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Exam 13: Current Liabilities and Contingencies

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Question 21

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Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2013, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2013, were $330,000. During 2013, $410,000 was refunded and deposits of $25,000 were forfeited. Required: 1. Prepare the appropriate journal entries for the deposits received and returned during 2013. 2. Determine the liability for refundable deposits to be reported in the December 31, 2013, balance sheet.

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Question 22

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

A) Face rate.
B) Contract rate.
C) Effective rate.
D) Stated rate.

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

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Question 23

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

Grossman Products began operations in 2013. The following selected transactions occurred from September 2013 through March 2014. Grossman's fiscal year ends on December 31. 2013: (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. 2014: (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 2013 transactions. 2. Prepare the liability section of the balance sheet at December 31, 2013, based on the data supplied. 3. Prepare the appropriate journal entries for the 2014 transactions.

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

A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

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.

The accounting concept that requires recognition of a liability for customer premium offers is:

The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2013, and financial statements are published in March 2014. 1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2013 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2014, 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 2013, 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 2013, 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 2014 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 2013. 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, 2014, 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.

Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and three coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2013, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2013, balance sheet?

At the beginning of 2013, Scarlet Industries began offering a three-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2013 were $270 million. Thirteen percent of the units sold were returned in 2013 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred. Required: Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2013. Show calculations.

In its 2013 annual report to shareholders, Ank-Morpork Times Inc. included the following disclosure: Revenue Recognition • Advertising revenue is recognized when advertisements are published, are broadcast, or when placed on the Company's websites, net of provisions for estimated rebates, credit and rate adjustments and discounts. • Circulation revenue includes single copy and home-delivery subscription revenue. Single copy revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from home-delivery subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions. • Other revenue is recognized when the related service or product has been delivered. Also, the following information on its current liabilities was included in its comparative balance sheets: Required: Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home-delivery subscriptions during fiscal year 2013, what amount of revenue did it recognize during 2013 from this source? Show the relevant T-account information to support your answer.

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, 2013.

B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2013, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2013. B's employees earn an average of $200 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is B required to report?

A customer advance produces a liability that is satisfied when the product or service is provided.

Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty, but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Texon would address this in its current year financial statements.

During 2013, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2013. At December 31, 2013, Deluxe should report a liability for unredeemed coupons of:

Under IFRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability.

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: