ACC 422 Week 4 CPA Solutions

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31, balance sheet, what amount should World report as note payable?

$735,800

$750,000

$758,300

$825,800

Gain contingencies are usually recognized in the income statement when

Realized.

Occurrence is reasonably possible and the amount can be reasonably estimated.

Occurrence is probable and the amount can be reasonably estimated.

The amount can be reasonably estimated.

For a bond issue which sells for less than its par value, the market rate of interest is

Dependent on rate stated on the bond.

Equal to rate stated on the bond.

Less than rate stated on the bond.

Higher than rate stated on the bond.

In December year 1, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, year 1 balance sheet, what amount should Mill report as estimated liability for coupons?

$ 3,960

$10,560

$19,800

$52,800

When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, year 1, the amount of interest expense for the year ended December 31, year 1, would be for

2 months.

6 months.

7 months.

8 months.

White Airlines sold a used jet aircraft to Brown Company for $800,000, accepting a 5-year 6% note for the entire amount. Brown’s incremental borrowing rate was 14%. The annual payment of principal and interest on the note was to be $189,930. The aircraft could have been sold at an established cash price of $651,460. The present value of an ordinary annuity of $1 at 8% for five periods is 3.99. The aircraft should be capitalized on Brown’s books at

$651,460

$757,820

$800,000

$949,650

Foley Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6%, $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts.

	A	B	C	D	E
		Cash	Interest	Discount	Carrying
1	Year	paid	expense	amortization	amount
2	1				$86,580
3	2	$6,000

Which formula should Foley use in cell E3 to calculate the bonds’ carrying amount at the end of year 2?

E2 + D3.

E2 – D3.

E2 + C3.

E2 – C3.

On September 1, year 1, a company borrowed cash and signed a 2-year interest-bearing note on which both the principal and interest are payable on September 1, year 3. The company did not elect the fair value option for reporting this note. At December 31, year 2, the liability for accrued interest should be

Zero.

For 4 months of interest.

For 12 months of interest.

For 16 months of interest.

On January 1, 2000, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2010 but were callable at 101 any time after December 31, 2003. Interest was payable semi-annually on July 1 and January 1.
On July 1, 2005, Fox called all of the bonds and retired them.

The bond premium was amortized on a straight-line basis. Before income taxes, Fox’s gain or loss in 2005 on this early extinguishment of debt was

$30,000 gain.

$12,000 gain.

$10,000 loss.

$8,000 gain

An investor purchased a bond classified as a long-term investment between interest dates at a premium. At the purchase date, the carrying value of the bond is more than the

*Cash paid to seller*	*Face value of bond*
Yes	Yes
Yes	No
No	Yes
No	No

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

Long-term liabilities of $130,000.

Current liabilities of $130,000.

Current liabilities of $30,000, long-term liabilities of $100,000.

Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.

Bonds payable issued with scheduled maturities at various dates are called

*Serial bonds*	*Term bonds*
No	Yes
No	No
Yes	No
Yes	Yes

A loss contingency for which the amount of loss can be reasonably estimated should be accrued when the occurrence of the loss is

*Reasonably possible*	*Remote*
Yes	No
Yes	Yes
No	No
No	Yes

On October 1, year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, year 1. Fleur’s year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, year 2. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

*12/31/Y1 retained earnings*	*12/31/Y1 interest payable*
Yes	Yes
No	No
Yes	No
No	Yes

Agee Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of the sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of April year 2 for the three salespersons in sales region 330 are as follows:

Salesperson	Fixed salary	Net sales	Commission rate
A	$ 5,000	$100,000	4%
B	7,000	200,000	6%
C	9,000	300,000	6%
Totals	$21,000	$600,000

For sales region 330, what total amount should Agee accrue for sales commissions payable at April 30, year 2?

$13,000

$14,000

$34,000

$35,000

On January 1, a company issued a $50,000 face value, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year?

$46,139

$46,446

$46,768

$47,106

Album Co. issued ten-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

12%

14%

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the

*Cash paid to seller*	*Face amount of bond*
No	Yes
No	No
Yes	No
Yes	Yes

On January 1, year 1, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Korn report as interest expense for the 6 months ended June 30, year 1?

$17,706

$20,000

$21,247

$24,000

Bryce Corp. signed an agreement with Casey, which requires that if Casey does not meet certain contractual obligations, Casey must forfeit land worth $100,000 to Bryce. Bryce’s accountants believe that Casey will not meet its contractual obligations, and it is probable Bryce will receive the land by the end of year 3. Bryce uses IFRS for reporting purposes. How should Bryce report the land in its December 31, year 2 financial statements?

As investment property in the asset section of the balance sheet.

As a contingent asset in the current asset section of the balance sheet.

In a footnote disclosure if the economic benefits are probable.

As a contingent asset and other comprehensive income for the period.

On March 1, year 1, Cain Corp. issued at 103 plus accrued interest 200 of its 9%, $1,000 bonds. The bonds are dated January 1, year 1, and mature on January 1, year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of

$216,000

$209,000

$206,000

$199,000

On April 1, year 1, Girard Corporation issued at 98 plus accrued interest, 200 of its 10%, $1,000 bonds. The bonds are dated January 1, year 1, and mature on January 1, year 11. Interest is payable semiannually on January 1 and July 1. From the bond issuance Girard would realize net cash receipts of

$191,000

$196,000

$198,500

$201,000

Bell Co. is a defendant in a lawsuit that could result in a large payment to the plaintiff. Bell’s attorney believes that there is a 90% chance that Bell will lose the suit, and estimates that the loss will be anywhere from $5,000,000 to $20,000,000 and possibly as much as $30,000,000. None of the estimates are better than the others. What amount of liability should Bell report on its balance sheet related to the lawsuit?

$ 5,000,000

$20,000,000

$30,000,000

Stark, Inc. has $1,000,000 of notes payable due June 15, year 2. At the financial statement date of December 31, year 1, Stark signed an agreement to borrow up to $1,000,000 to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Stark was providing. At the date of issue of the December 31, year 1 financial statements, the value of the collateral was $1,200,000 and was not expected to fall below this amount during year 2. On the December 31, year 1 balance sheet, Stark should classify

$40,000 of notes payable as short-term and $960,000 as long-term obligations.

$200,000 of notes payable as short-term and $800,000 as long-term obligations.

$1,000,000 of notes payable as short-term obligations.

$1,000,000 of notes payable as long-term obligations.

On October 1, year 1, a company borrowed cash and signed a 3-year interest-bearing note on which both the principal and interest are payable on October 1, year 4. The company did not elect to use the fair value option for reporting financial liabilities. At December 31, year 3, accrued interest should

Be reported on the balance sheet as a current liability.

Be reported on the balance sheet as a noncurrent liability.

Be reported on the balance sheet as part of long-term notes payable.

Not be reported on the balance sheet as a liability.

On January 1, year 1, Jaffe Corporation issued at 95 five hundred of its 9%, $1,000 bonds. Interest is payable semiannually on July 1 and January 1, and the bonds mature on January 1, year 11. Jaffe paid bond issue costs of $20,000 which are appropriately recorded as a deferred charge. Jaffe uses the straight-line method of amortizing bond discount and bond issue costs. Assume Jaffe does not elect the fair value option for reporting financial liabilities. On Jaffe’s December 31, year 1 balance sheet, the bonds payable should be reported at their carrying value of

$459,500

$477,500

$495,500

$522,500

In year 1, Jeremy Corporation issued 1,000 of its 8% $1,000 bonds for $1,040,000. The bonds were due on December 1, year 11. Jeremy did not elect the fair value option for reporting financial liabilities. On October 1, year 7, as part of its normal financing management strategy, Jeremy Corporation redeemed the bonds at a time when the carrying value of the bonds was $50,000 more than the cash paid to retire the bonds. Jeremy should report the $50,000 gain as

Extraordinary gain on early extinguishment of debt.

Discontinued operation.

Interest income from the bond.

Other income.

On December 31, year 1, Wall Corp. issued $100,000 maturity value, 10% bonds for $100,000 cash. The bonds are dated December 31, year 1, and mature on December 31, year 11. Interest will be paid semiannually on June 30 and December 31. In Wall’s September 30, year 2 balance sheet, the amount of accrued interest expense should be

$ 2,500

$ 5,000

$ 7,500

$10,000

Which of the following statements is true?

All financial assets and financial liabilities must be valued at fair value.

No financial assets or financial liabilities can be valued at fair value.

Debt modifications may be valued at fair value.

Debt modifications must be valued at fair value.

For a troubled debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debt

Exceeds the total future cash payments specified by the new terms.

Is less than the total future cash payments specified by the new terms.

Exceeds the present value specified by the new terms.

Is less than the present value specified by the new terms.

Tone Company is the defendant in a lawsuit filed by Witt in year 1 disputing the validity of a copyright held by Tone. At December 31, year 1, Tone determined that Witt would probably be successful against Tone for an estimated amount of $400,000. Appropriately, a $400,000 loss was accrued by a charge to income for the year ended December 31, year 1. On December 15, year 2, Tone and Witt agreed to a settlement providing for cash payment of $250,000 by Tone to Witt, and transfer of Tone’s copyright to Witt. The carrying amount of the copyright on Tone’s accounting records was $60,000 at December 15, year 2. What would be the effect of the settlement on Tone’s income before income tax in year 2?

No effect.

$ 60,000 decrease.

$ 90,000 increase.

$150,000 increase.

Blake Foods Corporation mails coupons to consumers which may be presented by a stated expiration date at retail food stores to obtain discounts on certain Blake products. Retailers are reimbursed for the face value of coupons redeemed, plus 10% of coupon value as compensation for handling costs. Blake honors requests for coupon redemption by retailers received up to 3 months after the consumer expiration date. In Blake’s experience, 60% of the coupons issued ultimately are redeemed. Information with respect to the two separate series of coupons issued by Blake during year 1 is as follows:

	Series A	Series B
Consumer expiration date	June 30, year 1	December 31, year 1
Total face value of coupons issued	$100,000	$200,000
Total payments to retailers as of December 31, year 1	$ 60,500	$ 40,500

What amount should Blake report as a liability for unredeemed coupons at December 31, year 1?

$79,500

$91,500

$97,000

In determining whether to accrue employees’ compensation for future absences, among the conditions that must be met are that the obligation relates to rights that

*Accumulate*	*Vest*
No	No
No	Yes
Yes	No
Yes	Yes

On September 1, year 1, a company borrowed cash and signed a 1-year interest-bearing note on which both the principal and interest are payable on September 1, year 2. How will the note payable and the related interest be classified in the December 31, year 1 balance sheet?

*Note payable*	*Accrued interest*
Current liability	Noncurrent liability
Noncurrent liability	Current liability
Current liability	Current liability
Noncurrent liability	No entry

Dell Company sells its products in reusable, expensive containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Dell accounts for the containers not returned within the time limit as being retired by sale at the deposit amount. Information for year 3. concerning the containers is as follows:

		Total
Held by customers at 12/31/Y2 from deliveries in
Year 1	$ 50,000
Year 2	145,000	$195,000
Delivered in year 3		$260,000
Returned in year 3 from deliveries in:
Year 1	$ 30,000
Year 2	85,000
Year 3	95,000	$210,000

What amount should Dell report as a liability for returnable containers at December 31, year 3?

$165,000

$215,000

$225,000

$245,000

On December 31, year 2, Marsh Company entered into a debt restructuring agreement with Saxe Company, which was experiencing financial difficulties. Marsh restructured a $100,000 note receivable as follows:

	Reduced the principal obligation to $70,000.
	Forgave $12,000 of accrued interest.
	Extended the maturity date from December 31, year 2 to December 31, year 4.
	Reduced the interest rate from 12% to 8%. Interest was payable annually on December 31, year 3 and year 4.

Present value factors

	Single sum, 2 years @ 8%	.85734
	Single sum, 2 years @ 12%	.79719
	Ordinary annuity 2 years @ 8%	1.78326
	Ordinary annuity 2 years @ 12%	1.69005

Marsh does not elect the fair value option for recording this note receivable. In accordance with the agreement, Saxe made payments to Marsh on December 31, year 3 and year 4. How much interest income should Marsh report for the year ended December 31, year 4?

$ 5,600

$ 8,100

$11,200

If the payment of compensation is probable, the amount can be reasonably estimated, and the obligation relates to rights that vest, employees’ compensation for future absences should be

Accrued if attributable to employees’ services already rendered.

Accrued if attributable to employees’ services not already rendered.

Accrued if attributable to employees’ services whether already rendered or not.

Recognized when paid.

Witt Corp. has outstanding at December 31, year 1, two long-term borrowings with annual sinking fund requirements and maturities as follows:

	Sinking fund requirements	Maturities
year 1	$1,000,000	$ —
year 2	1,500,000	2,000,000
year 3	1,500,000	2,000,000
year 4	2,000,000	2,500,000
year 5	2,000,000	3,000,000
	$8,000,000	$9,500,000

In the notes to its December 31, year 1 balance sheet, how should Witt report the above data?

No disclosure is required.

Only sinking fund payments totaling $8,000,000 for the next 5 years detailed by year need be disclosed.

Only maturities totaling $9,500,000 for the next 5 years detailed by year need to be disclosed.

The combined aggregate of $17,500,000 of maturities and sinking fund requirements detailed by year should be disclosed.

On January 1, year 1, Hansen, Inc. issued for $939,000, 1,000 of its 9%, $1,000 bonds. The bonds were issued to yield 10%. The bonds are dated January 1, year 1, and mature on December 31, year 10. Interest is payable annually on December 31. Hansen uses the interest method of amortizing bond discount. In its December 31, year 1 balance sheet, Hansen should report unamortized bond discount of

$57,100

$54,900

$51,610

$51,000

During year 1 Cain Corporation incurred the following costs in connection with the issuance of bonds:

Printing and engraving	$ 15,000
Legal fees	80,000
Fees paid to independent accountants for registration information	10,000
Commissions paid to underwriter	150,000

What amount should be recorded as a deferred charge to be amortized over the term of the bonds?

$ 15,000

$150,000

$245,000

$255,000

Reserves for contingencies for general or unspecified business risks should

Be accrued in the financial statements and disclosed in the notes thereto.

Not be accrued in the financial statements but should be disclosed in the notes thereto.

Not be accrued in the financial statements and need not be disclosed in the notes thereto.

Be accrued in the financial statements but need not be disclosed in the notes thereto.

Pak Co.’s professional fees expense account had a balance of $82,000 at December 31, year 1, before considering year-end adjustments relating to the following:


		Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in year 1.
		The attorney’s letter requested by the auditors dated January 28, year 2, indicated that legal fees of $6,000 were billed on January 15, year 2, for work performed in November year 1, and unbilled fees for December year 1 were $7,000.

What amount should Pak report for professional fees expense for the year ended December 31, year 1?

$105,000

$ 95,000

$ 88,000

$ 82,000

On March 1, year 1, a suit was filed against Dean Company for patent infringement. Dean’s legal counsel believes an unfavorable outcome is probable, and estimates that Dean will have to pay between $500,000 and $900,000 in damages. However, Dean’s legal counsel is of the opinion that $600,000 is a better estimate than any other amount in the range. The situation was unchanged when the December 31, year 1 financial statements were released on February 24, year 2. How much of a liability should Dean report on its balance sheet at December 31, year 1 in connection with this suit?

$500,000

$600,000

$900,000

How would the amortization of premium on bonds payable affect each of the following?

*Carrying value of bond*	*Net income*
Increase	Decrease
Increase	Increase
Decrease	Decrease
Decrease	Increase

Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain on restructuring the debt?

$25,000

$50,000

$75,000

Ray Finance, Inc. issued a 10-year, $100,000, 9% note on January 1, year 1. The note was issued to yield 10% for proceeds of $93,770. Ray did not elect the fair value option to report financial liabilities. Interest is payable semiannually. The note is callable after 2 years at a price of $96,000. Due to a decline in the market rate to 8%, Ray retired the note on December 31, year 6. On that date, the carrying amount of the note was $94,582, and the discounted market rate was $105,280. What amount should Ray report as gain (loss) from retirement of the note for the year ended December 31, year 6?

$ 9,280

$ 4,000

$(2,230)

$(1,418)

Snelling Co. did not record an accrual for a contingent loss, but disclosed the nature of the contingency and the range of the possible loss. How likely is the loss?

Remote.

Reasonably possible.

Probable.

Certain.

On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?

Hope Corporation prepares its financial statements in accordance with IFRS. Hope intends to refinance a $500,000 note payable due on March 1, year 2. The company expects the note to be refinanced for a period of five years. Under what circumstances can Hope report the note payable as a noncurrent liability on its December 31, year 1 statement of financial position?

Arno Corp.’s liability account balances at June 30, year 2, included a 10% note payable in the amount of $1,800,000. The note is dated October 1, year 1, and is payable in three equal annual payments of $600,000 plus interest. Arno does not elect the fair value option for reporting this financial liability. The first interest and principal payment was made on October 1, year 2. In Arno’s June 30, year 3 balance sheet, what amount should be reported as accrued interest payable for this note?

Which of the following contingencies should generally be accrued on the balance sheet as a liability when the occurrence of the contingent event is reasonably possible and its amount can be reasonably estimated?

Office supplies were ordered by Dwyer Company from Orcutt Company on December 15, year 1. The terms of sale were FOB destination. Orcutt shipped the office supplies on December 28, year 1, and Dwyer received them on January 3, year 2. When should Dwyer record the account payable?

A state requires quarterly sales tax returns to be filed with the sales tax bureau by the 20th day following the end of the calendar quarter. However, the state further requires that sales taxes collected be remitted to the sales tax bureau by the 20th day of the month following any month such collections exceed $500. These payments can be taken as credits on the quarterly sales tax return.

Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state sales tax, which Taft collects and records as sales revenue. The sales taxes paid by Taft are charged against sales revenue. Taft pays the sales taxes when they are due. Following is a monthly summary appearing in Taft’s first quarter year 2 sales revenue account:
In its financial statements for the quarter ended March 31, year 2, Taft’s sales revenue and sales taxes payable would be

A company has the following liabilities at year-end:

Mortgage note payable; $16,000 due within 12 months	$355,000
Short-term debt that the company is refinancing with long-term debt	175,000
Deferred tax liability arising from depreciation	25,000

What amount should the company include in the current liability section of the balance sheet?

Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall’s first two years in business, it made the following sales and incurred the following warranty repair costs:

What amount should Wall report as warranty expense for year 2?

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

Good Neighbor Financing will assume the responsibility of collecting the receivables.

Milton will retain control of the receivables.

Good Neighbor Financing will take title to the receivables and will return title to Milton after the loan is paid.

On March 1, year 1, Williams Corporation issued at 103 plus accrued interest, 100 of its 9%, $1,000 bonds. The bonds are dated January 1, year 1, and mature on January 1, year 11. Interest is payable semiannually on January 1 and July 1. Williams paid bond issue costs of $5,000. Based on the information above, Williams would realize net cash receipts from the bond issuance of

On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?

As a loss recorded in other comprehensive income.

As a provision for loss reported in the balance sheet and a loss on the income statement.

As a contingent liability reported in the balance sheet and a loss on the income statement.

In the footnotes to the financial statements as a contingency.

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On June 30, year 1, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on bond should Webb report in its June 30, year 2 balance sheet?

Bloy Corp.’s payroll for the pay period ended October 31, year 1, is summarized as follows:

Assume the following payroll tax rates:

FICA for employer and employee	7% each
Unemployment	3%

What amount should Bloy accrue as its share of payroll taxes in its October 31, year 1 balance sheet?

Glen Corporation had the following long-term debt:
The total of the serial bonds amounted to

Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of

Consistency.

Going concern.

Matching.

Substance over form.

An expropriation of assets which is imminent and for which the amount of loss can be reasonably estimated should be

*Accrued*	*Disclosed*
No	No
No	Yes
Yes	Yes
Yes	No

Bronson Apparel, Inc. operates a retail store and must determine the proper December 31, year 1 year-end accrual for the following expenses:

In its December 31, year 1 balance sheet, Bronson should report accrued expenses of

How would the amortization of discount on bonds payable affect each of the following?

*Carrying value of bond*	*Net income*
Increase	Decrease
Increase	Increase
Decrease	Decrease
Decrease	Increase

What type of bonds in a particular bond issuance will not all mature on the same date?

During year 2, a former employee of Dane Co. began a suit against Dane for wrongful termination in November year 1. After considering all of the facts, Dane’s legal counsel believes that the former employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being the most likely amount. Dane’s financial statements for the year ended December 31, year 1, will not be issued until February year 2. In its December 31, year 1 balance sheet, what amount should Dane report as a liability with respect to the suit?

Fulton Cereal Company inaugurated a new sales promotional program. For every 10 cereal box tops returned to the company, customers receive an attractive prize. Fulton estimates that only 30% of the cereal box tops reaching the consumer market will be redeemed. Additional information is as follows:
At the end of its year, Fulton recognized a liability equal to the estimated cost of potential prizes outstanding. What is the amount of this estimated liability?

Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?

An estimated loss from a loss contingency that is probable and for which the amount of the loss can be reasonably estimated should

Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?

E & S Partnership purchased land for $500,000 on May 1, year 1, paying $100,000 cash and giving a $400,000 note payable to Big State Bank. E & S made three annual payments on the note totaling $179,000, which included interest of $89,000. E & S then defaulted on the note. Title to the land was transferred by E & S to Big State, which cancelled the note, releasing the partnership from further liability. At the time of the default, the fair value of the land approximated the note balance. In E & S’s year 4 income statement, the amount of the loss should be

On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, year 2, the note was refinanced. How should Taylor report the note payable in its December 31, year 1 balance sheet?

In March year 2, an explosion occurred at Nilo Co.’s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo’s management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo’s $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo’s December 31, year 2 financial statements, for which the auditor’s fieldwork was completed in April year 3, how should this casualty be reported?

Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reported

In determining whether to accrue employees’ compensation for future absences, one of the conditions that must be met is that the employer has an obligation to make payment even if an employee terminates. This an example of a(n)

On October 1, year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, year 1. Fleur’s year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, year 2. Fleur’s year 1 cost of goods sold for the holiday merchandise was

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

Strand, Inc. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income in excess of $200,000 before income tax but after deduction of the bonus. If income before income tax and bonus is $640,000 and the tax rate is 40%, the amount of the bonus would be

In year 1, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of $1,000,000. On the note’s due date, December 31, year 6, May owed $40,000 of accrued interest and $1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments. May and the bank agreed to amend the note as follows:
May does not elect the fair value option for reporting its financial liabilities. As a result of the troubled debt restructuring, May should report a gain, before taxes, in its year 6 income statement of

Bloy Company pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Bloy accrues salaries expense only at its December 31 year-end. Data relating to salaries earned in December year 1 are as follows:

Assuming a 5-day work week, Bloy should record a liability at December 31, year 1, for accrued salaries of

On March 1, year 1, Harbour Corporation issued 10% debentures dated January 1, year 1, in the face amount of $1,000,000, with interest payable on January 1 and July 1. The debentures were sold at par and accrued interest. How much should Harbour debit to cash on March 1, year 1?

On December 1, year 1, Paxton Co. had a note payable due on August 1, year 2. On January 20, year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, year 2. How should Paxton classify the note on its balance sheet at December 31, year 1?

On November 1, year 1, Beni Corp. was awarded a judgment of $1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant, and it is expected that the appeal process will be completed by the end of year 2. Beni’s attorney feels that it is highly probable that an award will be upheld on appeal, but that the judgment may be reduced by an estimated 40%. In addition to footnote disclosure, what amount should be reported as a receivable in Beni’s balance sheet at December 31, year 1?

The following information pertains to a fire insurance policy in effect during calendar year 1, covering Vail Co.’s inventory:
Vail’s inventory averages $1,000,000 uniformly throughout the year. Vail’s income tax rate is 40%. How much of a contingent liability should Vail accrue at December 31, year 1, to cover possible future fire losses?

Which of the following is generally associated with payables classified as accounts payable?

Which of the following is classified as an accrued liability?

Morgan Company determined that: (1) it has a material obligation relating to employees’ rights to receive compensation for future absences attributable to employees’ services already rendered, (2) the obligation relates to rights that vest, and (3) payment of the compensation is probable. The amount of Morgan’s obligation as of December 31, year 1, is reasonably estimated for the following employee benefits:
What total amount should Morgan report as its liability for compensated absences in its December 31, year 1 balance sheet?

Bold Company estimates its annual warranty expense at 2% of annual net sales. The following data are available:
After recording the year 2 estimated warranty expense, the warranty liability account would show a December 31, year 2 balance of

A 15-year bond was issued in year 1 at a discount. The fair value option was not elected to value financial liabilities. During year 10 a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the year 10 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over the 15-year bonds.

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For year 1, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone’s bonus for the year year 1?

Wyatt 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 company issued 10-year term bonds at a discount in year 1. Bond issue costs were incurred at that time. The company uses the effective interest method to amortize bond issue costs. Reporting the bond issue costs as a deferred charge would result in

On June 30, year 1, Dean Company had outstanding 8%, $1,000,000 face value, 15-year bonds maturing on June 30, year 11. Interest is payable on June 30 and December 31. The unamortized balances on June 30, year 1, in the bond discount and deferred bond issue costs accounts were $45,000 and $15,000, respectively. Dean reacquired all of these bonds at 93 on June 30, year 1, and retired them. How much gain should Dean report on this early extinguishment of debt?

A retail store sells gift certificates that are redeemable in merchandise. When the gift certificate was sold for cash, a

Bake Co.’s trial balance included the following at December 31, year 1:

The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in year 2. What amount should be included in the current liability section of Bake’s December 31, year 2 balance sheet?

In open market transactions, Oak Corp. simultaneously sold its long-term investment in Maple Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Oak’s gain on the purchase of its own bonds exceeded its loss on the sale of Maple’s bonds. Oak should report the

Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1:
The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes.

In Gar’s December 31, year 1 balance sheet, the current liabilities total was

On July 1, year 1, Cody Company obtained a $2,000,000, 180-day bank loan at an annual rate of 12%. The loan agreement requires Cody to maintain a $400,000 compensating balance in its checking account at the lending bank. Cody would otherwise maintain a balance of only $200,000 in this account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year, the effective interest rate on the borrowing is

For the week ended June 30, year 1, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30, year 1?

A company receives an advance payment for special-order goods that are to be manufactured and delivered within 6 months. The advance payment should be reported in the company’s balance sheet as a

On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key’s December 31, year 1 balance sheet?

On January 1, year 2, Battle Corporation sold at 97 plus accrued interest 200 of its 8%, $1,000 bonds. The bonds are dated October 1, year 1, and mature on October 1, year 12. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, year 1, to January 1, year 2 amounted to $4,000. As a result on January 1, year 2, Battle would record bonds payable, net of discount, at

Jackson Corporation provides an incentive compensation plan under which its president is to receive a bonus equal to 10% of Jackson’s income in excess of $100,000 before deducting income tax but after deducting the bonus. If income before income tax and the bonus is $320,000, the amount of the bonus should be