Exam 3 Review Packet PDF

**Chapter 12** 1. Which of the following is a characteristic of a current liability but **not** a long-term liability? a. It is an unavoidable obligation. b. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services....

**Chapter 12** 1. Which of the following is a characteristic of a current liability but **not** a long-term liability? a. It is an unavoidable obligation. b. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. c. Its liquidation is reasonably expected to require the use of existing resources classified as current assets or create other current liabilities. d. The transaction or other event creating the liability has already occurred. 2. United Company has experienced a decline in its employee base from 500 in the final month of 2025 to 200 in the final month of 2026. The weekly payroll also decreased from \$1,000,000 to \$400,000 for the noted periods. Payroll is paid weekly every Friday for the current week. December 31, 2025 was a Monday, and December 31, 2026 is Friday. What conclusion can be drawn with respect to the salaries and wages liability from December 31, 2025 to December 31, 2026? e. The salaries and wages liability at December 31, 2026 must be less. f. The salaries and wages liability at December 31, 2026 must be greater. g. The salaries and wages liability at December 31, 2026 will be the same. h. It depends on the expectation regarding January 2027 salaries. 3. What is the relationship between present value and the concept of a liability? i. Present values are used to measure certain liabilities. j. Present values are not used to measure liabilities. k. Present values are used to measure all liabilities. l. Present values are only used to measure long-term liabilities. 4. In accounting for compensated absences, the difference between vested rights and accumulated rights is that m. vested rights are normally for a longer period of employment than are accumu­lated rights. n. vested rights are not contingent on the employee\'s future service. o. vested rights are a legal and binding obligation of the company; accumulated rights expire at the end of the accounting period in which they arose. p. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation. 5. Which of the following items is **not** included in an employer\'s payroll tax expense? q. F.I.C.A. (social security) taxes r. Federal unemployment taxes s. State unemployment taxes t. Federal income taxes 6. Which of the following is a condition for accruing a liability for the cost of compensation for future absences? u. The obligation relates to the rights that vest or accumulate. v. Payment of the compensation is probable. w. The obligation is attributable to employee services already performed. x. All of these are conditions for the accrual. 7. Blasio Company collects a deposit from a customer when a custom piece of machinery is ordered. Blasio uses a periodic inventory system. The entry to record collection of the deposit y. increases assets and increases equity. z. increases assets and increases liabilities. a. has no effect on assets, liabilities, or equity. b. increases liabilities and decreases equity. 8. PWT Inc. sells gift cards valued at \$500,000 during December. Based on experience, PWT estimates that 30% of the gift cards will not be redeemed. Which of the following statements is true regarding accounting for this breakage? c. Estimated breakage revenue is recorded at the time of the sale. d. Estimated breakage revenue is recognized in proportion to gift card redemptions. e. The liability for the gift cards is not adjusted for breakage. f. Unearned Gift Card Revenue related to the breakage is reported as a long-term liability. 9. Delta Darlings Salon sells gift cards for its services. Based on experience, the company estimates that 25% of the gift cards will not be redeemed. The entry to record the redemption of a gift card will include g. a credit to Service Revenue and a debit to Unearned Gift Card Revenue h. a debit to Cash and a credit to Unearned Gift Card Revenue. i. a debit to Unearned Gift Card Revenue and credits to Service Revenue and Gift Card Breakage Revenue. j. a debit to Cash and a credit to Service Revenue. 10. Which of the following is a characteristic of an assurance-type warranty, but **not** a service-type warranty? k. Warranty liability. l. Warranty expense. m. Unearned warranty revenue. n. Warranty revenue. 11. Which of the following is an example of a contingent liability? o. Obligations related to product warranties p. Possible receipt from a litigation settlement q. Pending court case with a probable favorable outcome r. Tax loss carryforwards 12. Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2025, due to the admitted negligence of the Railroad, hay on the farm caught on fire and burned. Brown 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 Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroad\'s offer. The Railroad\'s 2025 financial statements should include the following related to the incident: s. recognition of a loss and creation of a liability for the value of the land. t. recognition of a loss only. u. creation of a liability only. v. disclosure in note form only. 13. A contingent liability w. definitely exists as a liability but its amount and due date are indeterminable. x. is accrued even though not reasonably estimated. y. is not disclosed in the financial statements. z. is the result of a loss contingency. 14. 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. A company can exclude long-term debt maturing in the next 12 months from current liabilities if it is to be paid from assets accumulated for that purpose. 15. All of the following accounts are included in [both] the current ratio and the acid-test ratio **except** e. cash. f. short-term investments. g. net receivables. h. inventory. 16. Where is debt callable by the creditor reported on the debtor\'s financial statements? i. Long-term liabilities j. Current liabilities if the creditor intends to call the debt within the year, otherwise a long-term liabilities k. Current liabilities if it is probable that creditor will call the debt within the year, otherwise long-term liabilities l. Current liabilities 17. Why is the liability section of the balance sheet of primary importance to bankers? m. It is used to evaluate the entity\'s credit quality. n. It assists in understanding the entity\'s liquidity. o. It allows lenders to better understand sources of repayment. p. It is used to evaluate operating efficiency. 18. Saba Corporation borrowed \$60,000 on October 1, 2025, by signing a \$61,350, 3- month, zero-interest-bearing note payable. The journal entry to record the issuance of the note will include q. a debit to Interest Expense for \$1,350. r. a credit to Cash for \$61,350. s. a debit to Discount on Notes Payable for \$1,350. t. a credit to Notes Payable for \$60,000. 19. Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was \$754,350. The amount of sales taxes (to the nearest dollar) for May is a. \$62,286. b. \$49,350. c. \$67,893. d. \$52,806. 20. Avalon Company gives each of its 75 employees 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2025, they made an average of \$21 per hour and in 2026 they made an average of \$24 per hour. In 2026, employees took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. Assuming that all of the employees were employed continuously through 2025 and 2026, what amount of vacation liability would be reported on the 2025 and 2026 balance sheets, respectively? u. \$151,200; \$210,600 v. \$172,800; \$216,000 w. \$151,200; \$216,000 x. \$172,800; \$210,600 21. Flower Inc. has an annual unlimited vacation policy for its employees and the eligibility requirement is to be an employee of the company. Flower has 40 employees with average annual salaries of \$40,000. Flower expects its employees to take vacation evenly during the year. In the previous year, its employees took on average 4 weeks of vacation. How much vacation liability should be on the balance sheet at June 30, 2025? y. \$66,667 z. \$133,333 a. \$266,667 b. \$0 22. The Sociologist is an academic publication available only by annual subscription. At December 31, 2025, the Unearned Revenue account had a balance of \$22,000. During 2026, 1,000 annual subscriptions were sold at \$224 each. Revenue earned during 2026 was \$200,000. How much unearned revenue will be reported as of December 31? c. \$0 d. \$24,000 e. \$25,000 f. \$46,000 23. Big Bear BBQ Company sold 200 smokers during 2025 for \$1,700 each together with a 1-year warranty. Warranty claims are estimated to be \$150 per smoker. Actual warranty claims on the smokers in 2025 were \$12,550. Actual warranty claims on the smokers in 2026 are \$18,500. The entry to record claims on 2026 warranty expenditures includes g. a debit to Warranty Expense for \$17,450. h. a credit to Warranty Liability for \$1,050. i. a debit to Warranty Liability for \$17,450. j. a debit to Warranty Expense for \$18,500. 24. Composite provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of \$162 each. The company spent \$800,000 servicing the contracts during the current year and expects to spend \$4,200,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts? k. \$1,804,000 l. \$6,004,000 m. \$800,000 n. \$901,000 25. Excom manufactures high-end whole-home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is \$300 per unit sold and reported a liability for estimated warranty costs of \$10.4 million at the beginning of the current year. If during the current year, the company sold 60,000 units for a total of \$324 million and paid warranty claims of \$12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? o. \$3,733,333 p. \$6,000,000 q. \$16,400,000 r. \$18,000,000 26. In 2024, Salton Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of the sale, 2% in the year after the sale, and 3% in the second year after the sale. Sales and actual warranty expenditures for the first three year period were as follows: What amount should Salton report as warranty liability at December 31, 2026? a\. \$0 b\. \$14,000 c\. \$34,000 d\. \$72,000 27. Batali Italian Foods Company offers its customers a pizza wheel cutter if they send in 4 proof of purchase seals from its frozen pizza boxes and \$1. The company estimates that 60% of the proof of purchase seals will be redeemed. In 2026, the company sold 800,000 frozen pizzas and customers redeemed 352,000 proof of purchase seals receiving 88,000 pizza wheel cutters. If the pizza wheel cutters cost Batali \$2 each, how much liability for outstanding premiums should be reported at the end of 2026? s. \$240,000 t. \$64,000 u. \$96,000 v. \$134,400 28. Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs \$4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2025 and 2026 are as follows: [2026 ] The premium liability at December 31, 2026 is a\. \$30,000. b\. \$52,500. c\. \$60,000. d\. \$112,500. 29. On January 3, 2026, Benton Corp. owned a machine that had cost \$400,000. The accumulated depreciation was \$240,000, the estimated salvage value was \$24,000, and the fair value was \$640,000. On January 4, 2026, this machine was irreparably damaged by Pogo Corp. and became worthless. In October 2026, a court awarded damages of \$480,000 against Pogo in favor of Benton. At December 31, 2026, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Benton's attorney, Pogo's appeal will be denied. At December 31, 2026, what amount should Benton accrue for this gain contingency? a\. \$640,000 b\. \$520,000 c\. \$400,000 d\. \$0 30. Flavor Food Company distributes to consumers coupons that may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Flavor. The grocers are reimbursed when they send the coupons to Flavor. In Flavor\'s experience, 50% of such coupons are redeemed, and generally, one month elapses between the date a grocer receives a coupon from a consumer and the date Flavor receives it. In 2026, Flavor issued two separate series of coupons as follows: The only journal entry recorded to date is: debit to Coupon Expense and credit to Cash of \$815,000. The December 31, 2026 balance sheet should include a liability for unredeemed coupons of a\. \$0. b\. \$70,000. c\. \$184,000. d\. \$420,000. **Chapter 13 Review Questions** 31. The covenants and other terms of the agreement between the issuer of bonds and the lender are outlined in the w. bond indenture. x. bond debenture. y. registered bond. z. bond coupon. 32. If bonds are issued at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of the interest payments. c. the same as if the straight-line method were used. d. Less than if the straight-line method was used. 33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to e. the stated (nominal) rate of interest multiplied by the face value of the bonds. f. the market rate of interest multiplied by the face value of the bonds. g. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. h. the market rate multiplied by the beginning-of-period carrying amount of the bonds. 34. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be i. decreased by accrued interest from June 1 to November 1. j. decreased by accrued interest from May 1 to June 1. k. increased by accrued interest from June 1 to November 1. l. increased by accrued interest from May 1 to June 1. 35. Bond interest paid is equal to the m. carrying value of the bonds multiplied by the effective-interest rate. n. carrying value of the bonds multiplied by the stated interest rate. o. face amount of the bonds multiplied by the stated interest rate. p. face amount of the bonds multiplied by the effective-interest rate. 36. The face value of bonds is also called each of the following except q. maturity value. r. stated value. s. par value. t. principal. 37. The replacement of an existing bond issuance with a new one is called u. like-kind exchange. v. reissue. w. refunding. x. troubled-debt restructuring. 38. A gain on extinguishment will be recorded when y. the reacquisition price equals the carrying value of the bond. z. the reacquisition price is less than the carrying value of the bond. a. the reacquisition price is greater than the carrying value of the bond. b. the reacquisition price is greater than the face value of the bond. 39. A debt instrument with no ready market is exchanged for property with a fair value that is currently indeterminable. When such a transaction takes place, c. the present value of the debt instrument must be approximated using an imputed interest rate. d. it should not be recorded on the books of either party until the fair value of the property becomes evident. e. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. f. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. 40. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless g. no interest rate is stated. h. the stated interest rate is unreasonable. i. the stated face amount of the note is materially different from the current cash sales price for similar items or from the current fair value of the note. j. any of these answers are correct. 41. The total interest recorded on a zero-interest-bearing note is equal to k. the difference between the maturity value of the note and the cash proceeds received. l. the maturity value of the note multiplied by the effective interest rate. m. the cash proceeds multiplied by the imputed interest rate. 42. Note disclosures for long-term debt generally include all of the following **except** n. assets pledged as security. o. call provisions and conversion privileges. p. restrictions imposed by the creditor. q. names of specific creditors. 43. On January 1, 2024, Huber Co. sold 12% bonds with a face value of \$2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for \$2,154,428 to yield 10%. If the effective-interest method of amortization is used, interest expense reported for 2024 is r. \$200,000. s. \$214,829. t. \$215,400. u. \$240,000. 44. On January 2, 2024, a calendar-year corporation sold 8% bonds with a face value of \$3,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for \$2,768,338 to yield 10%. If the effective-interest method is used, what amount should be charged to interest expense in 2024? v. \$240,000 w. \$276,800 x. \$277,755 y. \$300,000 45. At the beginning of 2024, Wallace Corporation issued 10% bonds with a face value of \$6,000,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for \$5,558,367 to yield 12%. Wallace uses a calendar-year reporting period and the effective-interest method of amortization. What amount of interest expense should be reported for 2024? (Round your answer to the nearest dollar.) z. \$688,320 a. \$669,014 b. \$667,000 c. \$665,000 46. At the beginning of 2024, Winston Corporation issued 10% bonds with a face value of \$4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for \$3,705,578 to yield 12%. Winston uses a calendar-year reporting period. If the effective-interest method of amortization is used, what amount of interest expense should be reported for 2024? (Round your answer to the nearest dollar.) d. \$443,334 e. \$444,666 f. \$446,010 g. \$458,880 47. Kant Corporation retires its \$500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is \$481,250. The entry to record the redemption will include a h. credit of \$18,750 to Gain on Bond Redemption. i. debit of \$18,750 to Discount on Bonds Payable. j. debit of \$28,750 to Loss on Bond Redemption. k. debit of \$10,000 to Premium on Bonds Payable. 48. The 10% bonds payable of Nixon Company had a net carrying amount of \$2,850,000 on December 31, 2024. The bonds, which had a face value of \$3,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On\ July 2, 2025, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2025 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2025? a. \$60,000 b. \$189,000 c. \$168,000 d. \$210,000 49. A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of \$1,500,000. To extinguish this debt, the company had to pay a call premium of \$500,000. How should these amounts be treated for accounting purposes? a. Amortize \$2,000,000 over four years. b. Charge \$2,000,000 to a loss in the year of extinguishment. c. Charge \$500,000 to a loss in the year of extinguishment and amortize \$1,500,000 over four years. d. Either amortize \$1,000,000 over four years or charge \$1,000,000 to a loss immediately, whichever management selects. 50. The 12% bonds payable of Nyman Co. had a carrying amount of \$4,160,000 on\ December 31, 2024. The bonds, which had a face value of \$4,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2025, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement is a. \$0. b. \$32,000. c. \$49,600. d. \$160,000. 51. On January 1, 2024, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a \$5,000,000 zero-interest-bearing note payable in 5 equal annual installments of \$800,000, with the first payment due December 31, 2024. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was \$3,111,720 at January 1, 2024. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2024 after adjusting entries are made, assuming that the effective-interest method of amortization is used? a. \$0 b. \$1,608,225 c. \$1888,280 d. \$1,395,000 52. On January 1, 2024, Rutgers Company issued for cash a \$500,000, 5-year note bearing annual interest at 10% to Smith, Inc. The market rate of interest for a note of similar risk is 12%. What cash would have been recorded on the issue date of the note? a. \$0 b. \$463,954 c. \$500,000 d. \$536,046