Question 1

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

Accepted Answer

The midpoint of the range is the best estimate for accrual because it represents the most likely outcome. This is in line with the conservatism principle of accounting, which states that losses should be recognized when they are probable and reasonably estimable but not overstated or understated. Choosing the maximum or minimum of the range could result in overstating or understating the loss, respectively. Choosing zero would be inappropriate as there is a probable loss that needs to be recognized.

Question 2

During 2010, 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, 2010 and 2011 are as follows:  At December 31, 2011, Eaton should report an estimated warranty liability of

Accepted Answer

To calculate the estimated warranty liability at December 31, 2011, we need to consider the sales made in 2010 and 2011, as well as the estimated warranty costs related to these sales.

For the 2010 sales: 
Sales = $500,000 
Warranty costs within 12 months of sale = 2% of $500,000 = $10,000 
Warranty costs in the second 12 months following sale = 4% of $500,000 = $20,000 
Total warranty costs for 2010 sales = $30,000

For the 2011 sales: 
Sales = $700,000 
Warranty costs within 12 months of sale = 2% of $700,000 = $14,000 
Warranty costs in the second 12 months following sale = 4% of $700,000 = $28,000 
Total warranty costs for 2011 sales = $42,000

Therefore, the total estimated warranty liability at December 31, 2011 is: 
$30,000 + $42,000 = $72,000

However, we need to consider the actual warranty expenditures made in 2010 and 2011: 
Actual warranty expenditures in 2010 = $8,000 
Actual warranty expenditures in 2011 = $58,000

Therefore, we need to adjust the total estimated warranty liability by subtracting the actual warranty expenditures: 
$72,000 - $8,000 - $58,000 = $6,000

Thus, the estimated warranty liability at December 31, 2011 is $66,000. Therefore, the correct answer is D.

Question 3

Yount Trading Stamp Co.records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees.Yount's past experience indicates that only 80% of the stamps sold to licensees will be redeemed.Yount's liability for stamp redemptions was $7,500,000 at December 31, 2010.Additional information for 2011 is as follows:  If all the stamps sold in 2011 were presented for redemption in 2011, the redemption cost would be $2,500,000.What amount should Yount report as a liability for stamp redemptions at December 31, 2011?

Accepted Answer

The liability for stamp redemptions at December 31, 2011 should be $6,100,000. This is calculated as follows: 
Liability at December 31, 2010 = $7,500,000 
Add stamps sold during the year = $2,000,000 (since only 80% will be redeemed, this represents $10,000,000 in total stamps sold during the year) 
Less estimated redemptions during the year = $3,400,000 (80% of $4,250,000, which is the total redemption cost for stamps sold prior to 2011) 
Plus actual redemptions during the year = $2,000,000 (since all stamps sold in 2011 were redeemed in 2011) 
= $6,100,000

Question 4

On September 1, 2010, Herman Co.issued a note payable to National Bank in the amount of $1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of $400,000.On this date, the bank's prime rate was 11%.The first payment for interest and principal was made on September 1, 2011.At December 31, 2011, Herman should record accrued interest payable of

Accepted Answer

The answer of On September 1, 2010, Herman Co.issued a...

Question 5

Included in Vernon Corp.'s liability account balances at December 31, 2010, were the following:  Vernon's December 31, 2010 financial statements were issued on March 31, 2011.On January 15, 2011, the entire $600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum.In addition, on March 10, 2011, Vernon consummated a noncancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented.On the December 31, 2010 statement of financial position, the amount of the notes payable that Vernon should classify as short-term obligations is

Accepted Answer

The answer of Included in Vernon Corp.'s liability account balances...

Question 6

Felton 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 $480,000 at December 31, 2010 before year-end adjustment.Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2010.Outstanding service contracts at December 31, 2010 expire as follows:  What amount should be reported as unearned service contract revenues in Felton's December 31, 2010 statement of financial position?

Accepted Answer

The answer of Felton Co.sells major household appliance service contracts...

Question 7

On January 3, 2010, Boyer Corp.owned a machine that had cost $200,000.The accumulated depreciation was $120,000, estimated salvage value was $12,000, and fair value was $320,000.On January 4, 2010, this machine was irreparably damaged by Pine Corp.and became worthless.In October 2010, a court awarded damages of $320,000 against Pine in favor of Boyer.At December 31, 2010, the final outcome of this case was awaiting appeal and was, therefore, uncertain.However, in the opinion of Boyer's attorney, Pine's appeal will be denied.At December 31, 2010, what amount should Boyer accrue for this contingent asset?

Accepted Answer

Contingent assets are not recognized in financial statements until they are virtually certain. Since the outcome of the appeal is uncertain, Boyer should not accrue any amount for the contingent asset.

Question 8

On January 1, 2010, Beyer Co.leased a building to Heins Corp.for a ten-year term at an annual rental of $80,000.At inception of the lease, Beyer received $320,000 covering the first two years' rent of $160,000 and a security deposit of $160,000.This deposit will not be returned to Heins upon expiration of the lease but will be applied to payment of rent for the last two years of the lease.What portion of the $320,000 should be shown as a current and non-current liability, respectively, in Beyer's December 31, 2010 statement of financial position?

Accepted Answer

The answer of On January 1, 2010, Beyer Co.leased a...

Question 9

Edge Company's salaried employees are paid biweekly.Occasionally, advances made to employees are paid back by payroll deductions.Information relating to salaries for the calendar year 2011 is as follows:  At December 31, 2011, what amount should Edge report for accrued salaries payable?

Accepted Answer

The answer of Edge Company's salaried employees are paid biweekly.Occasionally,...

Quiz 13: Current Liabilities, Provisions, and Contingencies

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

Edge Company's salaried employees are paid biweekly.Occasionally, advances made to employees are paid back by payroll deductions.Information relating to salaries for the calendar year 2011 is as follows: At December 31, 2011, what amount should Edge report for accrued salaries payable?