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accounting

Questions and Answers of Accounting

Why is the liquidity of liabilities important in the accounting for liabilities?
How does the constraint of materiality affect the accounting for current liabilities?
Define a non-interest-bearing note that is discounted at a bank at a specific rate. How are the proceeds computed for a non-interest-bearing note?
What are compensated absences? How does a company account for them?
FASB Statement No. 49 requires that a company selling inventory and agreeing to repurchase it later neither record the transaction as a sale nor remove the inventory from the balance sheet. If so,
Identify how to account for warranty costs under the expense warranty accrual method, sales warranty accrual method, and modified cash basis.
Define contingency. What exactly is the company uncertain about—whether a future event will take place and result in a liability, or whether a future event will take place that will confirm that a
How do the matching principle and the conservatism convention enter into the accounting for contingencies?
What two criteria must be met before a loss contingency is reported in a company’s financial statements?
With regard to a loss contingency, by what date must the event that results in a probable loss have occurred before accrual is required? By what date must information be available for a company to
What conditions would have to be met for a company to accrue the loss from an unfiled lawsuit?
Define gain contingency. Describe the accounting requirements for a gain contingency.
What two criteria must be met before a company can classify short-term debt that is expected to be refinanced as a noncurrent liability?
How does a company demonstrate the ability to refinance currently maturing short-term debt?
FASB Statement No. 78 requires that a company report certain obligations due on demand within one year (or operating cycle, if longer) as current liabilities. Do you agree with this statement?
(Multiple Choice)1. Which of the following is classified as an accrued payroll liability?Federal Income Employee€™s ShareTax Withheld of F.I.C.A. Taxesa. No ............Yesb.
Accounts Payable and Cash Discounts On January 4, 2007 Dunbar Company purchased, on credit, 2,000 television sets at $500 each. Terms of the purchase were 2/10, n/30. Dunbar paid for one-fifth of
Notes Payable On December 1, 2007 Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringo Chemicals Company. Insto uses the calendar year as its
Non-interest-bearing Notes Payable On November 16, 2007 the Clear Glass Company borrowed $20,000 from First American Bank by issuing a 90-day, non-interest-bearing note. The bank discounted this note
Discounting of Notes Payable On October 30, 2007 the Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the
Compensated Absences The Bettinghaus Corporation began business on January 2, 2007 with five employees. It created a sick leave and vacation policy stated as follows: Each employee is allowed eight
Sales Taxes During August the Hill Sales Company had these summary transactions:1. Cash sales of $210,000, subject to sales taxes of 6%2. Sales on account of $260,000, subject to sales taxes of 6%3.
Payroll and Payroll Taxes The payroll of the Rand Company on December 31 of the current year is as follows:1. Total payroll, $500,0002. Payroll in excess of $90,000 to each employee, $350,0003.
Bonus Obligation Raymond Moss, vice president of Moss Auto Parts, gets an annual bonus of 15% of net income after bonus and income taxes. Income before bonus and income taxes is $250,000. The
Property Taxes Family Practice Associates has an estimated property tax liability of $7,200 assessed as of January 1, 2007 for the year May 1, 2007 to April 30, 2008. The property tax is paid on
Property Taxes The Ames Company is located in a city and county that issue property tax statements in May of each year. The fiscal year for the two local governmental units is May 1 to April 30.
Expense Warranty Accrual Method On September 1, 2007 Carolina Electronics Company has ready for sale 1,000 CD players. On October 1, 2007, 900 are sold at $50 each with a one-year warranty. Carolina
Sales Warranty Accrual Method On August 1, 2007 Pereira Corporation has ready for sale 2,000 Wiglow instruments. During the next 5 months, 1,600 Wiglows are sold at $460 each with a one-year
Premium Obligation The Sweet Dates Company offers to its customers a premium—a glass bowl (cost to Sweet Dates, $0.90) upon return of 40 coupons. Two coupons are placed in each box of dates sold.
Premium Obligation On the back of its cereal boxes, the Tiger Cereal Company offers a premium to its customers. The premium, a toy truck, may be claimed by sending in $1 plus 10 coupons; one coupon
Gift Certificates On December 5, 2007 Super Circuit Store sold gift certificates totaling $4,000. By December 31, 2007 all but $750 worth of these certificates had been redeemed for merchandise.
Loss Contingency On December 4, 2007 Dan Johnson, delivery truck driver for Farmers Products, Inc., ran a stop sign and collided with another vehicle. On January 8, 2008 the driver of the other
Gain Contingency On December 31, 2007 Braino Tech., Inc. learned that its competitor had introduced a product making use of an accessory over which Braino Tech. has exclusive patent rights. Braino
Disclosure of Serial Bonds Payable On May 1, 2007 the Ramden Company issues 13% serial bonds with a face value of $2 million. The bond contract calls for retirement of the bonds in periodic
Short-Term Debt Expected to Be Refinanced On December 31, 2007 Excello Electric Company had $1 million of short-term notes payable due February 7, 2008. Excello expected to refinance these notes on a
Short-Term Debt Expected to Be Refinanced On December 31, 2007 Carrboro Textile Company had short-term debt in the form of notes payable totaling $600,000. These notes were due on June 1, 2008.
The Byrd Company had the following transactions during 2007 and 2008:1. On December 24, 2007 a computer was purchased on account from Computers International for $60,000. Terms of the sale were 2/10,
On November 1, 2007 Edwin, Inc., borrowed cash and signed a $60,000, one year note payable.Required1. Compute the following items assuming (i) An interest-bearing note at 12%, (ii) A
The Adjusto Corporation (which is on a December 31 fiscal year-end) engaged in the following transactions during 2007 and 2008:2007Nov. 1 Issued a 120-day, 12% note, face value of $15,000, to
The Rexallo Company begins business on January 2, 2007 with 15 employees. Its company policy is to permit each employee to take six days of paid sick leave each year and one and one half days of paid
The Mauldin Company makes sales on which a 5% sales tax is assessed. The following summary transactions were made during 2007:1. Sales for cash of $1,665,400, excluding sales taxes2. Sales on credit
Bailey Dry Cleaners has six employees who were paid the following wages during 2007:Frank Johnson ........ $ 27,000Bill Long .......... 18,000Duff Morse ......... 95,000Laura Stewart ........
James Kimberley, president of National Motors, receives a bonus of 10% of National’s profits after his bonus and the corporation’s income taxes are deducted. National’s effective income tax
The Rosen Corporation was formed on December 12, 2006. It plans to close its books annually each December 31. The corporation is located in Lanmark City and Apple County. The fiscal period of these
Clean-All, Inc., sells washing machines with a three-year warranty. In the past Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale,
Wright Machinery Corporation manufactures automobile engines for major automobile producers. These engines have a warranty against any defects for a period of five years. Even though Wright Machinery
Yummy Cereal Company is offering one toy shovel set for 15 box tops of its cereal. Year-to-date sales have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs the
Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2007 financial statements. It has identified the following legal situations that may
Greenlaw, Inc., a publishing company, is preparing its December 31, 2007 financial statements and must determine the proper accounting treatment for each of the following situations:1. Greenlaw
Several times during 2007, Palmer Company issued short-term commercial paper totaling $7 million. On December 31, 2007, the company’s year-end, Palmer intends to refinance the commercial paper by
On December 31, 2007 Atwood Table Company has $8 million of short-term notes payable owed to City National Bank. On February 1, 2008 Atwood negotiates a revolving credit agreement providing for
On January 1, 2007 Northern Manufacturing Company bought a piece of equipment by signing a non-interest-bearing $80,000, one-year note. The face value of the note includes the price of the equipment
Selected transactions of the Lizard Lick Corporation during 2007 are as follows:Jan. 5 Purchased merchandise from Boston Company for $30,000; terms, 2/10, n/30. Purchases and accounts payable are
Selected transactions of the Shadrach Computer Corporation during November and December of 2007 are as follows:Nov. 1 Borrowed money from the bank by issuing a non-interest-bearing, $40,000, 90-day
The following is the current liability section of Hollo Hardware Company on December 31, 2007:Accounts payable, trade .......... $ 50,000Notes payable, 12%, due February 19, 2008 .. 70,000Unearned
While auditing the 2007 financial statements of Warder Corporation, you found evidence that the following were not included in its current liabilities on the December 31, 2007 balance sheet:1.
Part a. The two basic requirements for the accrual of a loss contingency are supported by several basic concepts of accounting. Three of these concepts are: periodicity (time periods), measurement,
Loss contingencies may exist for companies. Write a short memo that answers the following questions.Required1. What conditions should be met for an estimated loss from a loss contingency to be
Supey Chemical Co. encountered the following two situations in 2007:1. Supey must pay an indeterminate amount for toxic waste cleanup on its land. An adjoining land owner, Gap Toothpaste, sold its
Angela Company is a manufacturer of toys. During the year, the following situations arose:1. A safety hazard related to one of its toy products was discovered. It is considered probable that
On January 15, 2008 a truck driver for Cork Transfer Company negligently rounded a curve that was also a bridge covering several local merchant shops. The truck jumped the guardrail and fell 30 feet
Worldwide Motors has produced “Stallions” for 10 years as of December 31, 2007. In a civil judgment against it on July 20, 2007, it was found that for the period of January 1, 2004 until the
Skinner Company has the following contingencies:1. Potential costs due to the discovery of a possible defect related to one of its products. These costs are probable and can be reasonably
At December 31, 2007, Niki Company reviewed the following situations to consider their impact on its 2007 financial statements:1. In December 2007, Niki became aware of a safety hazard related to one
Reese Company sells two types of merchandise, Type A and Type B. Each carries a one-year warranty.Type A merchandise: Product warranty costs, based on past experience, will normally be 1% of
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. What were the total current liabilities at the end of 2004? What was the largest
Hart Corporation is a chemical company that produces cleaning fluids of different types; it is the main employer in a small town. Stan Hart has been the company president for 15 years and is paid a
Situation Bogan Company is in need of cash to finance its operations. The company creates a new company, Hall Company, which is wholly owned by Bogan. On November 1, 2007 Bogan sells inventory on
Situation Gilmatt Company developed a new product that it planned to sell directly to customers and to promote heavily because of “stiff” competition in the market place. Its marketing department
Why may a company that requires additional funds choose to issue long-term liabilities rather than equity securities?
What is a bond? Define face value, maturity date, contract rate, bond certificate, and bond indenture.
Distinguish between mortgage and debenture bonds.
Distinguish between registered and coupon bonds.
What are callable bonds? Convertible bonds?
Why does the stated (contract) rate and the effective rate (yield) of interest on bonds frequently differ?
Why do bond discounts and bond premiums arise at the time of sale?
Distinguish between bond premiums or discounts and bond issue costs.
Why does the recorded amount of interest expense for the first interest payment differ from the expense recorded for other interest payments when bonds are issued between interest payment dates?
What two methods may a company use to allocate a premium or discount over the life of a bond issue? Briefly describe each method.
How is the amount of interest expense a company records each period affected by the amortization of a bond discount using the straight-line method?
How is the amount of interest expense a company records each period affected by the amortization of a bond premium using the straight-line method?
How is the amount of proceeds from a bond issue determined once the market (yield) rate of interest is specified?
What is a call provision? Why do companies often include call provisions on bond issues?
Distinguish between bond retirements and bond refunding.
What are the three alternatives that could be used to account for gains or losses on bond refunding? What reasons support each of these methods? Which method did the APB finally favor? Why?
Why does a company issue a bond with detachable warrants (rights)? At what value is each of these securities recorded at the time of the bond issuance?
What are convertible bonds? Why would a company issue convertible debt?
What two alternative methods are available to account for the issuance of convertible debt? What method did the APB finally require? Why?
When a company exchanges a long-term non-interest-bearing note for cash and no interest rate is stated, how does it determine the effective interest?
Describe the steps necessary for a company to determine the value at which to record a non-interest-bearing note payable exchanged for property, goods, or services.
What is the incremental interest rate of a borrower? When and for what calculations is this rate used if a company exchanges a note for property, goods, or services?
When does a troubled debt restructuring occur? What are three conditions a troubled debt restructuring may involve?
(Multiple Choice)1. Should the following bond issue costs be expensed as incurred?UnderwritingLegal Fees Costsa. No .......... Nob. No .......... Yesc. Yes .......... Nod. Yes
The Kurten Corporation is authorized to issue $500,000 of 8% bonds. Interest on the bonds is payable semiannually; the bonds are dated January 1, 2007 and are due December 31, 2012.RequiredPrepare
On April 30, 2007 Hackman Corporation issued $1 million face value 12% bonds dated January 1, 2007, for $1,023,000 plus accrued interest. The bonds pay interest semiannually on June 30 and December
The Bryan Company issued $500,000 of 10% face value bonds on January 1, 2007 for $486,000. The bonds are due December 31, 2009, and pay interest semiannually on June 30 and December 31. The company
The Cotton Corporation issued $100,000 of 10% bonds dated January 1, 2007 for $97,158.54 on July 1, 2007. The bonds are due December 31, 2010, were issued to yield 11%, and pay interest semiannually
Addison Incorporated issued $200,000 of 13% bonds on July 1, 2007 for $206,801.60. The bonds were dated January 1, 2007, pay interest on each June 30 and December 31, are due December 31, 2011, and
The Madison Corporation is authorized to issue $800,000 of five-year bonds dated June 30, 2007, with a face rate of interest of 11%. Interest on the bonds is payable semiannually and the bonds are
The Taylor Company issued $100,000 of 13% bonds on January 1, 2007. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2009.Required1. Assume the company sells

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