(Test Bank) ACCT 439: Chapter 13: Comlet Paper Graded A+

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Chapter 13 - Current Liabilities and Contingencies Chapter 13 Current Liabilities and Contingencies True / False Questions 1. Some liabilities are not contractual obligations and may not be payable in cash. True False 2. Amounts withheld from employees in connection with payroll often represent liabilities to third parties. True False 3. A customer advance produces a liability that is satisfied when the product or service is provided. True False 4. 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. True False 5. The concept of substance over form influences the classification of obligations expected to be refinanced. True False 6. 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. True False 13-1Chapter 13 - Current Liabilities and Contingencies 7. Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold. True False 8. For a loss contingency to be accrued, the claim must have been made before the accounting period ended. True False 9. A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated. True False 10. A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible. True False 11. Under IFRS, the term "probable" indicates a threshold of probability that is substantially higher than a 50/50 chance. True False 12. Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss. True False 13. The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers. True False 13-2Chapter 13 - Current Liabilities and Contingencies 14. Unlike the Social security tax there is no maximum wage base for the Medicare portion of the FICA tax. True False 15. State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages. True False Matching Questions 16. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. Short-term note Liabilities when received. ____ 2. Warranty liability Confirming event is likely to occur. ____ 3. Advances from customers A loss contingency accrued in the period of related sales. ____ 4. Probable Most common temporary financing arrangement. ____ 5. Secured loan Requires collateral. ____ 17. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. Sales tax payable Due on demand. ____ 2. Callable Contra liability. ____ 3. Accrued liabilities A third party liability. ____ 4. Discount on notes payable Accrues with passage of time. ____ 5. Interest payable Expenses incurred but not yet paid. ____ 13-3Chapter 13 - Current Liabilities and Contingencies 18. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. Noncommitted lines of credit Liabilities until refunded. ____ 2. Gain contingencies More than remote but less than likely. ____ 3. Customer deposits Face amount x rate x time. ____ 4. Reasonably possible Not recorded until realized. ____ 5. Interest paid on debt Informal borrowing agreements. ____ 19. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. Subsequent events Exceeds the stated rate on discounted notes. ____ 2. Unasserted claims May include items that are not legal liabilities. ____ 3. Accounting liabilities Sales of receivables. ____ 4. Factoring Evaluated for recognition only if an unfavorable outcome is probable. ____ 5. Effective interest Occur in the current year before prior year financial statements are issued. ____ 20. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. Noninterest-bearing notes Use accounts receivable as collateral. ____ 2. Committed lines of credit Often require compensating balance. ____ 3. Loss contingencies Only formal credit instrument is the invoice. ____ 4. Pledging arrangements Effective interest higher than stated interest. ____ 5. Accounts payable Recorded if probable and amount is known or reasonably estimable. ____ 13-4Chapter 13 - Current Liabilities and Contingencies 21. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. 1. Disclosure notes Present value of interest plus present value of principal. ____ 2. Commercial paper Required for contingencies. ____ 3. Current liabilities Payable with current assets. ____ 4. Usual valuation of long- term liabilities Short-term debt to be refinanced with long-term bonds payable. ____ 5. Long-term liabilities Avoids registration with SEC. ____ 22. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. 1. Liability A material gain contingent on a future event that appears exceedingly likely. ____ 2. Disclosure note only A penalty assessment that probably will be asserted by the EPA, in which case a determinable payment is probable. ____ 3. Liability Unassessed penalty with a reasonable possibility of being asserted, in which case a determinable payment is probable. ____ 4. Not reported An extremely likely loss due to an event that occurred previously and whose amount is unknown but estimable. ____ 23. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms related to accounting for contingent liabilities under IFRS. Match each phrase with the most correct term by placing the letter designating that term in the space provided. 1. contingent gains are not accrued How present values affect the measurement of contingent liabilities under IFRS. ____ 2. more likely than not Definition of "probable" under IFRS. ____ 3. mid-point of the range how IFRS refers to an accrued liability that would generally be referred to as an "accrued contingent loss" under U.S. GAAP. ____ 4. report at present value whenever time value of money is material The amount IFRS would accrue given a range of equally likely outcomes. ____ 5. provision Treatment of contingent gains under IFRS. ____ 13-5Chapter 13 - Current Liabilities and Contingencies 24. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. 1. Disclosure note only Estimated warranty cost. ____ 2. Not reported A material gain contingent on a future event that appears extremely likely to occur in three months. ____ 3. Current liability Unasserted assessment of penalty that probably will be asserted, in which case there would probably be a loss in six months. ____ 4. Current liability Unasserted assessment of penalty with a reasonable possibility of being asserted, in which case there would probably be a loss in 13 months. ____ 5. Current liability A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months. ____ Essay Questions 25. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. 13-6Chapter 13 - Current Liabilities and Contingencies 26. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. Multiple Choice Questions 27. The most common type of liability is: A. One that comes into existence due to a loss contingency. B. One that must be estimated. C. One that comes into existence due to a gain contingency. D. One to be paid in cash and for which the amount and timing are known. 13-7Chapter 13 - Current Liabilities and Contingencies 28. 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. 29. Which of the following is the best definition of a current liability? 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. 30. Which of the following is not a liability? A. An unused line of credit. B. Estimated income taxes. C. Sales tax collected from customers. D. Advances from customers. 31. Current liabilities normally are recorded at their: A. Present value. B. Cost. C. Maturity amount. D. Expected value. 32. Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of: A. Matching. B. Consistency. C. Materiality. D. Conservatism. 13-8Chapter 13 - Current Liabilities and Contingencies 33. The key accounting considerations relating to accounts payable are: A. Determining their existence and ensuring that they are recorded in the appropriate accounting period. B. Determining their present value and ensuring that they are recorded in the appropriate accounting period. C. Determining their existence and determining the correct amount. D. Determining the present value of the principal and the amount of the interest. 34. Classifying liabilities as either current or long-term helps creditors assess: A. Profitability. B. The relative risk of a firm's liabilities. C. The degree of a firm's liabilities. D. The amount of a firm's liabilities. 35. When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: A. A current liability. B. Revenue. C. Shareholders' equity. D. Paid-in capital. 36. A discount on a noninterest-bearing note payable is classified in the balance sheet as: A. An asset. B. A component of shareholders' equity. C. A contingent liability. D. A contra liability. 37. The rate of interest printed on the face of a note payable is called the: A. Yield rate. B. Effective rate. C. Market rate. D. Stated rate. 13-9Chapter 13 - Current Liabilities and Contingencies 38. 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. 39. On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky's effective interest rate on this loan is: A. More than the stated discount rate of 8%. B. Less than the stated discount rate of 8%. C. Equal to the stated discount rate of 8%. D. Unrelated to the stated discount rate of 8%. 40. Jane's Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this note, Jane's should report interest expense at December 31, 2011, in the amount of: A. $0. B. $24,000. C. $48,000. D. $50,880. 41. What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000? A. 12.4%. B. 12.0 %. C. 11.5%. D. 3.0%. 13-10Chapter 13 - Current Liabilities and Contingencies 42. On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is: A. 9.0%. B. 9.5%. C. 9.6%. D. 9.7%. 43. Universal Travel Inc. borrowed $500,000 on November 1, 2011, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2012. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2011, in the amount of: A. $8,000. B. $30,000. C. $5,000. D. $25,000. 44. Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by Second Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this loan (rounded) is: A. 9.28% B. 9.49% C. 9.50% D. 9.57% 45. Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year? A. $890,000. B. $660,000. C. $555,000. D. $785,000. 13-11Chapter 13 - Current Liabilities and Contingencies 46. On June 1, 2011, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2011? A. $525,000. B. $300,000. C. $495,000. D. $475,000. 47. At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: A. Liabilities until the product or service is provided. B. A component of shareholders' equity. C. Long-term assets until the product or service is provided. D. Revenue upon receipt of the advance payment. 48. M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2011, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2011. M's employees earn an average of $150 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is M required to report? A. $0. B. $30,000. C. $225,000. D. $450,000. 13-12Chapter 13 - Current Liabilities and Contingencies 49. Which of the following generally is associated with accounts payable? A. Option A B. Option B C. Option C D. Option D 50. Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2011 is as follows ($ in millions): What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2011, balance sheet? A. $0. B. $80. C. $125. D. $170. 51. All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party? A. Sales tax payable. B. Customer deposits. C. Employee insurance deductions. D. Social security taxes deductions. 13-13Chapter 13 - Current Liabilities and Contingencies 52. When a deposit on returnable containers is forfeited, the firm holding the deposit will experience: A. A decrease in cost of goods sold. B. An increase in current liabilities. C. An increase in accounts receivable. D. An increase in revenue. 53. B Corp. has an employee benefit plan for compensated absences that gives employees 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, 2011, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B's employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report? A. $60,000. B. $84,000. C. $90,000. D. $144,000. 54. On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G's employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G's 2012 wages expense related to 2011 vacation time? A. $0 B. $20,000 C. $400,000 D. $420,000 13-14Chapter 13 - Current Liabilities and Contingencies 55. Revenue associated with gift card sales should be recognized: A. When the gift card is sold. B. No later than the last day of the operating period in which the gift card is delivered to the customer. C. When the probability of gift card redemption is viewed as remote. D. Under no circumstances, as gift cards are not themselves a delivered product, but rather a selling technique. 56. All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? A. Large increase, because unearned revenue becomes revenue when revenue is earned. B. Large decrease, because unearned revenue implies that less revenue has been earned, which reduces future revenue. C. No effect, because unearned revenue is a liability, so payment will use assets rather than providing revenue. D. Large decrease, because unearned revenue indicates collection problems that will reduce net revenues in future periods. 57. Peterson Photoshop sold $1000 of gift cards on a special promotion on October 15, 2011, and sold $1500 of gift cards on another special promotion on November 15, 2011. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2011, Peterson would show an unearned revenue account for their gift cards with a balance of: A. $0. B. $1000. C. $1350. D. $1500. 58. When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: 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. 13-15Chapter 13 - Current Liabilities and Contingencies 59. Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2011. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture? A. $0. B. $2,000. C. $10,000. D. $14,400. 60. In May of 2011, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2011, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2011 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2011, balance sheet of: A. $770,000. B. $900,000. C. $970,000. D. $1,170,000. 61. Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2011. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits? A. $0. B. $7,500. C. $9,000. D. $45,000. 62. Which of the following is not a current liability? A. Accounts payable. B. A note payable due in 2 years. C. Accrued interest payable. D. Sales tax payable. 13-16Chapter 13 - Current Liabilities and Contingencies 63. Short-term obligations can be reported as long-term liabilities if: A. The firm has a long-term line of credit. B. The firm has tentative plans to issue long-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. 64. Of the following, which typically would not be classified as a current liability? A. Estimated liability from cash rebate program. B. A long-term note payable maturing within the coming year. C. Rent revenue received in advance. D. A six-month bank loan to be paid with the proceeds from the sale of common stock. 65. Large, highly rated firms sometimes sell commercial paper: A. To borrow funds at a lower rate than through a bank. B. To earn a profit on the paper. C. To avoid paperwork. D. Because the interest rate is locked in by the Federal Reserve Board. 66. Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? A. The long-term debt is callable by the creditor. B. The creditor has the right to demand payment due to a contractual violation. C. The long-term debt matures within the upcoming year. D. All of the above require the current classification. 67. A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt A. is callable by the creditor. B. is secured by adequate collateral. C. will be refinanced with stock. D. will be refinanced with debt. 13-17Chapter 13 - Current Liabilities and Contingencies 68. On December 31, 2011, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet? A. $0 B. $500,000 C. $1,000,000 D. $1,500,000 69. Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under A. US GAAP. B. IFRS. C. Either U.S. GAAP and IFRS. D. Neither U.S. GAAP and IFRS. 70. Kline Company refinanced current debt as long-term debt on January 5, 2012. Kline's fiscal year ended on December 31, 2011, and its financial statements will be issued sometime in early March, 2012. Under IFRS, how would Kline classify the debt on its December 31, 2011 balance sheet? A. In the "mezzanine" between current and non-current liabilities. B. Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances. C. As a noncurrent liability. D. As a current liability. 13-18Chapter 13 - Current Liabilities and Contingencies 71. Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2012. At December 31, 2011, Branch signed an agreement with First Bank to 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, 2011, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2011, balance sheet, Branch should classify the notes as follows: A. $15,000,000 long-term and $3,000,000 current liabilities. B. $4,500,000 short-term and $13,500,000 current liabilities. C. $18,000,000 of current liabilities. D. $18,000,000 of long-term liabilities. 72. Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report: A. Higher working capital and a higher inventory turnover. B. Lower working capital and a higher current ratio. C. Higher working capital and a higher current ratio. D. Higher working capital and a lower debt to equity ratio. 73. Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: A. Only if the amount is known. B. Only if the amount is known or reasonably estimable. C. Unless the amount is not reasonably estimable. D. Even if the amount is not reasonably estimable. 74. Gain contingencies usually are recognized in a company's income statement when: A. Realized. B. The amount can be reasonably estimated. C. The gain is reasonably possible and the amount can be reasonable estimated. D. The gain is probable and the amount can be reasonably estimated. 13-19Chapter 13 - Current Liabilities and Contingencies 75. A company should accrue a loss contingency only if the likelihood that a liability has been incurred is: A. More likely than not and the amount of the loss is known. B. At least reasonably possible and the amount of the loss is known. C. At least reasonably possible and the amount of the loss can be reasonably estimated. D. Probable and the amount of the loss can be reasonably estimated. 76. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: A. The likelihood of a loss is remote. B. The incurrence of a loss is reasonably possible. C. The incurrence of a loss is more likely than not. D. The likelihood of a loss is probable. 77. 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. 78. A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is: A. at least remotely possible and the amount of the loss is known. B. reasonably possible and the amount of the loss is known. C. reasonably possible and the amount of the loss can be reasonably estimated. D. probable and the amount of the loss can be reasonably estimated. 13-20Chapter 13 - Current Liabilities and Contingencies 79. Paul Company issues a product recall due to an apparently pre-existing 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: A. To disclose it in a footnote. B. To accrue a long-term liability. C. To accrue the liability and explain it in a footnote. D. To do nothing relative to the contingency. 80. Accounting for costs of incentive programs for customer purchases: A. Requires probability estimation. B. Follows the matching principle. C. Is a loss contingency situation. D. All of the above are correct. 81. Providing a monetary rebate program for purchasing a product: A. Is accounted for similarly to product warranties. B. Creates an expense for the seller in the period of sale. C. Creates a contingent liability for the seller at the time of sale. D. All of the above are correct. 82. The main difference between accounting for rebate and cash discount coupons is: A. The latter is not treated as an expense. B. Only the former creates a contingent liability when issued. C. The expense for the latter is usually deferred until redemption of the coupon. D. There are no significant differences in accounting between the two. 83. Which of the following entail essentially the same accounting treatment? A. Coupons for cash rebates and coupons for other premiums B. Cents-off coupons and coupons for other premiums C. Cents-off coupons and coupons for cash rebates D. All of the above are correct. 13-21Chapter 13 - Current Liabilities and Contingencies 84. Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, 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. 85. Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the 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. 86. Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, 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. 87. Z Co. filed suit against W, Inc. in 2011 seeking damages for patent infringement. At December 31, 2011, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2012. Z should report this award in its 2011 financial statements, issued in March, 2012 as A. A receivable and unearned revenue of $40 million. B. A receivable and revenue of $40 million. C. A disclosure of a gain contingency of $40 million. D. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million. 13-22Chapter 13 - Current Liabilities and Contingencies 88. When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be: A. Reported in the income statement and disclosed. B. Offset against shareholders' equity. C. Disclosed, but not recognized in the income statement. D. Neither recognized in the income statement nor disclosed. 89. 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. 90. 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. When the premiums are claimed. 91. The accounting concept that requires recognition of a liability for customer premium offers is A. Periodicity. B. Conservatism. C. Historical cost. D. The matching principle. 92. Accounting for costs of incentive programs for frequent customer purchases involves: A. Recording an expense and a liability each period. B. Recording a liability and a reduction of revenue each period. C. Recording an expense and an asset reduction each period. D. Recording an expense and revenue each period. 13-23Chapter 13 - Current Liabilities and Contingencies 93. A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer 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: A. $0. B. $1,000,000. C. $2,000,000. D. $3,000,000. 94. A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer 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 IFRS, Razor should accrue a liability in the amount of: A. $0. B. $1,000,000. C. $2,000,000. D. $3,000,000. 95. V olt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with V olt. Based on prior experience, warranty costs are estimated to be $25 per item sold. V olt should recognize these warranty costs: A. When the equipment is sold. B. When the repairs are performed. C. When payments are made to the service firm. D. Evenly over the life of the warranty. 13-24Chapter 13 - Current Liabilities and Contingencies 96. Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2011, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2011, income statement? A. $0. B. $400,000. C. $800,000. D. $1,200,000. 97. Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 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 2011, 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, 2011, balance sheet? A. $0. B. $150,000. C. $300,000. D. $450,000. 98. At the beginning of 2011, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2011 were $180 million. Fifteen percent of the units sold were returned in 2011 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2011 income statement is: A. $5.3 million. B. $7.2 million. C. $10.6 million. D. $27.0 million. 13-25