Intermediate Accounting Kieso 16e Test Bank 13.3
141. Roasten Corp.'s payroll for the pay period ended October 31, 2018 is summarized as follows:
Federal Amount of Wages Subject
Department Total Income Tax to Payroll Taxes
Payroll Wages Withheld F.I.C.A. Unemployment
Factory $ 75,000 $ 9,000 $70,000 $32,000
Sales 22,000 3,000 16,000 2,000
Office 18,000 2,000 8,000 —
$115,000 $14,000 $94,000 $34,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee 8% each
Unemployment 3%
What amount should Roasten accrue as its share of payroll taxes in its October 31, 2018 balance sheet?
a. $22,540.
b. $15,020.
c. $10,220.
d. $8,540.
142. Yurman Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $960,000 at December 31, 2016 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $240,000 at December 31, 2016. Outstanding service contracts at December 31, 2016 expire as follows:
During 2017 During 2018 During 2019
$200,000 $320,000 $140,000
What amount should be reported as unearned service contract revenues in Yurman's December 31, 2016 balance sheet?
a. $720,000.
b. $660,000.
c. $480,000.
d. $440,000.
143. Core Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Core's past experience indicates that only 75% of the stamps sold to licensees will be redeemed. Core's liability for stamp redemptions was $7,500,000 at December 31, 2017. Additional information for 2018 is as follows:
Stamp service revenue from stamps sold to licensees $6,000,000
Cost of redemptions 4,980,000
If all the stamps sold in 2018 were presented for redemption in 2019, the redemption cost would be $4,500,000. What amount should Core report as a liability for stamp redemptions at December 31, 2018?
a. $12,480,000.
b. $8,520,000.
c. $5,895,000.
d. $7,020,000.
144. Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be
a. zero.
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.
145. During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2017 and 2018 are as follows:
Actual Warranty
Sales Expenditures
2017 $ 800,000 $12,000
2018 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2018, (assuming the accrual method) Eaton should report an estimated warranty liability of
a. $0.
b. $25,000.
c. $35,000.
d. $61,000.
146. In March 2018, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2018, no claims had yet been asserted against Kirk. However, Kirk's management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $5,000,000 would be a reasonable estimate of the damages. Kirk's $6,000,000 comprehensive public liability policy contains a $500,000 deductible clause. In Kirk's December 31, 2017 financial statements, for which the auditor's fieldwork was completed in April 2018, how should this casualty be reported?
a. As a note disclosing a possible liability of $5,000,000.
b. As an accrued liability of $500,000.
c. As a note disclosing a possible liability of $500,000.
d. No note disclosure of accrual is required for 2017 because the event occurred in 2018.
BRIEF EXERCISES
BE. 13-147—Notes payable.
On August 31, Latty Co. partially refunded $900,000 of its outstanding 10% note payable made one year ago to Dugan State Bank by paying $900,000 plus $90,000 interest, having obtained the $990,000 by using $262,000 cash and signing a new one-year $800,000 note discounted at 9% by the bank.
Instructions
(1) Make the entry to record the partial refunding. Assume Latty Co. makes reversing entries when appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.
BE. 13-148—Payroll entries.
Total payroll of Walnut Co. was $2,760,000, of which $480,000 represented amounts paid in excess of $118,500 to certain employees. The amount paid to employees in excess of $7,000 was $2,160,000. Income taxes withheld were $675,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee’s salaries and wages to $118,500 and 1.45% in excess of $118,500.
Instructions
(a) Prepare the journal entry for the salaries and wages paid.
(b) Prepare the entry to record the employer payroll taxes.
EXERCISES
Ex. 13-149—Compensated absences.
Snow Co. began operations on January 2, 2017. It employs 15 people who work 8-hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The average hourly wage rate was $24.00 in 2017 and $25.50 in 2018. The average vacation days used by each employee in 2018 was 9. Snow Co. accrues the cost of compensated absences at rates of pay in effect when earned.
Instructions
Prepare journal entries to record the transactions related to paid vacation days during 2017 and 2018.
Ex. 13-150—Contingent liabilities.
Below are three independent situations.
1. In August, 2018 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2018. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount.
3. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.
Instructions
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.
Ex. 13-151—Premiums.
Irwin Music Shop gives its customers coupons redeemable for a poster plus a Bo Diddley CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $6.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 420,000. Sales for the second period were $840,000, and the coupons redeemed totaled 750,000. Irwin Music Shop bought 20,000 posters at $2.50/poster and 20,000 CDs at $7.50/CD.
Instructions
Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period.
Entry Period 1 Period 2
(a) To record coupons redeemed
———————————————————————————————————————————
(b) To record estimated liability
———————————————————————————————————————————
Ex. 13-152—Premiums.
Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.50 each. Sterling's experience indicates that 60 percent of the coupons will be redeemed. During 2017, 150,000 bags of dog food were sold, 18,000 toys were purchased, and 60,000 coupons were redeemed. During 2018, 180,000 bags of dog food were sold, 24,000 toys were purchased, and 90,000 coupons were redeemed.
Instructions
Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2017 and 2018.
PROBLEMS
Pr. 13-153—Accounts and Notes Payable.
Described below are certain transactions of Lamar Company for 2018:
1. On May 10, the company purchased goods from Fox Company for $75,000, terms 2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18.
2. On June 1, the company purchased equipment for $150,000 from Rao Company, paying $50,000 in cash and giving a one-year, 9% note for the balance.
3. On September 30, the company discounted at 10% its $300,000, one-year zero-interest-bearing note at Virginia State Bank.
Instructions
(a) Prepare the journal entries necessary to record the transactions above using appropriate dates.
(b) Prepare the adjusting entries necessary at December 31, 2018 in order to properly report interest expense related to the above transactions. Assume straight-line amortization of discounts.
(c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Lamar Company's December 31, 2018 balance sheet.
Pr. 13-154—Refinancing of short-term debt.
At the financial statement date of December 31, 2017, the liabilities outstanding of Pollard Corporation included the following:
1. Cash dividends on common stock, $50,000, payable on January 15, 2018.
2. Note payable to Wabaso State Bank, $470,000, due January 20, 2018.
3. Serial bonds, $1,800,000, of which $450,000 mature during 2018.
4. Note payable to Orlando National Bank, $300,000, due January 27, 2018.
The following transactions occurred early in 2018:
January 15: The cash dividends on common stock were paid.
January 20: The note payable to Wabaso State Bank was paid.
January 25: The corporation entered into a financing agreement with Wabaso State Bank, enabling it to borrow up to $500,000 at any time through the end of 2020. Amounts borrowed under the agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from the date of the loan. The corporation immediately borrowed $400,000 to replace the cash used in paying its January 20 note to the bank.
January 26: 40,000 shares of common stock were issued for $350,000. $300,000 of the proceeds was used to liquidate the note payable to Orlando National Bank.
February 1: The financial statements for 2017 were issued.
Instructions
Prepare a partial balance sheet for Pollard Corporation, showing the manner in which the above liabilities should be presented at December 31, 2017. The liabilities should be properly classified between current and long-term, and appropriate note disclosure should be included.
Pr. 13-155—Premiums.
Kane Candy Company offers a coffee mug as a premium for every ten $1 candy bar wrappers presented by customers together with $2. The purchase price of each mug to the company is $2.40; in addition it costs $1.60 to mail each mug. The results of the premium plan for the years 2017 and 2018 are as follows (assume all purchases and sales are for cash):
2017 2018
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
Wrappers redeemed 2,800,000 4,200,000
2017 wrappers expected to be redeemed in 2018 2,000,000
2018 wrappers expected to be redeemed in 2019 2,700,000
Instructions
(a) Prepare the general journal entries that should be made in 2017 and 2018 related to the above plan by Kane Candy.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the Kane Candy Company balance sheet and income statement at the end of 2017 and 2018.
Pr. 13-156—Warranties.
Merritt Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 1,200 computers.
Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor per unit.
(Assume sales all occur at December 31, 2017.)
In 2018, Merritt incurred actual warranty costs relative to 2017 computer sales of $16,000 for parts and $24,000 for labor.
Instructions
(a) Record give the entries to reflect the above transactions (accrual method) for 2017 and 2018.
(b) The transactions of part (a) create what balance under current liabilities in the 2017 balance sheet?
IFRS QUESTIONS
True / False Questions
1. Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued.
2. For purposes of recognizing a provision “probable” is defined as more likely than not
3. A provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement.
4. IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company`s chance of losing a lawsuit.
5. Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible.
6. A company can exclude a short-term obligation from current liabilities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.
7. Provisions are only recorded if it is likely that the company will have to settle an obligation at some point in the future.
8. An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.
9. Contingent assets are not reported in the statement of financial position.
10. IFRS uses the term “contingent” for assets and liabilities not recognized in the financial statement.
Multiple Choice:
11. Under IFRS, which of the following is used to measure a liability, if a range of estimates is predicted and no amount in the range is more likely than any other amount in the range?
a. Minimum of the range
b. Maximum of the range
c. Mid-point of the range
d. Average of the range
12. Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent if the refinancing is completed:
a. by the financial reporting date.
b. by issue date of the financial statement.
c. either by the financial statement date or before the date the financial statement is issued.
d. after the maturity date of the obligation.
13. Examples of contingent assets include all of the following except:
a. unrealized gain on the sale of investments.
b. pending lawsuit with a probable favorable outcome.
c. possible refunds from the government in tax disputes.
d. promise of land to be donated by city as an enticement to move manufacturing facilities.
14. Contingent assets need not be disclosed in the financial statements or in the notes if they are:
a. virtually certain to occur.
b. probable to occur.
c. likely to occur.
d. possible but not probable to occur.
15. For which of the following areas a provision may be recognized in the financial statement?
a. Possibility of war
b. Business recession
c. Warranties
d. Strike
