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Exam 13: Current Liabilities and Contingencies

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Question 71

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A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

A) More likely than not and the amount of the loss is known.
B) At least reasonably possible and the amount of the loss is known.
C) At least reasonably possible and the amount of the loss can be reasonably estimated.
D) Probable and the amount of the loss can be reasonably estimated.

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Question 72

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The following facts relate to gift cards sold by Sunbru Coffee Company during 2013. Sunbru's fiscal year ends on December 31. (a.) In October 2013, sold $3,000 of gift cards, and redeemed $500 of those gift cards. (b.) In November 2013, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700 of November gift cards. (c.) In December 2013, sold $3,000 of gift cards, and redeemed $200 of October gift cards, $2,000 of November gift cards, and $400 of December gift cards. (d.) Sunbru views a gift card to be "broken" (with a remote probability of redemption) two months after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July would be viewed as broken as of September 30. Required: 1. Prepare all journal entries appropriate to be recorded only during the month of December 2013 relevant to gift card sales, gift card redemptions, and gift card breakage. 2. Determine the balance of the unearned revenue liability to be reported in the December 31, 2013, balance sheet. Show the relevant T-account information to support your answer.

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Question 73

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Sunnyvale Computer Company sells a line of computers that carry a six-month warranty. Customers are offered the opportunity to buy a two-year extended warranty for an additional charge. During 2013, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase. Required: Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2013.

In the current year, Hanna Company reported warranty expense of $190,000 and the warranty liability account increased by $20,000. What were warranty expenditures during the year?

What is the expense that Holyoak should report for its promotional rebates in its 2013 income statement?

Accounting for costs of incentive programs for customer purchases:

Which of the following is not a current liability?

In its 2013 annual report to shareholders, Hyer Aviation Group Inc. included the following disclosure: On October 6, 2012, 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, 2013, 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.

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:

On January 1, 2013, 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, 2013, G's employees each earned an average of $800 per week. A total of 500 vacation weeks earned in 2013 were not taken during 2013. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2014. What is the amount of G's 2014 wages expense related to 2013 vacation time?

Jane's Donut Co. borrowed $200,000 on January 1, 2013, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2015. In connection with this note, Jane's should report interest expense at December 31, 2013, in the amount of:

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

On June 1, 2013, 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, 2013?

For a loss contingency to be accrued, the claim must have been made before the accounting period ended.

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

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.

A discount on a noninterest-bearing note payable is classified in the balance sheet as:

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, 2013.

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold.

Hardin Widget Manufacturing began operations in January 2013. Hardin sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Hardin's management projects that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2013 and 2014 are as follows: 2013: Sold 200 widgets on account; incurred warranty expenditures of $300. 2014: Sold 300 widgets on account; actual warranty expenditures were $500. Required: 1. Prepare journal entries that summarize the sales and any aspects of the warranty for 2013. 2. Prepare journal entries that summarize the sales and any aspects of the warranty for 2014.