Self Study Solutions Chapter 13

CHAPTER 13
Current Liabilities and Contingencies
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13-10 (a) (b) Lawsuit Loss Lawsuit Liability 900,000 900,000
No entry is necessary. The loss is not accrued because it is not prob able that a liability has been incurred at 12/31/12.
BRIEF EXERCISE 13-11 Buchanan should record a litigation accrual on the patent case, since the amount is both estimable and probable. This entry will reduce income by $300,000 and Buchanan will report a litigation liability of $300,000. The $100,000 self-insurance allowance has no impact on income or liabilities. BRIEF EXERCISE 13-12 Oil Platform Asset Retirement Obligation 450,000 450,000
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
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SOLUTIONS TO EXERCISES
EXERCISE 13-1 (1015 minutes)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) Current liability. Current liability. Current liability or long-term liability depending on term of warranty. Current liability. Footnote disclosure (assume not probable and/or not reasonably estimable). Current liability. Current or noncurrent liability depending upon the time involved. Current liability. Current liability. Current liability. Current liabilities or long-term liabilities as a deduction from face value of note. Current liability. Current liability. Current liability. Footnote disclosure. Separate presentation in either current or long-term liability section.
EXERCISE 13-3 (1012 minutes) ALEXANDER COMPANY Partial Balance Sheet December 31, 2012 Current liabilities: Notes payable (Note 1) Long-term debt: Notes payable refinanced in February 2013 (Note 1) Note 1. Short-term debt refinanced. As of December 31, 2012, the
$300,000 900,000
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company had notes payable totaling $1,200,000 due on February 2, 2013. These notes were refinanced on their due date to the extent of $900,000 received from the issuance of common stock on January 21, 2013. The balance of $300,000 was liquidated using current assets. OR Current liabilities: Notes payable (Note 1) Long-term debt: Short-term debt expected to be refinanced (Note 1) (Same footnote as above.) $300,000 900,000
EXERCISE 13-8 (1015 minutes) Salaries and Wages Expense Withholding Taxes Payable FICA Taxes Payable* Union Dues Payable Cash *[($480,000 $140,000) X 7.65% = $26,010] $140,000 X 1.45% = $2,030; $26,010 + $2,030 = $28,040 Payroll Tax Expense FICA Taxes Payable (See previous computation.) FUTA Taxes Payable [($480,000 $410,000) X .8%) SUTA Taxes Payable [$70,000 X (3.5% 2.3%)] EXERCISE 13-12 (1520 minutes) Inventory of Premiums (8,800 X $.90) 7,920
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480,000 80,000 28,040 9,000 362,960
29,440 28,040
560 840
Cash Cash (120,000 X $3.30) Sales Revenue Premium Expense Inventory of Premiums [(44,000 10) X $.90] Premium Expense Premium Liability *[(120,000 X 60%) 44,000] 10 X $.90 = 2,520 396,000
7,920 396,000 3,960 3,960 2,520* 2,520
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EXERCISE 13-13 (2030 minutes) (1) The FASB requires that, when some amount within the range of ex pected loss appears at the time to be a better estimate than any other amount within the range, that amount is accrued. When no amount within the range is a better estimate than any other amount, the dollar amount at the low end of the range is accrued and the dollar amount at the high end of the range is disclosed. In this case, therefore, Maverick Inc. would report a liability of $800,000 at December 31, 2012. (2) The loss should be accrued for $6,000,000. The potential insurance recovery is a gain contingencyit is not recorded until received. According to FASB ASC 410-30-35-8, claims for recoveries may be recorded if the recovery is deemed probable. (3) This is a gain contingency because the amount to be received will be in excess of the book value of the plant. Gain contingencies are not recorded and are disclosed only when the probabilities are high that a gain contingency will become reality.
EXERCISE 13-14 (2530 minutes) (a) Plant Assets Cash Plant Assets Asset Retirement Obligation (b) Depreciation Expense Accumulated Depreciation Plant Assets Depreciation Expense Accumulated Depreciation 3,909
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600,000 600,000 39,087 39,087 60,000 60,000
Plant Assets Interest Expense Asset Retirement Obligation *$39,087/10. **$39,087 X .06. 2,345
3,909* 2,345**
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EXERCISE 13-14 (Continued) (c) Asset Retirement Obligation Loss on ARO Settlement Cash 70,000 10,000 80,000
EXERCISE 13-16 (2025 minutes) # 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Assets I NE NE I NE I D NE NE I NE I NE D NE D NE NE Liabilities I NE I I I I I I I I I I I D I NE D I Owners Equity NE NE D NE D I D D D NE D I D NE D D I D Net Income NE NE D NE D I D D D NE D I D NE D D I D
EXERCISE 13-17 (1015 minutes) (a) Current ratio = Current Assets Current Liabilities = $210,000 $70,000 = 3.00
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Current ratio measures the short-term ability of the company to meet its currently maturing obligations. (b)
Acid-test ratio = Cash + Short-term Investments + Net Receivables = $115,000 Current Liabilities $70,000 = 1.64
Acid-test ratio also measures the short-term ability of the company to meet its currently maturing obligations. However, it eliminates assets that might be slow moving, such as inventories and prepaid expenses. (c) Debt to total assets = Total Liabilities Total Assets = $210,000 $430,000 = 48.84%
This ratio provides the creditors with some idea of the corporations ability to withstand losses without impairing the interests of creditors. (d)
Rate of return on assets = Net Income Average Total Assets = $25,000 $430,000 = 5.81%
This ratio measures the return the company is earning on its average total assets and provides one indication related to the profitability of the enterprise.
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SOLUTIONS TO PROBLEMS
PROBLEM 13-4
(a)
Name B. D. Williams D. Raye K. Baker F. Lopez A. Daniels B. Kingston Total Earnings to Aug. 31 $ 6,800 6,500 7,600 13,600 107,000 112,000 $253,500 September Earnings $ 800 700 1,100 1,900 13,000 16,000 $33,500 Income Tax Withholding $ 80 70 110 190 1,300 1,600 $3,350 FICA $ 61.20 53.55 84.15 145.35 188.50
a
FUTA $2.00* 5.00*** $7.00
SUTA $1.60** 4.00**** $5.60
232.00
b
$764.75
a *($7,000 $6,800) X 1% = $2.00 $13,000 X 1.45% = $188.50 **($7,000 $6,800) X .8% = $1.60 b$16,000 X 1.45% = $232.00 ***($7,000 $6,500) X 1% = $5.00 ****($7,000 $6,500) X .8% = $4.00
Salaries and Wages Expense Withholding Taxes Payable FICA Taxes Payable Cash (b) Payroll Tax Expense FICA Taxes Payable FUTA Taxes Payable SUTA Taxes Payable Withholding Taxes Payable FICA Taxes Payable FUTA Taxes Payable SUTA Taxes Payable Cash
33,500.00 3,350.00 764.75 29,385.25 777.35 764.75 5.60 7.00 3,350.00 1,529.50 5.60 7.00 4,892.10
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(c)
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PROBLEM 13-5
(a) (b)
Cash (400 X $2,500) Sales Revenue Cash (400 X $2,500) Sales Revenue Warranty Expense (400 X [$155 + $185]) Warranty Liability
1,000,000 1,000,000 1,000,000 1,000,000 136,000 136,000
(c)
No liability would be disclosed under the cash-basis method relative to future costs due to warranties on past sales.
(d)
Current Liabilities: Warranty Liability Long-term Liabilities: Warranty Liability
$68,000 $68,000 61,300 21,400 39,900 61,300 21,400 39,900
(e)
Warranty Expense Inventory Salaries and Wages Payable Warranty Payable Inventory Salaries and Wages Payable
(f)
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CHAPTER 13

Current Liabilities and Contingencies

SOLUTIONS TO BRIEF EXERCISES

EXERCISE 13-1 (1015 minutes)

480,000 80,000 28,040 9,000 362,960

7,920 396,000 3,960 3,960 2,520* 2,520

600,000 600,000 39,087 39,087 60,000 60,000

FUTA $2.00* 5.00*** $7.00

SUTA $1.60 4.00** $5.60

1,000,000 1,000,000 1,000,000 1,000,000 136,000 136,000

Current Liabilities: Warranty Liability Long-term Liabilities: Warranty Liability

$68,000 $68,000 61,300 21,400 39,900 61,300 21,400 39,900

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