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Exam 13: Current Liabilities and Contingencies

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Question 1

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

A) Employee withholding taxes
B) Employee voluntary deductions
C) Employee fringe benefits
D) All of these are correct.

E) A) and B)
F) A) and C)

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Question 2

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On June 1, 2009, 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%. What is the carrying value of the note as of September 30, 2009?

A) $525,000.
B) $300,000.
C) $495,000.
D) $475,000.

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

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Question 3

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What factors are important in determining whether a pending lawsuit should be accrued as a liability and reflected in the financial statements?

The concept of substance over form influences the classification of obligations expected to be refinanced.

A $90,000, 6-month, noninterest-bearing note is discounted at the bank at a 10% discount rate. Required: 1. Prepare the appropriate journal entry to record the issuance of the note. 2. Determine the effective interest rate.

M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2009, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2009. M's employees earn an average of $150 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is M required to report?

Identify and define the three classifications prescribed by SFAS No. 5 to identify the range of possibilities for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.

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

Required: Briefly explain the authoritative basis on which the costs/obligations for environmental cleanup and product liability/tort claim matters were accrued in the financial statements.

What was General's coupon promotion expense in 2009?

In May of 2009, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2009, 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 2009 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of:

What is the effective interest rate on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?

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

Grossman Products began operations in 2009. The following selected transactions occurred from September 2009 through March 2010. Grossman's fiscal year ends on December 31. 2009: (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. 2010: (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 2009 transactions. 2. Prepare the liability section of the balance sheet at December 31, 2009, based on the data supplied. 3. Prepare the appropriate journal entries for the 2010 transactions.

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2009 is as follows ($ in millions) : What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2009, balance sheet?

On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. 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, 2010. In February 2010, 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 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet?

Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January, 2009, the first month of BMS's fiscal year. The journal entry to record payroll for the January 2009 pay period will include a debit to payroll tax expense of

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement?

Identify the major components included in the official definition of a liability as set forth by the FASB.

Gain contingencies usually are recognized in a company's income statement when: