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Exam 13: Current Liabilities and Contingencies

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Question 51

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A liability for an unasserted claim must be accrued if it is reasonably possible that the claim will be asserted.

A) True
B) False

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Question 52

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Bank loans are often arranged in advance as lines of credit. What is a line of credit? How do a committed and a noncommitted line of credit differ?

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Lines of credit permit a company to borr...

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Question 53

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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?

Some liabilities are not contractual obligations and may not be payable in cash.

Define a loss contingency and give two examples that almost always are accrued.

Swift Drug Company is being sued this year for a wrongful death due to violation of FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements.

At the beginning of 2018, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2018 were $180 million. Fifteen percent of the units sold were returned in 2018 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2018 income statement is:

During 2018, Deluxe Leather Goods issued 800,000 coupons which entitles the customer to a $5.00 cash refund when the coupon is submitted at the time of any future purchase. Deluxe estimates that 70% of the coupons will be redeemed. 350,000 coupons had been processed during 2018. At December 31, 2018, Deluxe should report a liability for unredeemed coupons of:

In 2018, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2018, 7,100 had been redeemed and the $20 reduction of purchase price provided to customers. -Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. What is the promotional coupon liability that Holyoak should report in its December 31, 2018, balance sheet?

Gray Co. estimates it is probable that it will receive a $10,000 gain contingency and pay a $4,000 loss contingency. After recording the appropriate journal entries to recognize contingent amounts, Gray Co.'s net assets will:

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

On May 1, Lectric Industries issued 9-month notes in the amount of $60 million. Interest is payable at maturity. Required: Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

Z Co. filed suit against W Inc. in 2018 seeking damages for patent infringement. At December 31, 2018, 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 2019. Z should report this award in its 2018 financial statements, issued in March 2019 as:

The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2018, and financial statements are published in March 2019. 1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2018 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2019, judgment was rendered against Bowe-Whitney in the amount of $14 million plus interest, a total of $15.2 million. Bowe-Whitney does not plan to appeal the judgment. 2. Since August of 2018, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2018, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted. 3. Bowe-Whitney is the defendant in a lawsuit filed in January 2019 in which Access Company seeks $10 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2018. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for. 4. At March 1, 2019, the EPA is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable. Required: Prepare journal entries that should be recorded as a result of each of the above contingencies.

The rate of interest that actually is incurred on a note payable is called the:

In its 2018 annual report to shareholders, the Goodday Chemical Company included the following disclosure note excerpts on CONTINGENCIES in its annual report to shareholders: At December 31, 2018, Goodday had recorded liabilities aggregating $66.5 million for anticipated costs related to various environmental matters, primarily the remediation of numerous waste disposal sites and certain properties sold by Goodday. These costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities and will be paid over several years. The amount of Goodday's ultimate liability in respect of these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute. At December 31, 2018, Goodday had recorded liabilities aggregating $218.7 million for potential product liability and other tort claims, including related legal fees expected to be incurred, presently asserted against Goodday. The amount recorded was determined on the basis of an assessment of potential liability using an analysis of available information with respect to pending claims, historical experience, and, where available, current trends. Goodday is a defendant in numerous lawsuits involving at December 31, 2018, approximately 63,000 claimants alleging various asbestos-related personal injuries purported to result from exposure to asbestos in certain rubber-coated products manufactured by Goodday in the past or in certain Goodday facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. In the past, Goodday has disposed of approximately 22,000 cases by defending and obtaining the dismissal thereof or by entering into a settlement. Goodday has policies and coverage-in-place agreements with certain of its insurance carriers that cover a substantial portion of estimated indemnity payments and legal fees in respect of the pending claims. At December 31, 2018, Goodday has recorded an asset in the amount it expects to collect under the policies and coverage-in-place agreements with certain carriers related to its estimated asbestos liability. Goodday has also commenced discussions with certain of its excess coverage insurance carriers to establish arrangements in respect of their policies. Subject to the uncertainties referred to above, Goodday has concluded that in respect of any of the above described liabilities, it is not reasonably possible that it would incur a loss exceeding the amount recognized at December 31, 2018, with respect thereto which would be material relative to the consolidated financial position, results of operations, or liquidity of Goodday. -Prepare the summary journal entry that Goodday recorded for the environmental cleanup and product liability/tort claim matters, described in the note disclosure.

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

How are customer advances and refundable deposits similar and yet different?

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:

Of the following, which typically would not be classified as a current liability?