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Questions and Answers of Accounting

Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits
At December 31, 2011, the investments in securities available-for-sale of Beale Developments were reported at $78 million:During 2012, Beale sold its investment in Schwab Pharmaceuticals, which had
On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan
On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan
Companies can choose the fair value option for investments that otherwise would be accounted for under the equity method. If the fair value option is chosen, the investment is shown at fair value in
Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver
On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Company's 6 million outstanding common shares. Miller's CEO became a member of Marlon's board of directors during
Indicate (by letter) the way each of the investments listed below most likely should be accounted for based on the information provided.
On January 1, 2011, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $150,000. The Cortland bonds have a stated interest rate of 6%. Interest is paid semiannually on June 30 and
Stewart Enterprises has the following investments, all purchased prior to 2011:1. Bee Company 5% bonds, purchased at face value, with an amortized cost of $4,000,000, and classified as held to
This problem is a variation of Problem 12-16, modified to consider accounting for impairments under IFRS.Required:Consider the facts presented in P12-16, and assume that Stewart accounts for its
The following disclosure note appeared in the June 27, 2009, 10Q of the Intel Corporation.Note 6: Available-for-Sale Investments (partial)Table 1: Available-for-sale investments as of June 27, 2009,
Investments in common stocks potentially affect each of the various financial statements as well as the disclosure notes that accompany those statements.Required:1. Locate a recent annual report of
The following are excerpts from the 2008 financial statements of Renault, a large French automobile manufacturer.Investment in Nissan: Renault holds 44.3% ownership in Nissan. Renault and Nissan
Obtain the 2009 annual report of Vodafone www.vodafone.com. Contrast the accounting approaches used in notes 13 for “investments in joint ventures” and 14 for “investments in associated
All publicly traded domestic companies use EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, to make the majority of their filings with the SEC. You can access EDGAR at
Corporations frequently invest in securities issued by other corporations. Some investments are acquired to secure a favorable business relationship with another company. On the other hand, others
As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporation reports its investments available-for-sale at the fair value of the investment securities. The net unrealized
In Appendix 12B you learned that accounting for other-than-temporary impairments has changed recently. You also learned that these changes were controversial. In fact, two of the five members of the
British Airways, Plc. (BA), a U.K. company, prepares its financial statements according to International Financial Reporting Standards. BA's annual report for the year ended March 31, 2009, which
Is it necessary for an investor to report individual amounts for the three categories of investments held-to-maturity, available-for-sale, or trading in the financial statements? What information
What are the essential characteristics of liabilities for purposes of financial reporting?
What distinguishes current liabilities from long-term liabilities?
Bronson Distributors owes a supplier $100,000 on open account. The amount is payable in three months. What is the theoretically correct way to measure the reportable amount for this liability? In
Bank loans often are arranged under existing lines of credit. What is a line of credit? How does a noncommitted line of credit differ from a committed line?
Banks sometimes loan cash under noninterest-bearing notes. Is it true that banks lend money without interest?
How does commercial paper differ from a bank loan? Why is the interest rate often less for commercial paper?
Salaries of $5,000 have been earned by employees by the end of the period but will not be paid to employees until the following period. How should the expense and related liability be recorded? Why?
Under what conditions should an employer accrue an expense and the related liability for employees’ compensation for future absences? How do company custom and practice affect the accrual decision?
How are refundable deposits and customer advances similar? How do they differ?
How do companies account for gift cards?
Amounts collected for third parties represent liabilities until remitted. Provide several examples of this kind of collection.
Consider the following liabilities of Future Brands, Inc., at December 31, 2011, the company’s fiscal year-end. Should they be reported as current liabilities or long-term liabilities?1. $77
Long-term obligations usually are reclassified and reported as current liabilities when they become payable within the upcoming year (or operating cycle, if longer than a year). So, a 25-year bond
How do IFRS and U.S. GAAP differ with respect to the classification of debt that is expected to be refinanced?
Define a loss contingency. Provide three examples.
List and briefly describe the three categories of likelihood that a future event(s) will confirm the incurrence of the liability for a loss contingency.
What is the difference between the use of the term contingent liability in U.S. GAAP and IFRS?
Suppose the analysis of a loss contingency indicates that an obligation is not probable. What accounting treatment if any is warranted?
Name two loss contingencies that almost always are accrued.
Distinguish between the accounting treatment of a manufacturer’s warranty and an extended warranty. Why the difference?
At December 31, the end of the reporting period, the analysis of a loss contingency indicates that an obligation is only reasonably possible, though its dollar amount is readily estimable. During
After the end of the reporting period, a contingency comes into existence. Under what circumstances, if any, should the contingency be reported in the financial statements for the period ended?
Suppose the Environmental Protection Agency is in the process of investigating Ozone Ruination Limited for possible environmental damage but has not proposed a penalty as of December 31, 2011, the
You are the plaintiff in a lawsuit. Your legal counsel advises that your eventual victory is inevitable. “You will be awarded $12 million,” your attorney confidently asserts. Describe the
On October 1, Eder Fabrication borrowed $60 million and issued a nine-month, 12% promissory note. Interest was payable at maturity. Prepare the journal entry for the issuance of the note and the
On October 1, Eder Fabrication borrowed $60 million and issued a nine-month promissory note. Interest was discounted at issuance at a 12% discount rate. Prepare the journal entry for the issuance of
On July 1, Orcas Lab issued a $100,000, 12%, 8-month note. Interest is payable at maturity. What is the amount of interest expense that should be recorded in a year-end adjusting entry if the fiscal
Branch Corporation issued $12 million of commercial paper on March 1 on a nine-month note. Interest was discounted at issuance at a 9% discount rate. Prepare the journal entry for the issuance of the
Life.com issued $10 million of commercial paper on April 1 on a nine-month note. Interest was discounted at issuance at a 6% discount rate. What is the effective interest rate on the commercial paper?
On December 12, 2011, Pace Electronics received $24,000 from a customer toward a cash sale of $240,000 of diodes to be completed on January 16, 2012. What journal entries should Pace record on
In Lizzie Shoes’ experience, gift cards that have not been redeemed within 12 months are not likely to be redeemed. Lizzie Shoes sold gift cards for $18,000 during August of 2011. $4,000 of cards
During December, Rainey Equipment made a $600,000 credit sale. The state sales tax rate is 6% and the local sales tax rate is 1.5%. Prepare the appropriate journal entry.
Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected
Consultants notified management of Goo Goo Baby Products that a crib toy poses a potential health hazard. Counsel indicated that a product recall is probable and is estimated to cost the company $5.5
Bell International can estimate the amount of loss that will occur if a foreign government expropriates some company property. Expropriation is considered reasonably possible. How should Bell report
Household Solutions manufactures kitchen storage products. During the year, the company became aware of potential costs due to (1) A possible product defect that is reasonably possible and can be
Quandary Corporation has a major customer who is alleging a significant product defect. Quandary engineers and attorneys have analyzed the claim and have concluded that there is a 51% chance that the
At March 13, 2012, the Environmental Protection Agency is in the process of investigating a possible emissions leak last summer at a facility of Now Chemical. The EPA has not yet proposed a penalty
On November 1, 2011, Quantum Technology, a geothermal energy supplier, borrowed $16 million cash to fund a geological survey. The loan was made by Nevada BancCorp under a noncommitted short-term line
On July 1, 2011, Ross-Livermore Industries issued nine-month notes in the amount of $400 million. Interest is payable at maturity.Required:Determine the amount of interest expense that should be
The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal year ends on December 31.Required:Prepare the appropriate journal entries through the
JWS Transport Company’s employees earn vacation time at the rate of 1 hour per 40-hour work period. The vacation pay vests immediately (that is, an employee is entitled to the pay even if
On January 1, 2011, Poplar Fabricators 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.
Bavarian Bar and Grill opened for business in November 2011. During its first two months of operation, the restaurant sold gift certificates in various amounts totaling $5,200, mostly as Christmas
Diversified Semiconductors sells perishable electronic components. Some must be shipped and stored in reusable protective containers. Customers pay a deposit for each container received. The deposit
The following selected transactions relate to liabilities of Interstate Farm Implements for December of 2011. Interstate’s fiscal year ends on December 31.Required:Prepare the appropriate journal
CircuitTown commenced a gift card program in January 2011 and sold $10,000 of gift cards in January, $15,000 in February, and $16,000 in March of 2011 before discontinuing further gift card sales.
An annual report of Sprint Corporation contained a rather lengthy narrative entitled "Review of Segmental Results of Operation." The narrative noted that short-term notes payable and commercial paper
Consider the information presented in E13-10.Required:1. How would Sprint report the debt in its balance sheet if it reported under IFRS? Why?2. Would your answer to requirement 1 change if Sprint
At December 31, 2011, Newman Engineering’s liabilities include the following:1. $10 million of 9% bonds were issued for $10 million on May 31, 1988. The bonds mature on May 31, 2022, but
Cupola Awning Corporation introduced a new line of commercial awnings in 2011 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product
Carnes Electronics sells consumer electronics that carry a 90-day manufacturer’s warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty
Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management December 2011 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense
The Manda Panda Company uses the allowance method to account for bad debts. At the beginning of 2011, the allowance account had a credit balance of $75,000. Credit sales for 2011 totaled $2,400,000
Drew-Richards iMusic is a regional music media reseller. As a promotion, it offered $5 cash rebates on specific CDs. Customers must mail in a proof-of-purchase seal from the package plus the cash
At April 1, 2012, the Environmental Protection Agency is in the process of investigating a possible chemical leak last June at a facility of Shu Lamination, Inc. The EPA has not yet proposed a
The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2011. Classical’s fiscal year ends on December 31. Financial statements
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus’s fiscal year ends on December 31. Financial statements are published in March 2012. Erismus prepares its
Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011.
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer€™s defects. Because this was the first product for which
The Commonwealth of Virginia filed suit in October 2009 against Northern Timber Corporation, seeking civil penalties and injunctive relief for violations of environmental laws regulating forest
The Dow Chemical Company provides chemical, plastic, and agricultural products and services to various consumer markets. The following excerpt is taken from the disclosure notes of Dow’s 2008
Lee Financial Services pays employees monthly. Payroll information is listed below for January 2011, the first month of Lee’s fiscal year. Assume that none of the employees exceeded any relevant
The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.Required:1. Obtain the relevant authoritative literature on
A ccess the FASB’s Codification Research System at the FASB website (www.fasb.org).Required:Determine the specific citation for accounting for each of the following items:1. If it is only
The following questions are used in the Kaplan CPA Review Course to study current liabilities and contingencies while preparing for the CPA examination. Determine the response that best completes the
The following questions dealing with current liabilities and contingencies are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA
Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2011, to provide working capital for year-end production. Blanton issued a four-month, 12%
Camden Biotechnology began operations in September 2011. The following selected transactions relate to liabilities of the company for September 2011 through March 2012. Camden’s fiscal year ends on
The balance sheet at December 31, 2011, for Nevada Harvester Corporation includes the liabilities listed below:a. 11% bonds with a face amount of $40 million were issued for $40 million on October
The unadjusted trial balance of the Manufacturing Equitable at December 31, 2011, the end of its fiscal year, included the following account balances. Manufacturing’s 2011 financial statements
Sometimes compensation packages include bonuses designed to provide performance incentives to employees. The difficulty a bonus can cause accountants is not an accounting problem, but a math problem.
Sometimes compensation packages include bonuses designed to provide performance incentives to employees. The difficulty a bonus can cause accountants is not an accounting problem, but a math problem.
HolmesWatson (HW) is considering what the effect would be of reporting its liabilities under IFRS rather than U.S. GAAP. The following facts apply:a. HW is defending against a lawsuit and believes it
The Heinrich Tire Company recalled a tire in its subcompact line in December 2011. Costs associated with the recall were originally thought to approximate $50 million. Now, though, while management
Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites. Below are four possibilities regarding the
Van Rushing Hunting Goods' fiscal year ends on December 31. At the end of the 2011 fiscal year, the company had notes payable of $12 million due on February 8, 2012. Rushing sold 2 million shares of
Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated withit.
Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2011. Transit's fiscal year ends on December 31. Its annual

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