ACC 306 Chapter13

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1. The accounting concept that requires D. The matching 4. All else equal, a large increase in unearned Large
recognition of a liability for customer principle. revenue in the current period would be increase,
premium offers is: expected to produce what effect on revenue in a because
future period? unearned
revenue
A. Periodicity. becomes
A. Large increase, because unearned revenue revenue
B. Conservatism. becomes revenue when revenue is earned. when
revenue
C. Historical cost. B. Large decrease, because unearned revenue is earned
implies that less revenue has been earned, which
D. The matching principle. reduces future revenue.
2. Accounting for costs of incentive D. All of the above
programs for customer purchases: are correct. C. No effect, because unearned revenue is a
liability, so payment will use assets rather than
providing revenue.
A. Requires probability estimation.
D. Large decrease, because unearned revenue
B. Follows the matching principle. indicates collection problems that will reduce net
revenues in future periods.
C. Is a loss contingency situation. 5. All of the following but one represent collections Customer
for third parties. Which one of the following is deposits
D. All of the above are correct. not a collection for a third party?
3. Accounting for costs of incentive A. Recording an
programs for frequent customer expense and a
purchases involves: liability each period. A. Sales tax payable.

B. Customer deposits.
A. Recording an expense and a
liability each period. C. Employee insurance deductions.

B. Recording a liability and a reduction D. Social security taxes deductions.

of revenue each period. 6. At the beginning of 2013, Angel Corporation $180
began offering a two-year warranty on its million x
C. Recording an expense and an asset products. The warranty program was expected 4% = $7.2
reduction each period. to cost Angel 4% of net sales. Net sales made million
under warranty in 2013 were $180 million. Fifteen
D. Recording an expense and revenue percent of the units sold were returned in 2013
each period. and repaired or replaced at a cost of $5.3
million. The amount of warranty expense on
Angel's 2013 income statement is:

A. $5.3 million.

B. $7.2 million.

C. $10.6 million.

D. $27.0 million.
7. At times, businesses require advance payments A. 9. B Corp. has an employee benefit plan A. $60,000
from customers that will be applied to the Liabilities for compensated absences that gives The liability for
purchase price when goods are delivered or until the each employee 10 paid vacation days compensated
services provided. These customer advances product or and 10 paid sick days. Both vacation absences at
represent: service is and sick days can be carried over December 31, 2013,
provided. indefinitely. Employees can elect to is $60,000 for the
receive payment in lieu of vacation 300 vacation days
A. Liabilities until the product or service is days; however, no payment is given for times $200 per
provided. sick days not taken. At December 31, day. The key word
2013, B's unadjusted balance of liability in dealing with sick
B. A component of shareholders' equity. for compensated absences was pay is the word
$42,000. B estimated that there were "required." The
C. Long-term assets until the product or service 300 total vacation days and 150 sick problem asks what
is provided. days available at December 31, 2013. is the liability
B's employees earn an average of $200 required at
D. Revenue upon receipt of the advance per day. In its December 31, 2013, December 31, 2013.
payment. balance sheet, what amount of liability Since the payment
8. Barbara Muller Services (BMS) pays its C. 11080 for compensated absences is B of sick pay is not
employees monthly. The payroll information required to report? probable, B Corp.
listed below is for January 2013, the first month A. $60,000. would not be
of BMS's fiscal year. required to accrue
B. $84,000. a liability for sick
pay.
C. $90,000.
The journal entry to record payroll for the
January 2013 pay period will include a debit to D. $144,000.
payroll tax expense of: 10. Blue Co. can estimate the amount of D. Neither accrued
loss that will occur if a foreign as a liability nor
A. $6,120. government expropriates some of the disclosed.
company's assets in that country. If the
B. $4,960. likelihood of expropriation is remote, a
loss contingency should be:
C. $11,080.

D. $57,880. A. Disclosed but not accrued as a

liability.

B. Disclosed and accrued as a liability.

C. Accrued as liability but not

disclosed.

D. Neither accrued as a liability nor

disclosed.
11. Branch Company, a building materials 18000 -
supplier, has $18,000,000 of notes payable 15000000LT
due April 12, 2014. At December 31, 2013, = 2012. In 2013, Carpenter's warranty expenditures
Branch signed an agreement with First Bank to 3000000ST
borrow up to $18,000,000 to refinance the
notes on a long-term basis. The agreement
specified that borrowings would not exceed
75% of the value of the collateral that Branch
provided. At the date of issue of the December
31, 2013, financial statements, the value of
Branch's collateral was $20,000,000. On its
December 31, 2013, balance sheet, Branch
should classify the notes as follows:
13. Carpenter Inc. had a balance of $80,000 in its 35000
warranty liability account as of December 31,
were $445,000. Its warranty expense is
calculated as 1% of sales. Sales in 2013 were $40
million. What was the balance in the warranty
liability account as of December 31, 2013?
A. $35,000.
B. $425,000.
C. $125,000.

A. $15,000,000 long-term and $3,000,000 D. $480,000.

current liabilities. 14. Clark's Chemical Company received customer ($100,000
deposits on returnable containers in the amount x 12%)
B. $4,500,000 short-term and $13,500,000 of $100,000 during 2013. Twelve percent of the 120% =
current liabilities. containers were not returned. The deposits are $10,000
based on the container cost marked up 20%.
C. $18,000,000 of current liabilities. What is cost of goods sold relative to this
forfeiture?
D. $18,000,000 of long-term liabilities.
12. Captain Cook Cereal includes one coupon in [(6,000,000
each package of Granola that it sells and x 20%) - A. $0.
offers a puzzle in exchange for $2.00 and 900,000]/3
three coupons. The puzzles cost Captain Cook = 100,000 B. $2,000.
$3.50 each. Experience indicates that 20% of puzzles
the coupons eventually will be redeemed. 100,000 x C. $10,000.
During the last month of 2013, the first month ($3.50 -
of the offer, Captain Cook sold 6 million boxes $2.00) = D. $14,400.
of Granola and 900,000 of the coupons were $150,000 15. Classifying liabilities as either current or long- The
redeemed. What amount should Captain Cook term helps creditors assess: relative
report as a liability for coupons on its A. Profitability. risk of a
December 31, 2013, balance sheet? firm's
B. The relative risk of a firm's liabilities. liabilities.

A. $0. C. The degree of a firm's liabilities.

B. $150,000. D. The amount of a firm's liabilities.

C. $300,000.

D. $450,000.
16. A company should accrue a loss D. Probable 20. Current liabilities normally are recorded at Maturity
contingency only if the likelihood that a and the their: amount
liability has been incurred is: amount of the
loss can be
reasonably A. Present value.
A. More likely than not and the amount of estimated.
the loss is known. B. Cost.

B. At least reasonably possible and the C. Maturity amount.

amount of the loss is known.
D. Expected value.
C. At least reasonably possible and the 21. A customer of Razor Sharpeners alleges that C.
amount of the loss can be reasonably Razor's new razor sharpener had a defect that $2,000,000
estimated. resulted in serious injury to the customer.
Razor believes the customer has a 51% chance
D. Probable and the amount of the loss can of winning the case, and that if the customer
be reasonably estimated. wins the case, there is a range of losses of
17. A contingent loss should be reported in a B. The between $1,000,000 and $3,000,000 in which
disclosure note to the financial statements incurrence of a any number is equally likely to occur. Under
rather than being accrued if: loss is IFRS, Razor should accrue a liability in the
reasonably amount of:
possible.
A. The likelihood of a loss is remote.
A. $0.
B. The incurrence of a loss is reasonably
possible. B. $1,000,000.

C. The incurrence of a loss is more likely C. $2,000,000.

than not.
D. The likelihood of a loss is probable.
18. The cost of customer premium offers
should be charged to expense:
A. When the related product is sold.
B. When the premium offer expires.
C. Over the life cycle of the product to
which the premium relates.
D. $3,000,000.
22. A customer of RoughEdge Sharpeners alleges A. $0
A. When the that RoughEdge's new razor sharpener had a
related defect that resulted in serious injury to the
product is customer. RoughEdge believes the customer
sold. has a 51% chance of winning the case, and that
if the customer wins the case, there is a range
of losses of between $1,000,000 and
$3,000,000 in which any number is equally
likely to occur. Under U.S. GAAP, RoughEdge
should accrue a liability in the amount of:

D. When the premiums are claimed. A. $0.

19. Current liabilities are normally recorded at Materiality.
the amount expected to be paid rather B. $1,000,000.
than at their present value. This practice
can be supported by GAAP according to C. $2,000,000.
the concept of:
A. Matching. D. $3,000,000.

B. Consistency.

C. Materiality.

D. Conservatism.
23. A discount on a noninterest-bearing note A contra 26. Financial statement note disclosure is required D. Even if
payable is classified in the balance sheet as: liability for material potential losses when the loss is at the amount
A. An asset. least reasonably possible: is not
reasonably
B. A component of shareholders' equity. estimable.
A. Only if the amount is known.
C. A contingent liability.
B. Only if the amount is known or reasonably
D. A contra liability. estimable.
24. During 2013, Deluxe Leather Goods sold [(800,000
800,000 reversible belts under a new sales x 70%) - C. Unless the amount is not reasonably
promotional program. Each belt carried one 350,000] x estimable.
coupon, which entitles the customer to a $5.00 $5 =
cash rebate. Deluxe estimates that 70% of the $1,050,000 D. Even if the amount is not reasonably
coupons will be redeemed, even though only estimable.
350,000 coupons had been processed during 27. Funzy Cereal includes one coupon in each C.
2013. At December 31, 2013, Deluxe should package of Wheatos that it sells and offers a $800,000.
report a liability for unredeemed coupons of: toy car in exchange for $1.00 and three
coupons. The cars cost Funzy $1.50 each.
Experience indicates that 40% of the coupons
A. $560,000. eventually will be redeemed. During the last
month of 2013, the first month of the offer,
B. $1,050,000. Funzy sold 12 million boxes of Wheatos and 2.4
million of the coupons were redeemed. What
C. $1,225,000. amount should Funzy report as a promotional
expense for coupons on its December 31, 2013,
D. $1,750,000. income statement?
25. During the year, L&M Leather Goods sold 1,000,000 28. Gain contingencies usually are recognized in a A.
1,000,000 reversible belts under a new sales x 70% x $4 company's income statement when: Realized.
promotional program. Each belt carried one =
coupon, which entitles the customer to a $4.00 $2,800,000
cash rebate. L&M estimates that 70% of the 500,000 x A. Realized.
coupons will be redeemed, even though only $4 =
500,000 coupons had been processed during $2,000,000 B. The amount can be reasonably estimated.
the year. At December 31, L&M should report a $2,800,000
liability for unredeemed coupons of: - C. The gain is reasonably possible and the
$2,000,000 amount can be reasonable estimated.
= $800,000
A. $700,000. D. The gain is probable and the amount can be
reasonably estimated.
B. $800,000. 29. General Product Inc. shipped 100 million 100 million
coupons in products it sold in 2013. The x $.30 x
C. $1,000,000. coupons are redeemable for 30 cents each. 70% = $21
General anticipates that 70% of the coupons million
D. $2,800,000. will be redeemed. The coupons expire on $21 million
December 31, 2014. There were 45 million - (45
coupons redeemed in 2013 and 30 million million x
redeemed in 2014 $.30) =
$7.5
What was General's coupon liability as of million
December 31, 2013?
30. General Product Inc. shipped 100 million coupons B. $1.5 32. In 2013, Holyoak Inc. offers a $20 cash rebate This is the
in products it sold in 2013. The coupons are million. coupon to customers who purchased one of its expected
redeemable for 30 cents each. General anticipates new line of products. Holyoak sold 10,000 of amount
that 70% of the coupons will be redeemed. The these products during the year. By year-end of to be
coupons expire on December 31, 2014. There were 2013, 7,600 of the rebates had been claimed, claimed
45 million coupons redeemed in 2013 and 30 and 7,100 had been paid. Holyoak's historical from 2013
million redeemed in 2014. experience with such rebates indicates that 85% sales; i.e.,
What was General's coupon promotional expense of customers claim the rebates $20 x
in 2014? What is the expense that Holyoak should report 10,000 x
for its promotional rebates in its 2013 income .85.
statement?
A. Zero, since all the expense should be reflected
in 2013.
A. $142,000.
B. $1.5 million.
B. $152,000.
C. $7.5 million.
C. $170,000.
D. $9.0 million.
31. General Product Inc. shipped 100 million coupons 100 D. $200,000.
in products it sold in 2013. The coupons are million 33. In 2013, Holyoak Inc. offers a $20 cash rebate This is
redeemable for 30 cents each. General anticipates x $.30 coupon to customers who purchased one of its (8,500
that 70% of the coupons will be redeemed. The x 70% new line of products. Holyoak sold 10,000 of expected
coupons expire on December 31, 2014. There were = $21 these products during the year. By year-end of - 7,100
45 million coupons redeemed in 2013 and 30 million 2013, 7,600 of the rebates had been claimed, paid) x
million redeemed in 2014. and 7,100 had been paid. Holyoak's historical $20 =
What was General's coupon promotion expense in experience with such rebates indicates that 85% $28,000
2013? of customers claim the rebates
What is the rebate promotion liability that
Holyoak should report in its December 31, 2013,
A. $30.0 million. balance sheet?

B. $21.0 million.
A. $20,000.
C. $13.5 million.
B. $28,000.
D. $7.5 million.
C. $18,000.

D. None of the above is correct.

34. In May of 2013, Raymond Financial Services $900,000. 37. The key accounting considerations relating Determining
became involved in a penalty dispute with the to accounts payable are: their
EPA. At December 31, 2013, the environmental existence and
attorney for Raymond indicated that an ensuring that
unfavorable outcome to the dispute was A. Determining their existence and ensuring they are
probable. The additional penalties were that they are recorded in the appropriate recorded in
estimated to be $770,000 but could be as high accounting period. the
as $1,170,000. After the year-end, but before the appropriate
2013 financial statements were issued, Raymond B. Determining their present value and accounting
accepted an EPA settlement offer of $900,000. ensuring that they are recorded in the period.
Raymond should have reported an accrued appropriate accounting period.
liability on its December 31, 2013, balance sheet
of: C. Determining their existence and
determining the correct amount.

A. $770,000. D. Determining the present value of the

principal and the amount of the interest.
B. $900,000. 38. Kline Company refinanced current debt as As a current
long-term debt on January 5, 2014. Kline's liability
C. $970,000. fiscal year ended on December 31, 2013,
and its financial statements will be issued
D. $1,170,000. sometime in early March 2014. Under IFRS,
35. In the current year, Hanna Company reported 190000 - how would Kline classify the debt on its
warranty expense of $190,000 and the warranty 20000 = December 31, 2013, balance sheet?
liability account increased by $20,000. What 170000
were warranty expenditures during the year?
A. In the "mezzanine" between current and
noncurrent liabilities.
A. $190,000.
B. Kline would not classify the debt as
B. $170,000. current or noncurrent, but rather would
write a disclosure note explaining the
C. $210,000 circumstances.

D. $0. C. As a noncurrent liability.

36. Jane's Donut Co. borrowed $200,000 on January $200,000
1, 2013, and signed a two-year note bearing x 12% x D. As a current liability.
interest at 12%. Interest is payable in full at 12/12 =
maturity on January 1, 2015. In connection with $24,000
this note, Jane's should report interest expense
at December 31, 2013, in the amount of:

A. $0.

B. $24,000.

C. $48,000.

D. $50,880.
39. Lake Co. receives nonrefundable advance 110 + 195 - 42. A long-term liability should be A. Is callable by the
payments with special orders for containers 180 - 45 = reported as a current liability in a creditor.
constructed to customer specifications. $80 classified balance sheet if the long-
Related information for 2013 is as follows ($ term debt:
in millions)

Customer Advances Balance $110 A. Is callable by the creditor.

Adanvce received 2013 orders $195
Advances applicable to orders $180 B. Is secured by adequate collateral.
Advances orders canceled in $45
C. Will be refinanced with stock.
What amount should Lake report as a current
liability for advances from customers in its D. Will be refinanced with debt.
Dec. 31, 2013, balance sheet? 43. A loss contingency should be D. Probable and the
A. $0. accrued in a company's financial amount of the loss
statements only if the likelihood that can be reasonably
B. $80. a liability has been incurred is: estimated.

C. $125.
A. At least remotely possible and the
D. $170. amount of the loss is known.
40. Large, highly rated firms sometimes sell A. To
commercial paper: borrow B. Reasonably possible and the
funds at a amount of the loss is known.
lower rate
A. To borrow funds at a lower rate than than C. Reasonably possible and the
through a bank. through a amount of the loss can be reasonably
bank. estimated.
B. To earn a profit on the paper.
D. Probable and the amount of the
C. To avoid paperwork. loss can be reasonably estimated.
44. The main difference between The expense for the
D. Because the interest rate is locked in by accounting for rebate and cash latter is usually
the Federal Reserve Board. discount coupons is: deferred until
41. Liabilities payable within the coming year are A. US redemption of the
classified as long-term liabilities if GAAP. coupon.
refinancing is completed before date of A. The latter is not treated as an
issuance of the financial statements under: expense.

B. Only the former creates a

A. US GAAP. contingent liability when issued.

B. IFRS. C. The expense for the latter is

usually deferred until redemption of
C. Either U.S. GAAP and IFRS. the coupon.

D. Neither U.S. GAAP and IFRS. D. There are no significant

differences in accounting between
the two.
45. M Corp. has an employee benefit plan for B. 48. Oklahoma Oil Corp. paid interest 785000-125000=660000
compensated absences that gives each $30,000. of $785,000 during 2013, and the
employee 15 paid vacation days. Vacation days interest payable account
can be carried over indefinitely. Employees can decreased by $125,000. What was
elect to receive payment in lieu of vacation interest expense for the year?
days. At December 31, 2013, M's unadjusted
balance of liability for compensated absences
was $30,000. M estimated that there were 200 A. $910,000.
total vacation days available at December 31,
2013. M's employees earn an average of $150 B. $660,000.
per day. In its December 31, 2013, balance sheet,
what amount of liability for compensated C. $555,000.
absences is M required to report?
D. $785,000.
49. On December 31, 2013, L Inc. had a B. $500,000.
A. $0. $1,500,000 note payable GAAP states that the
outstanding, due July 31, 2014. L amount excluded from
B. $30,000. borrowed the money to finance current liabilities
construction of a new plant. L through refinancing
C. $225,000. planned to refinance the note by cannot exceed the
issuing long-term bonds. Because amount actually
D. $450,000. L temporarily had excess cash, it refinanced. Therefore, L
46. The most common type of liability is: One to prepaid $500,000 of the note on should consider the
be paid January 23, 2014. In February $1,000,000 paid by the
in cash 2014, L completed a $3,000,000 refinancing to be a
A. One that comes into existence due to a loss and for bond offering. L will use the bond long-term liability and
contingency. which the offering proceeds to repay the the $500,000 a current
amount note payable at its maturity and to liability in the
B. One that must be estimated. and pay construction costs during December 31, 2013,
timing 2014. On March 13, 2014, L issued balance sheet. The
C. One that comes into existence due to a gain are its 2013 financial statements. What refinancing was
contingency. known. amount of the note payable completed before the
should L include in the current issuance of the financial
D. One to be paid in cash and for which the liabilities section of its December statements and meets
amount and timing are known. 31, 2013, balance sheet? both criteria (intent and
47. Of the following, which typically would not be D. A six- financial ability) for the
classified as a current liability? month classification of the
bank loan A. $0. $1,000,000 as a long-
to be term liability
A. Estimated liability from cash rebate program. paid with B. $500,000.
the
B. A long-term note payable maturing within the proceeds C. $1,000,000.
coming year. from the
sale of D. $1,500,000.
C. Rent revenue received in advance. common
stock.
D. A six-month bank loan to be paid with the
proceeds from the sale of common stock.
50. On January 1, 2013, G Corporation agreed (500 x $800) x 52. On October 31, 2013, Simeon Builders More than the
to grant all its employees two weeks paid 5% = $20,000 borrowed $16 million cash and issued a stated discount
vacation each year, with the stipulation 7-month, noninterest-bearing note. The rate of 8%.
that vacations earned each year can be loan was made by Star Finance Co. The
taken the following year. For the year stated discount rate is 8%. Sky's
ended December 31, 2013, G's employees effective interest rate on this loan is:
each earned an average of $800 per
week. A total of 500 vacation weeks
earned in 2013 were not taken during A. More than the stated discount rate of
2013. Wage rates for employees rose by 8%.
an average of 5 percent by the time
vacations actually were taken in 2014. B. Less than the stated discount rate of
What is the amount of G's 2014 wages 8%.
expense related to 2013 vacation time?
C. Equal to the stated discount rate of
8%.
A. $0.
D. Unrelated to the stated discount rate
B. $20,000. of 8%.
53. On September 1, 2013, Hiker Shoes $100,000 x 9% x
C. $400,000. issued a $100,000, 8-month, noninterest- 8/12 = $6,000
bearing note. The loan was made by [$6,000/($100,000
D. $420,000. Second Commercial Bank where the - $6,000)] x 12/8 =
51. On June 1, 2013, Dirty Harry Co. borrowed 500000 - stated discount rate is 9%. Hiker's 9.6% (rounded)
cash by issuing a 6-month noninterest- (500000.066/12) effective interest rate on this loan
bearing note with a maturity value of + 10000 (rounded) is:
$500,000 and a discount rate of 6%.
Assuming straight-line amortization of the
discount, what is the carrying value of the A. 9.0%.
note as of September 30, 2013?
B. 9.5%.

A. $525,000. C. 9.6%.

B. $300,000. D. 9.7%.
54. Orange Co. can estimate the amount of A. Disclosed but
C. $495,000. loss that will occur if a foreign not accrued as a
government expropriates some of the liability.
D. $475,000. company's asset in that country. If
expropriation is reasonably possible, a
loss contingency should be:

A. Disclosed but not accrued as a

liability.

B. Disclosed and accrued as a liability.

C. Accrued as liability but not disclosed.

D. Neither accrued as a liability nor

disclosed.
55. Other things being equal, most managers C. Higher 58. Peterson Photoshop sold $1,000 in gift cards All of
would prefer to report liabilities as noncurrent working on a special promotion on October 15, 2013, October
rather than current. The logic behind this capital and and sold $1,500 in gift cards on another sales
preference is that the long-term classification a higher special promotion on November 15, 2013. Of recognized
permits the company to report: current the cards sold in October, $100 were as revenue;
ratio. redeemed in October, $250 in November, and $150 + $350
$300 in December. Of the cards sold in of
A. Higher working capital and a higher November, $150 were redeemed in November
inventory turnover. November and $350 were redeemed in sales
December. Peterson views the probability of recognized
B. Lower working capital and a higher current redemption of a gift card as remote if the as revenue,
ratio. card has not been redeemed within two so unearned
months. At 12/31/2013, Peterson would show revenue =
C. Higher working capital and a higher current an unearned revenue account for the gift $1,500
ratio. cards with a balance of: November
sales - $500
D. Higher working capital and a lower debt to recognized
equity ratio. A. $0. as revenue =
56. Panther Co. had a warranty liability of D. $1,000.
$350,000 at the beginning of 2013 and $2,040,000. B. $1,000.
$310,000 at the end of 2013. Warranty expense
is based on 4% of sales, which were $50 C. $1,350.
million for the year. What were the warranty
expenditures for 2013? D. $1,500.
59. Providing a monetary rebate program for D. All of the
purchasing a product: above are
A. $0. correct.

B. $1,960,000. A. Is accounted for similarly to product

warranties.
C. $2,000,000.
B. Creates an expense for the seller in the
D. $2,040,000. period of sale.
57. Paul Company issues a product recall due to C. To
an apparently preexisting and material defect accrue the C. Creates a contingent liability for the seller
discovered after the end of its fiscal year. liability and at the time of sale.
Financial statements have not yet been issued. explain it in
The action required of Paul Company for this a note to D. All of the above are correct.
reasonably estimable contingency for the year the 60. The rate of interest printed on the face of a Stated rate
just ended is: financial note payable is called the:
statements.

A. To disclose it in a note to the financial A. Yield rate.

statements.
B. Effective rate.
B. To accrue a long-term liability.
C. Market rate.
C. To accrue the liability and explain it in a
note to the financial statements. D. Stated rate.

D. To do nothing relative to the contingency.

61. The rate of interest that actually is incurred Effective rate 65. Slotnick Chemical received customer deposits 45000 -
on a note payable is called the: on returnable containers in the amount of (45000 /
$300,000 during 2013. Fifteen percent of the 120%) =
containers were not returned. The deposits are 7500
A. Face rate. based on the container cost marked up 20%.
How much profit did Slotnick realize on the
B. Contract rate. forfeited deposits?

C. Effective rate.
A. $0.
D. Stated rate.
62. Red Co. can estimate the amount of loss that B. Disclosed B. $7,500.
will occur if a foreign government and accrued
expropriates some of the company's assets as a liability. C. $9,000.
in that country. If expropriation is probable,
a loss contingency should be: D. $45,000.
66. Universal Travel Inc. borrowed $500,000 on $500,000
November 1, 2013, and signed a 12-month note x 6% x
A. Disclosed but not accrued as a liability. bearing interest at 6%. Interest is payable in full 2/12 =
at maturity on October 31, 2014. In connection $5,000
B. Disclosed and accrued as a liability. with this note, Universal Travel Inc. should
report interest payable at December 31, 2013, in
C. Accrued as liability but not disclosed. the amount of:

D. Neither accrued as a liability nor

disclosed. A. $8,000.
63. Revenue associated with gift card sales When the
should be recognized: probability of B. $30,000.
gift card
redemption is C. $5,000.
A. When the gift card is sold. viewed as
remote. D. $25,000.
B. No later than the last day of the operating 67. Volt Electronics sells equipment that includes a A. When
period in which the gift card is delivered to three-year warranty. Repairs under the the
the customer. warranty are performed by an independent equipment
service company under contract with Volt. is sold.
C. When the probability of gift card Based on prior experience, warranty costs are
redemption is viewed as remote. estimated to be $25 per item sold. Volt should
recognize these warranty costs:
D. Under no circumstances, as gift cards are
not themselves a delivered product, but
rather a selling technique. A. When the equipment is sold.
64. Short-term obligations can be reported as The firm
long-term liabilities if: intends to B. When the repairs are performed.
and has the
ability to C. When payments are made to the service
A. The firm has a long-term line of credit. refinance as firm.
long-term.
B. The firm has tentative plans to issue long- D. Evenly over the life of the warranty.
term bonds.

C. The firm intends to and has the ability to

refinance as long-term.

D. The firm has the ability to refinance on a

long-term basis.
68. What is the effective interest rate $200,000 x 12% x 72. When cash is received from customers A current liability
(rounded) on a 3-month, noninterest- 3/12 = $6,000 in the form of a refundable deposit, the
bearing note with a stated rate of 12% $6,000/($200,000 cash account is increased with a
and a maturity value of $200,000? - $6,000) = 3.09% corresponding increase in:
A. 12.4%. 3.09% x 12/3 =
12.4% (rounded)
B. 12.0 %. A. A current liability.

C. 11.5%. B. Revenue.

D. 3.0%. C. Shareholders' equity.

69. When a deposit on returnable An increase in
containers is forfeited, the firm holding revenue D. Paid-in capital.
the deposit will experience: 73. Which of the following entail essentially A. Coupons for
the same accounting treatment? cash rebates and
coupons for
A. A decrease in cost of goods sold. other premiums.
A. Coupons for cash rebates and
B. An increase in current liabilities. coupons for other premiums.

C. An increase in accounts receivable. B. Cents-off coupons and coupons for

other premiums.
D. An increase in revenue.
70. When a material gain contingency is C. Disclosed but C. Cents-off coupons and coupons for
probable and the amount of gain can be not recognized in cash rebates.
reasonably estimated, the gain should the income
be: statement. D. All of the above are correct.
74. Which of the following generally is A. ) Option A
associated with accounts payable?
A. Reported in the income statement INterest Exp. Reported at PV
and disclosed. a. NO No
b. No Yes
B. Offset against shareholders' equity. c. Yes Yes
d. Yes Yes
C. Disclosed but not recognized in the
income statement. A. Option a

D. Neither recognized in the income B. Option b

statement nor disclosed.
71. When a product or service is delivered A debit to a C. Option c
for which a customer advance has been liability and a
previously received, the appropriate credit to a D. Option d
journal entry includes: revenue account.

A. A debit to a revenue and a credit to a

liability account.

B. A debit to a revenue and a credit to

an asset account.

C. A debit to an asset and a credit to a

revenue account.

D. A debit to a liability and a credit to a

revenue account.
75. Which of the following is a
contingency that should be
accrued?
A. The company is being sued
and a loss is reasonably
possible and reasonably
estimable.
B. The company deducts life
insurance premiums from
employees' paychecks.
C. The company offers a two-
year warranty and the
expenses can be reasonably
estimated.
D. It is probable that the
company will receive
$100,000 in settlement of a
lawsuit.
76. Which of the following is a
contingency that would most
likely require accrual?
A. Potential claims on
extended warranties.
B. Customer premium offers.
C. Potential liability on a
product where none have yet
been sold.
D. Sales tax payable.
77. Which of the following is not
a characteristic of a liability?
A. It represents a probable,
future sacrifice of economic
benefits.
B. It must be payable in cash.
C. It arises from present
obligations to other entities.
D. It results from past
transactions or events.
C. The company offers a 78.
two-year warranty and the
expenses can be reasonably
estimated.
79.
B. Customer premium offers.
80.
It must be payable in cash.
Which of the following is not A note payable due in two
a current liability? years.
A. Accounts payable.
B. A note payable due in two
years.
C. Accrued interest payable.
D. Sales tax payable.
Which of the following is not An unused line of credit.
a liability?
A. An unused line of credit.
B. Estimated income taxes.
C. Sales tax collected from
customers.
D. Advances from customers.
Which of the following is the An obligation expected to
best definition of a current be satisfied with current
liability? assets or by the creation of
other current liabilities
A. An obligation payable
within one year.
B. An obligation payable
within one year of the
balance sheet date.
C. An obligation payable
within one year or within the
normal operating cycle,
whichever is longer.
D. An obligation expected to
be satisfied with current
assets or by the creation of
other current liabilities.
81. Which of the following may create D. All of the 83. Z Co. filed suit against W Inc. in 2013 D. A disclosure of a
employer liabilities in connection with their above are seeking damages for patent gain contingency of
payrolls? correct. infringement. At December 31, 2013, an undetermined
legal counsel for Z believed that it amount in the range
was probable that Z would be of $30 million to $60
A. Employee withholding taxes. successful against W for an million.
estimated amount in the range of
B. Employee voluntary deductions. $30 million to $60 million, with each GAAP states that gain
amount in that range considered contingencies should
C. Employee fringe benefits. equally likely. Z was awarded $40 not be recognized in
million in April 2014. Z should report the financial
D. All of the above are correct. this award in its 2013 financial statements until
82. Which of the following situations would not D. All of the statements, issued in March 2014 as: realized. Adequate
require that long-term liabilities be above require disclosure should be
reported as current liabilities on a the current made in the
classified balance sheet? classification. A. A receivable and unearned footnotes but care
revenue of $40 million. should be taken to
avoid misleading
A. The long-term debt is callable by the B. A receivable and revenue of $40 implications as to the
creditor. million. likelihood of
realization of the
B. The creditor has the right to demand C. A disclosure of a gain contingent gain.
payment due to a contractual violation. contingency of $40 million.

C. The long-term debt matures within the D. A disclosure of a gain

upcoming year. contingency of an undetermined
amount in the range of $30 million to
D. All of the above require the current $60 million.
classification.