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Exam 13: Current Liabilities and Contingencies

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Question 41

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When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

A) A decrease in cost of goods sold.
B) An increase in current liabilities.
C) An increase in accounts receivable.
D) An increase in revenue.

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

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Question 42

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Current liabilities normally are recorded at their:

A) Present value.
B) Cost.
C) Maturity amount.
D) Expected value.

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

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Question 43

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In its 2018 annual report to shareholders, Border Airlines Inc. presented the following balance sheet information about its liabilities: In addition, Border presented the following among its note disclosures: Maturities of long-term debt (including sinking fund requirements) for the next five years are: 2019 - $421 million; 2020 - $212 million; 2021 - $273 million; 2022 - $1.0 billion; 2023 - $777 million. Required: Consider the appropriate classification of these long-term debt obligations. Assuming no more long-term debt will be issued, what are the implications of the information above for Border's liquidity and solvency risk in 2018 and the following years?

Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss.

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

Expense for a quality-assurance warranty is recorded along with the related liability in the reporting period in which the product under warranty is sold.

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:

Amber Inc. is one of the largest pharmacy retailers in mid-America. In its 2018 annual report to shareholders, it made the following disclosure: In 2013, Amber assigned a number of leases to Bell's Inc. and Home Stores, Inc., as part of the sale of the Company's former Eastern divisions. Amber is contingently liable if Bell's and Home are unable to continue making rental payments on these leases. In 2017, Amber recorded a pretax charge to earnings of $42.7 million to recognize the estimated lease liabilities associated with the Bell's and Home bankruptcies and for a single lease from Amber's former Georgia division. In 2018, Bell's began the liquidation process and Home emerged from bankruptcy and, based on the resolution of various leases, Amber reversed $12.1 million of this accrual. Explain the accounting principle(s) that required Amber to record the $42.7 million charge in 2017 and the $12.1 million reversal in 2018.

On December 31, 2018, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2019. 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, 2019. In February 2019, 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 2019. On March 13, 2019, L issued its 2018 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2018, balance sheet?

Panther Co. had a quality-assurance warranty liability of $350,000 at the beginning of 2018 and $310,000 at the end of 2018. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2018?

Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2018, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2018, were $330,000. During 2018, $410,000 was refunded and deposits of $25,000 were forfeited. Required: 1. Prepare the appropriate journal entries for the deposits received and returned during 2018. 2. Determine the liability for refundable deposits to be reported in the December 31, 2018, balance sheet.

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2019. At December 31, 2018, 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, 2018, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2018, balance sheet, Branch should classify the notes as follows:

All else equal, a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period?

A line of credit is an agreement to provide long-term financing, typically made with a bank or a group of banks.

Identify the major components included in the official definition of a liability as set forth by Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements."

Which of the following is a contingency that would most likely require accrual?

On January 1, 2018, G Corporation agreed to grant all its employees two weeks paid vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2018, G's employees each earned an average of $800 per week. A total of 500 vacation weeks earned in 2018 were not taken during 2018. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2019. What is the amount of G's 2019 wages expense related to 2018 vacation time?

Which of the following generally is associated with accounts payable?

The following selected transactions relate to liabilities of Chicago Glass Corporation for 2018. Chicago's fiscal year ends on December 31. 1. On January 15, Chicago received $7,000 from Henry Construction toward the purchase of $66,000 of plate glass to be delivered on February 6. 2. On February 3, Chicago received $6,700 of refundable deposits relating to containers used to transport glass components. 3. On February 6, Chicago delivered the plate glass to Henry Construction and received the balance of the purchase price. 4. First quarter credit sales totaled $700,000. The state sales tax rate is 4% and the local sales tax rate is 2%. Required: Prepare journal entries for the above transactions.

Providing a monetary rebate program for purchasing a product: