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Exam 13: Current Liabilities and Contingencies

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Question 71

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On November 1, 2018, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note to the bank. Interest was discounted at a 12% discount rate. Required: 1. Prepare the appropriate journal entry by Ziegler to record the issuance of the note. 2. Determine the effective interest rate. 3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Ziegler. 4. Prepare the appropriate journal entry on December 31, 2018, to accrue interest expense on the note described requirement 3, for the 2018 financial statements.

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Question 72

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Carpenter Inc. had a balance of $80,000 in its quality-assurance warranty liability account as of December 31, 2017. In 2018, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2018 were $40 million. What was the balance in the warranty liability account as of December 31, 2018?

A) $35,000.
B) $425,000.
C) $125,000.
D) $480,000.

E) B) and C)
F) All of the above

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Question 73

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Financial statement note disclosure is required for material potential losses when the loss is at least reasonably possible:

Amounts withheld from employees in connection with payroll often represent liabilities to be remitted to third parties.

Stern Corporation borrowed $10 million cash on September 1, 2018, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year. Required: 1. Prepare all journal entries from issuance to maturity for Stern Corporation. 2. Prepare all journal entries from issuance to maturity for Second State Bank.

Clark's Chemical Company received refundable deposits on returnable containers in the amount of $100,000 during 2018. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

Under IFRS, the term "probable" indicates a threshold of probability that is substantially more than a 50 percent chance of occurrence.

Which of the following is the best definition of a current liability?

The following selected transactions relate to contingencies of Eastern Products Inc., which began operations in July 2018. Eastern's fiscal year ends on December 31. Financial statements are published in April 2019. 1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2018. 2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2018 and were recorded as warranty expense when incurred. 3. In December 2018, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million. 4. In November 2018, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2019. 5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2018. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million. Required: Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

On September 1, 2018, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is:

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. -Briefly explain the GAAP requirement from which the costs/obligations for environmental cleanup and product liability/tort claim matters were accrued in the financial statements.

Which of the following is true about the initial journal entry used to record quality-assurance warranties?

Accounting for costs of incentive programs for customer purchases:

Yummy Rice Cereal offers an all-star bowl in exchange for three proof-of-purchase box tops. Yummy Rice estimates that 30% of box tops will be redeemed. The bowls cost Yummy Rice $1 each. In 2018, 5,000,000 boxes of cereal were sold. By year-end 900,000 box tops had been redeemed. Required: Calculate the liability that Yummy Rice should report at December 31, 2018.

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

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. -What is the point of the last paragraph of the Goodday disclosure? Explain in terms of authoritative GAAP.

The following facts relate to gift cards sold by Sunbru Coffee Company during 2018. Sunbru's fiscal year ends on December 31. (a.) In October 2018, sold $3,000 of gift cards, and redeemed $500 of those gift cards. (b.) In November 2018, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700 of November gift cards. (c.) In December 2018, 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 2018 relevant to gift card sales, gift card redemptions, and gift card breakage. 2. Determine the balance of the deferred revenue liability to be reported in the December 31, 2018, balance sheet. Show the relevant T-account information to support your answer.

Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under:

On June 30, 2018, Chu Industries issued 9-month notes in the amount of $700,000. Assume that interest is payable at maturity in the following three independent cases: Determine the amount of interest expense that should be accrued in a year-end adjusting entry under each assumption:

An extended warranty typically results in the seller: