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Determine amount to accrue as a loss contingency.

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CHAPTER CURRENT LIABILITIES AND CONTINGENCIES;TRUE-FALSE Conceptual Answer F F T T F F T F T F T F T F T T F F F T No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Description Zero-interest-bearing note payable. Dividends in arrears. Examples of unearned revenues. Reporting discount on Notes Payable. Currently maturing long-term debt. Excluding short-term debt refinanced. Accounting for sales tax collected. Accounting for sick pay. Social security taxes as liabilities. Definition of accumulation rights. Recognizing compensated absences expense. Accruing estimated loss contingency. Disclosing gain contingencies. Sales-type warranty profit. Fair value of asset retirement obligation. Reporting a litigation liability. Expense warranty approach. Acid-test ratio components. Affect on current ratio. Reporting current liabilities. MULTIPLE CHOICE Conceptual Answer d d a a b d c d c d c d d d d a No. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Description Definition of a liability. Nature of current liabilities. Recording of accounts payable. Classification of notes payable. Classification of discounts on notes payable. Identify current liability. Bonds reported as current liability. Identify item which is not a current liability. Dividends reported as current liability. Classification of stock dividends distributable. Identify item which is not a current liability. Identify current liability. Short-term obligations expected to be refinanced. Ability to consummate refinancing of short-term obligations. Determine what is a liability. Classification of sales taxes. 13 - 2 Test Bank for Intermediate Accounting, Twelfth Edition MULTIPLE CHOICE Conceptual (cont.) Answer d b d d d c d d d b a c d b c c c a b d d c a d d d P S No. S S Description Disclosure for short-term debt refinanced. Vested rights vs. accumulated rights. Deductions in computing net pay. Employer's payroll tax expense. Accrual of a liability for compensated absences. Accrual of a liability for compensated absences. Accrual of a liability for compensated absences. Disclosure of a gain contingency. Disclosure of contingencies. Accrual of loss contingency. Litigation and loss contingencies. Accrual of a contingent liability. Source of a contingent liability. Asset retirement obligation. Asset retirement obligation. Classification of warranty liability. Liability accrual due to governmental action. Accrual of product warranties. Determining loss amount to report. Reporting lawsuit loss and liability. Accrual method for warranty costs. Presentation of current liabilities. Current ratio formula. Disclosure of accrued liabilities. Acid-test ratio elements. Methods of calculating employee bonuses. 37. 38. P 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. P 55. S 56. S 57. S 58. P 59. 60. 61. *62. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. MULTIPLE CHOICE Computational Answer b d b d b b c a a d d c c c No. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. Description Adjusting entry involving discount on short-term note payable. Calculate effective interest on discounted note. Determine amount of short-term debt to be reported. Determine amount of short-term debt to be reported. Calculate sales taxes for the month. Calculate amount of sales taxes payable. Determine amount of sales subject to sales tax. Short-term debt to be excluded. Short-term debt to be excluded. Federal/state unemployment taxes. Federal/state unemployment taxes. Vacation liability accrual. Vacation liability accrual. Calculate payroll tax expense. Current Liabilities and Contingencies 13 - 3 MULTIPLE CHOICE Computational (cont.) Answer d a b d a b d d b d b d d d b d a d b c c c b No. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. *97. *98. *99. Description Calculation of vacation expense to be recognized. Calculation of accrued liability to be recognized for compensated balances. Calculate rebate expense and liability. Asset retirement obligation. Calculate insurance expense and loss. Calculate rebate expense and liability. Asset retirement obligation. Calculate warranty liability. Calculate liability for premiums. Calculate warranty liability. Calculate liability for premiums. Determine premiums expense for the year. Calculate estimated liability for premiums. Calculate estimated liability for premiums. Determine amount to accrue as a loss contingency. Accrue warranty expense for the year. Calculate warranty liability. Determine amount to accrue as a gain contingency. Calculate liability for unredeemed coupons. Calculate the quick (acid-test) ratio. Calculate amount of bonus to be recognized. Calculate amount of bonus to be recognized. Calculate amount of bonus to be recognized. MULTIPLE CHOICE CPA Adapted Answer a b c d a d b c d d c No. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. Description Knowledge of accounts payable. Determine current and long-term portions of debt. Determine accrued interest payable. Determine amount of short-term debt to be reported. Calculate accrued salaries payable. Accrual of payroll taxes. Calculate unearned service contract revenue. Determine liability from unredeemed trading stamps. Determine range of loss accrual. Calculate the estimated warranty liability. Disclosure of a casualty claim. EXERCISES Item E13-111 E13-112 E13-113 E13-114 E13-115 E13-116 *E13-117 Description Notes payable. Payroll entries. Compensated absences. Contingent liabilities. Premiums. Premiums. Bonus calculation. 13 - 4 Test Bank for Intermediate Accounting, Twelfth Edition PROBLEMS Item P13-118 P13-119 P13-120 P13-121 Description Accounts and notes payable. Refinancing of short-term debt. Premiums. Warranties. CHAPTER LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. *7. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short-term debt expected to be refinanced. Identify types of employee-related liabilities. Identify the criteria used to account for and disclose gain and loss contingencies. Explain the accounting for different types of loss contingencies. Indicate how to present and analyze liabilities and contingencies. Compute employee bonuses under differing arrangements. Current Liabilities and Contingencies 13 - 5 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 50. 51. 18. 19. 62. Note: Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC TF TF MC Item 21. 22. 23. 24. 33. 34. 35. 35. 38. P 39. 40. S Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC TF MC MC Item 25. 26. 27. 28. 36. 37. 65. Type Item Type Item Type MC MC MC MC MC MC MC MC MC MC MC MC E MC MC MC MC MC MC P P E Item 102. 111. 118. Type MC E P Item Type S 41. 42. 43. 72. 45. 46. 79. 80. 81. 82. 83. 84. P 35. 44. 52. 53. 54. P 55. S 56. S 57. 20. 58. 97. S 59. 60. 98. Learning Objective 1 MC 29. MC 63. MC 30. MC 64. MC 31. MC 100. MC 32. MC 101. Learning Objective 2 MC 66. MC 69. MC 67. MC 70. MC 68. MC 71. Learning Objective 3 MC 73. MC 77. MC 74. MC 78. MC 75. MC 104. MC 76. MC 105. Learning Objective 4 MC 47. MC 49. MC 48. MC 114. Learning Objective 5 MC 85. MC 91. MC 86. MC 92. MC 87. MC 93. MC 88. MC 94. MC 89. MC 95. MC 90. MC 106. Learning Objective 6 MC 61. MC 118. MC 96. MC 119. Learning Objective *7 MC 99. MC 117. E = Exercise P = Problem 103. 119. MC P 112. 113. E E 107. 108. 109. 110. 115. 116. 120. MC MC MC MC E E P 120. 121. P P TF = True-False MC = Multiple Choice 13 - 6 Test Bank for Intermediate Accounting, Twelfth Edition TRUE-FALSE Conceptual 1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized. 2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability. 3. Magazine subscriptions and airline ticket sales both result in unearned revenues. 4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet. 5. All long-term debt maturing within the next year must be classified as a current liability on the balance sheet. 6. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis. 7. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale. 8. A company must accrue a liability for sick pay that accumulates but does not vest. 9. Companies report the amount of social security taxes withheld from employees as well as the companies matching portion as current liabilities until they are remitted. 10. Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment. 11. Companies should recognize the expense and related liability for compensated absences in the year earned by employees. 12. Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred. 13. A company discloses gain contingencies in the notes only when a high probability exists for realizing them. 14. The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold. 15. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability. 16. The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements. 17. Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty. Current Liabilities and Contingencies 13 - 7 18. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio. 19. Paying a current liability with cash will always reduce the current ratio. 20. Current liabilities are usually recorded and reported in financial statements at their full maturity value. True-False Answers Conceptual Item 1. 2. 3. 4. 5. Ans. F F T T F Item 6. 7. 8. 9. 10. Ans. F T F T F Item 11. 12. 13. 14. 15. Ans. T F T F T Item 16. 17. 18. 19. 20. Ans. T F F F T MULTIPLE CHOICE Conceptual 21. Liabilities are a. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles. c. obligations to transfer ownership shares to other entities in the future. d. obligations arising from past transactions and payable in assets or services in the future. Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these Which of the following is true about accounts payable? 1. Accounts payable should not be reported at their present value. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used. a. b. c. d. 1 2 3 Both 2 and 3 are true. 22. 23. 13 - 8 24. Test Bank for Intermediate Accounting, Twelfth Edition Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as a. current liabilities. b. deferred charges. c. long-term liabilities. d. intermediate debt. Which of the following is not true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d. All of these are true. Which of the following may be a current liability? a. Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue d. All of these Which of the following items is a current liability? a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months. b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. Which of the following should not be included in the current liabilities section of the balance sheet? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these are included Which of the following is a current liability? a. Preferred dividends in arrears b. A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders d. All of these Stock dividends distributable should be classified on the a. income statement as an expense. b. balance sheet as an asset. c. balance sheet as a liability. d. balance sheet as an item of stockholders' equity. 25. 26. 27. 28. 29. 30. Current Liabilities and Contingencies 31. 13 - 9 Of the following items, the only one which should not be classified as a current liability is a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced. d. unearned revenues. An account which would be classified as a current liability is a. dividends payable in the company's stock. b. accounts payable debit balances. c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage. d. none of these. Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. d. None of these. The ability to consummate the refinancing of a short-term obligation may be demonstrated by a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued. b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis. c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued. d. all of these. Which of the following statements is false? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. b. Cash dividends should be recorded as a liability when they are declared by the board of directors. c. Under the cash basis method, warranty costs are charged to expense as they are paid. d. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority. Which of the following is not a correct statement about sales taxes? a. Sales taxes are an expense of the seller. b. Many companies record sales taxes in the sales account. c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate. d. All of these are true. 32. 33. 34. 35. 36. 13 - 10 Test Bank for Intermediate Accounting, Twelfth Edition S 37. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except a. a general description of the financing arrangement. b. the terms of the new obligation incurred or to be incurred. c. the terms of any equity security issued or to be issued. d. the number of financing institutions that refused to refinance the debt, if any. In accounting for compensated absences, the difference between vested rights and accumulated rights is a. vested rights are normally for a longer period of employment than are accumulated rights. b. vested rights are not contingent upon an employee's future service. c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. d. vested rights carry a stipulated dollar amount that is owed to the employee, accumulated rights do not represent monetary compensation. An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's a. portion of FICA taxes, and unemployment taxes. b. and employer's portion of FICA taxes, and unemployment taxes. c. portion of FICA taxes, unemployment taxes, and any voluntary deductions. d. portion of FICA taxes, and any voluntary deductions. Which of these is not included in an employer's payroll tax expense? a. F.I.C.A. (social security) taxes b. Federal unemployment taxes c. State unemployment taxes d. Federal income taxes Which of the following is a condition for accruing a liability for the cost of compensation for future absences? a. The obligation relates to the rights that vest or accumulate. b. Payment of the compensation is probable. c. The obligation is attributable to employee services already performed. d. All of these are conditions for the accrual. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a. be accrued during the period when the compensated time is expected to be used by employees. b. be accrued during the period following vesting. c. be accrued during the period when earned. d. not be accrued unless a written contractual obligation exists. S 38. P 39. 40. 41. 42. Current Liabilities and Contingencies 43. The amount of the liability for compensated absences should be based on 13 - 11 1. the current rates of pay in effect when employees earn the right to compensated absences. 2. the future rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future periods. a. b. c. d. 44. 1. 2. 3. Either 1 or 2 is acceptable. Which of the following is the proper way to report a gain contingency? a. As an accrued amount. b. As deferred revenue. c. As an account receivable with additional disclosure explaining the nature of the contingency. d. As a disclosure only. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto? a. Probable losses not reasonably estimable b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others d. All of these must be disclosed. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? a. Amount of loss is reasonably estimable and event occurs infrequently. b. Amount of loss is reasonably estimable and occurrence of event is probable. c. Event is unusual in nature and occurrence of event is probable. d. Event is unusual in nature and event occurs infrequently. Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007 financial statements should include the following related to the incident: a. recognition of a loss and creation of a liability for the value of the land. b. recognition of a loss only. c. creation of a liability only. d. disclosure in note form only. A contingency can be accrued when a. it is certain that funds are available to settle the disputed amount. b. an asset may have been impaired. c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred. d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated. 45. 46. 47. 48. 13 - 12 Test Bank for Intermediate Accounting, Twelfth Edition 49. A contingent liability a. definitely exists as a liability but its amount and due date are indeterminable. b. is accrued even though not reasonably estimated. c. is not disclosed in the financial statements. d. is the result of a loss contingency. To record an asset retirement obligation (ARO), the cost associated with the ARO is a. expensed. b. included in the carrying amount of the related long-lived asset. c. included in a separate account. d. none of these. A company is legally obligated for the costs associated with the retirement of a long-lived asset a. only when it hires another party to perform the retirement activities. b. only if it performs the activities with its own workforce and equipment. c. whether it hires another party to perform the retirement activities or performs the activities itself. d. when it is probable the asset will be retired. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty a. should be reported as long-term. b. should be reported as current. c. should be reported as part current and part long-term. d. need not be disclosed. Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition b. Note disclosure only c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000 Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be a. accrued. b. disclosed but not accrued. c. neither accrued nor disclosed. d. classified as an appropriation of retained earnings. 50. 51. 52. 53. 54. Current Liabilities and Contingencies P 13 - 13 55. Mayberry Co. has a loss contingency to accrue. The loss amount 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 amount of loss accrual should be a. zero. b. the minimum of the range. c. the mean of the range. d. the maximum of the range. Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and a. the Marx Company admits guilt. b. the court will decide the case within one year. c. the damages appear to be material. d. the cause for action occurred during the accounting period covered by the financial statements. Use of the accrual method in accounting for product warranty costs a. is required for federal income tax purposes. b. is frequently justified on the basis of expediency when warranty costs are immaterial. c. finds the expense account being charged when the seller performs in compliance with the warranty. d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale. Which of the following is not acceptable treatment for the presentation of current liabilities? a. Listing current liabilities in order of maturity b. Listing current liabilities according to amount c. Offsetting current liabilities against assets that are to be applied to their liquidation d. Showing current liabilities immediately below current assets to obtain a presentation of working capital The ratio of current assets to current liabilities is called the a. current ratio. b. acid-test ratio. c. current asset turnover ratio. d. current liability turnover ratio. Accrued liabilities are disclosed in financial statements by a. a footnote to the statements. b. showing the amount among the liabilities but not extending it to the liability total. c. an appropriation of retained earnings. d. appropriately classifying them as regular liabilities in the balance sheet. The numerator of the acid-test ratio consists of a. total current assets. b. cash and marketable securities. c. cash and net receivables. d. cash, marketable securities, and net receivables. S 56. S 57. S 58. P 59. 60. 61. 13 - 14 Test Bank for Intermediate Accounting, Twelfth Edition *62. Which of the following is not a permissible method of calculating a bonus to an employee? a. The bonus is based on income before deductions for the bonus and income taxes. b. The bonus is based on income after deduction of the bonus but before deduction of income taxes. c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible. Multiple Choice Answers Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. 22. 23. 24. 25. 26. d d a a b d 27. 28. 29. 30. 31. 32. c d c d c d 33. 34. 35. 36. 37. 38. d d d a d b 39. 40. 41. 42. 43. 44. d d d c d d 45. 46. 47. 48. 49. 50. d b a c d b 51. 52. 53. 54. 55. 56. c c c a b d 57. 58. 59. 60. 61. *62. d c a d d d Solutions to those Multiple Choice questions for which the answer is none of these. 22. A long-term debt maturing currently to be paid with current assets is a current liability. 32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities. 33. The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities. MULTIPLE CHOICE Computational 63. Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 2007 for the purchase of $150,000 of inventory. The face value of the note was $152,205. Assuming Edson used a Discount on Note Payable account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2007 will include a a. debit to Discount on Note Payable for $735. b. debit to Interest Expense for $1,470. c. credit to Discount on Note Payable for $735. d. credit to Interest Expense for $1,470. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 10% is a. 10.87%. b. 10%. c. 9.09%. d. 11.11%. 64. Current Liabilities and Contingencies 65. 13 - 15 On February 10, 2007, after issuance of its financial statements for 2006, Flynn Company entered into a financing agreement with Lebo Bank, allowing Flynn Company to borrow up to $4,000,000 at any time through 2009. Amounts borrowed under the agreement bear interest at 2% above the bank's prime interest rate and mature two years from the date of loan. Flynn Company presently has $1,500,000 of notes payable with First National Bank maturing March 15, 2007. The company intends to borrow $2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires Flynn to maintain a working capital level of $6,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of Flynn Company as of the December 31, 2007 balance sheet date is a. $0. b. $1,500,000. c. $2,000,000. d. $4,000,000. On December 31, 2006, Frye Co. has $2,000,000 of short-term notes payable due on February 14, 2007. On January 10, 2007, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $1,500,000 at one percent above the prime rate for three years. On February 2, 2007, Frye borrowed $1,200,000 from County Bank and used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2006 balance sheet which is issued on March 5, 2007 is a. $0. b. $300,000. c. $500,000. d. $800,000. 66. Use the following information for questions 67 and 68. Raney Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales tax collected. Raney Co. records the sales tax in the Sales account. The amount recorded in the Sales account during May was $148,400. 67. The amount of sales taxes (to the nearest dollar) for May is a. $8,726. b. $8,400. c. $8,904. d. $9,438. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is a. $8,551. b. $8,232. c. $8,726. d. $9,249. 68. 13 - 16 Test Bank for Intermediate Accounting, Twelfth Edition 69. Trent, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2007, Trent remitted $81,480 tax to the state tax division for March 2007 retail sales. What was Trent 's March 2007 retail sales subject to sales tax? a. $1,629,600. b. $1,596,000. c. $1,680,000. d. $1,645,000. Holbert Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? a. $1,500,000 b. $2,500,000 c. $1,000,000 d. $0 Grogan Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 60,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? a. $1,200,000 b. $1,800,000 c. $600,000 d. $0 Timmons Co., which has a taxable payroll of $500,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Timmons Co.? a. $58,500 b. $41,000 c. $20,000 d. $14,000 Unruh Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Unruh Co.? a. $46,800 b. $32,800 c. $16,000 d. $11,200 70. 71. 72. 73. Current Liabilities and Contingencies 74. 13 - 17 A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 20

 

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