month of Muller's fiscal year. Required: Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the January 2013 pay period.

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Mozart Music Co. began operations in December of 2013. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within three years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2013 as part of merchandise purchases having a total retail price of $750. Required: 1. Determine the liability for gift certificates to be reported in the December 31, 2013, balance sheet. 2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2013? Show calculations.

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The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers.

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:

What was General's coupon promotional expense in 2014?

What was General's coupon promotion expense in 2013?

The following selected transactions relate to contingencies of Eastern Products Inc., which began operations in July 2013. Eastern's fiscal year ends on December 31. Financial statements are published in April 2014. 1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2013. 2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2013 and were recorded as warranty expense when incurred. 3. In December 2013, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million. 4. In November 2013, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2014. 5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2013. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million. Required: Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

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:

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:

On September 1, 2013, Triton Entertainment borrowed $24 million cash to fund a new Fun Park. The loan was made by Nevada Bank under a noncommitted short-term line of credit arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity. Triton's fiscal period is the calendar year. Required: 1. Prepare the journal entry for the issuance of the note by Triton. 2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2013. 3. Prepare the journal entry for the payment of the note at maturity.

Carpenter Inc. had a balance of $80,000 in its warranty liability account as of December 31, 2012. In 2013, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2013 were $40 million. What was the balance in the warranty liability account as of December 31, 2013?

Accounting for costs of incentive programs for frequent customer purchases involves:

This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted circuits have been sold) that depends on an uncertain future event (customer claims). The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2013, the period in which the products under warranty are sold. 2. 2013 Sales

Indicate (by number) the way each of the items listed below should be reported in a balance sheet at December 31, 2013.

Which of the following generally is associated with accounts payable?

The main difference between accounting for rebate and cash discount coupons is:

Which of the following is not a characteristic of a liability?

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:

Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline's fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?

Which of the following may create employer liabilities in connection with their payrolls?