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Exam 13: Current Liabilities and Contingencies

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Question 81

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Amber Inc. is one of the largest pharmacy retailers in mid-America. In its 2013 annual report to shareholders, it made the following disclosure: In 2008, Amber assigned a number of leases to Bell's Inc. and Home Stores, Inc., as part of the sale of the Company's former Eastern divisions. Amber is contingently liable if Bell's and Home are unable to continue making rental payments on these leases. In 2012, Amber recorded a pretax charge to earnings of $42.7 million to recognize the estimated lease liabilities associated with the Bell's and Home bankruptcies and for a single lease from Amber's former Georgia division. In 2013, Bell's began the liquidation process and Home emerged from bankruptcy and, based on the resolution of various leases, Amber reversed $12.1 million of this accrual. Explain the accounting principle(s) that required Amber to record the $42.7 million charge in 2012 and the $12.1 million reversal in 2013.

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GAAP requires that a loss and correspond...

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Question 82

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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.

E) B) and C)
F) C) and D)

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Question 83

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Which of the following is the best definition of a current liability?

In 2013, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,000,000 for the first year of the product's life and actual warranty expenditures were $29,000. Assume that all sales are on credit. Required: 1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2013. 2. What amount should Cap City report as a liability at December 31, 2013?

Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.

Gain contingencies usually are recognized in a company's income statement when:

Identify the major components included in the official definition of a liability as set forth by Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements."

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

Which of the following entail essentially the same accounting treatment?

State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages.

Indicate how TinyPart would disclose or account for the lawsuit described in part (c) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2013.

In May of 2013, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2013, 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 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of: