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Exam 13: Current Liabilities and Contingencies

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Question 21

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An asset for a gain contingency should not be accrued unless it is probable that the gain contingency will be realized.

A) True
B) False

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Question 22

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Cracker Corporation began a special promotion in July 2018 in an attempt to increase sales. A coupon was included in various print advertisements. Customers could send in five coupons to receive $2.00. Cracker's management estimated that 70% of the coupons would be redeemed. For the six months ended December 31, 2018, the following information is available: Record all necessary journal entries for the coupon offer for 2018.

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Question 23

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On June 1, 2018, 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%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2018?

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:

Paul Company issues a product recall due to an apparently preexisting 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:

Universal Travel Inc. borrowed $500,000 on November 1, 2018, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2018, in the amount of:

Classifying liabilities as either current or long-term helps creditors assess:

In its 2018 annual report to shareholders, Hyer Aviation Group Inc. included the following disclosure: On October 6, 2017, the company's subsidiary, Pyro Aeroplex, filed suit against Syntex, an unincorporated division of Bright American Corporation, for breach of contract and fraud with regard to the supply of deficient wire rope that is installed as aircraft flight control cables on WD-50 aircraft. The case, filed in the circuit court of Bell County, Arkansas, was brought to trial and on September 20, 2018, a jury returned with a verdict in favor of the company in the amount of $17.5 million. The Court, upon a post-judgment motion filed by Pyro, reduced the judgment to $4.5 million. Pyro has appealed that Order to the Supreme Court of Arkansas. The company believes the appeal is without merit and will continue to pursue final judgment on the Order. The company, pending appeal, has not recorded the $4.5 million favorable judgment. Required: What journal entries, if any, has Hyer recorded regarding this contingency? Explain its rationale.

In May of 2018, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2018, 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 2018 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2018, balance sheet of:

Large, highly rated firms sometimes sell commercial paper:

The following facts apply to TinyPart Toy Company's pending litigation as of December 31, 2018: a. TinyPart is defending against a lawsuit and believes there is a 51% chance it will lose in court. If it loses, TinyPart estimates that damages will be $100,000. b. TinyPart is defending against another lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of $30,000 to $50,000, with each amount in that range equally likely to occur. c. TinyPart is defending against another lawsuit that is identical to item (b), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $15,000 and $25,000. TinyPart's management believes the effects of time value of money on these amounts are material, but also believes the timing of these amounts is uncertain. d. TinyPart is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court. If TinyPart loses, it believes damages will fall somewhere in the range of $35,000 to $40,000, with each amount in that range equally likely to occur. -Indicate how TinyPart would disclose or account for the lawsuit described in part (d) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2018.

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

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:

Grossman Products began operations in 2018. The following selected transactions occurred from September 2018 through March 2019. Grossman's fiscal year ends on December 31. 2018: (a.) On September 5, Grossman opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees. (b.) On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity. (c.) Grossman received $3,000 of refundable deposits in December for reusable containers. (d.) For the September through December period, sales totaled $5,000,000. The state sales tax rate is 4% and 75% of sales are subject to sales tax. (e.) Grossman recorded accrued interest. 2019: (f.) Grossman paid the promissory note on the March 1 due date. (g.) Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months. Required: 1. Prepare the appropriate journal entries for the 2018 transactions. 2. Prepare the liability section of the balance sheet at December 31, 2018, based on the data supplied. 3. Prepare the appropriate journal entries for the 2019 transactions.

Jane's Donut Co. borrowed $200,000 on January 1, 2018, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2020. In connection with this note, Jane's should report interest expense at December 31, 2018, in the amount of:

As part of a promotion campaign, Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 4% of the coupons eventually will be redeemed. During the last month of 2018, the first month of the offer, 12 million coupons were distributed and 240,000 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2018, income statement?

Define the following: 1. Liabilities that are definite in amount. 2. Liabilities that must be estimated. 3. Liabilities that are contingent.

The following facts apply to TinyPart Toy Company's pending litigation as of December 31, 2018: a. TinyPart is defending against a lawsuit and believes there is a 51% chance it will lose in court. If it loses, TinyPart estimates that damages will be $100,000. b. TinyPart is defending against another lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of $30,000 to $50,000, with each amount in that range equally likely to occur. c. TinyPart is defending against another lawsuit that is identical to item (b), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $15,000 and $25,000. TinyPart's management believes the effects of time value of money on these amounts are material, but also believes the timing of these amounts is uncertain. d. TinyPart is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court. If TinyPart loses, it believes damages will fall somewhere in the range of $35,000 to $40,000, with each amount in that range equally likely to occur. -Indicate how TinyPart would disclose or account for the lawsuit described in part (a) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2018.

Hot Springs Marine borrowed $20 million cash on December 1, 2018, to provide working capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to Third Bank under a prearranged short-term financing arrangement. Interest on the note was payable at maturity. Each firm's fiscal period is the calendar year. Required: 1. Prepare the journal entries to record (a) the issuance of the note by Hot Springs Marine and (b) Third Bank's receivable on December 1, 2018. 2. Prepare the journal entries by both firms to record all subsequent events related to the note through March 31, 2019. 3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entries to record the issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2018. What would be the effective interest rate?

The rate of interest printed on the face of a note payable is called the: