Question

The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study accounting for current liabilities and contingencies while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. On March 1, 2012, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2014. What amount should Fine report as a liability for accrued interest at December 31, 2013?
a. $ 0
b. $1,000
c. $1,200
d. $2,320
2. North 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, 2013, North's unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 2013. North's employees earn an average of $100 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is North required to report?
a. $15,000
b. $21,000
c. $22,500
d. $36,000
3. On December 31, 2013, Largo, Inc., had a $750,000 note payable outstanding, due July 31, 2014. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, 2014. In February 2014, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2014. On March 3, 2014, Largo issued its 2013 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, 2013, balance sheet?
a. $250,000
b. $750,000
c. $500,000
d. $ 0
4. In May 2010, Caso Co. filed suit against Wayne, Inc., seeking $1,900,000 in damages for patent infringement.
A court verdict in November 2013 awarded Caso $1,500,000 in damages, but Wayne's appeal is not expected to be decided before 2015. Caso's counsel believes it is probable that Caso will be successful against Wayne for an estimated amount in the range between $800,000 and $1,100,000, with $1,000,000 considered the most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31, 2013?
a. $ 0
b. $ 800,000
c. $1,000,000
d. $1,500,000
5. In December 2013, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, 2013, balance sheet, what amount should Mill report as estimated liability for coupons?
a. $ 3,960
b. $10,560
c. $19,800
d. $52,800
6. During 2013, Gum 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 the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 2013, and 2014, are as follows:


What amount should Gum report as estimated warranty liability in its December 31, 2014, balance sheet?
a. $ 2,500
b. $ 4,250
c. $11,250
d. $14,250 Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for current liabilities and contingencies.
7. Wilhelm Company prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 55 percent chance of losing a lawsuit. Assuming Wilhelm can reliably estimate the amount it would pay if it loses the lawsuit, it should.
a. Accrue a liability for the lawsuit.
b. Disclose the matter in the notes to the financial statements but not accrue a liability for the lawsuit.
c. Make no mention of the lawsuit in the financial statements or notes.
d. None of the above.
8. Tweedy Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 99 percent chance of winning a lawsuit. Assuming Tweedy can reliably estimate the amount it would receive if it wins the lawsuit, it should.
a. Accrue an asset for the lawsuit.
b. Disclose the matter in the notes to the financial statements but not accrue an asset for the lawsuit.
c. Make no mention of the lawsuit in the financial statements or notes.
d. None of the above.
9. Cline Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently concluded that it will lose a lawsuit, and that it will pay a range of damages falling somewhere between $10 million and $20 million. Cline should accrue a liability in the amount of.
a. $0, as no specific amount is probable to be incurred.
b. $10 million, the lower end of the range of probable amounts.
c. $15 million, the expected value of the amount to be paid.
d. $20 million, the upper end of the range of probableamounts.


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  • CreatedDecember 23, 2013
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