Multiple Choice (5 points each) Circle the MOST correct answer

1. WhichofthefollowingisNOTtrueaboutthediscounton
shorttermnotespayable?
a.TheDiscountonNotesPayableaccounthasadebitbalance.
b.TheDiscountonNotesPayableaccountshouldbereported
asanassetonthebalancesheet.
c.Whenthereisadiscountonanotepayable,theeffective
interestrateishigherthanthestateddiscountrate.
d.Allofthesearetrue.

BShouldbereportedasacontraliability.

2. Whichofthefollowingstatementsiscorrect?
a.Acompanymayexcludeashorttermobligationfromcurrent
liabilitiesifthefirmintendstorefinancethe
obligationonalongtermbasis.
b.Acompanymayexcludeashorttermobligationfromcurrent
liabilitiesifthefirmcandemonstrateanabilityto
consummatearefinancing.
c.Acompanymayexcludeashorttermobligationfromcurrent
liabilitiesifitispaidoffafterthebalancesheetdate
andsubsequentlyreplacedbylongtermdebtbeforethe
balancesheetisissued.
d.Noneofthese.

DMusthaveboththeintentanddemonstrateability.Cwould
leadtoacurrentclassificationmustrefinancebeforepayoff.

3. RitterCompanyhas35employeeswhowork8hourdaysandare
paidhourly.OnJanuary1,2003,thecompanybeganaprogram
ofgrantingitsemployees10days'paidvacationeachyear.
Vacationdaysearnedin2003mayfirstbetakenonJanuary1,
2004.Informationrelativetotheseemployeesisasfollows:

HourlyVacationDaysEarnedVacationDaysUsed
YearWagesbyEachEmployeebyEachEmployee

2003$17.20100
200418.00108
200519.001010

Ritterhaschosentoaccruetheliabilityforcompensated
absencesatthecurrentratesofpayineffectwhenthe
compensatedtimeisearned.

1

Whatistheamountofexpenserelativetocompensated
absencesthatshouldbereportedonRitter'sincomestatement
for2003?
a.$0.
b.$45,920.
c.$50,400.
d.$48,160.

D$17.20/hr*8hrs/day*10days/employee*35employees=$48,160

4. Acontingencycanbeaccruedwhen
a.itiscertainthatfundsareavailabletosettlethe
disputedamount.
b.anassetmayhavebeenimpaired.
c.theamountofthelosscanbereasonablyestimatedandit
isprobablethatanassethasbeenimpairedoraliability
incurred.
d.itisprobablethatanassethasbeenimpairedora
liabilityincurredeventhoughtheamountoftheloss
cannotbereasonablyestimated.

CProbableandestimablearerequired.

5. Theprintingcostsandlegalfeesassociatedwiththe
issuanceofbondsshould
a.beexpensedwhenincurred.
b.bereportedasadeductionfromthefaceamountofbonds
payable.
c.beaccumulatedinadeferredchargeaccountandamortized
overthelifeofthebonds.
d.notbereportedasanexpenseuntiltheperiodthebonds
matureorareretired.

Ceitherstaightlineoreffectiveinterestmethod

6. Anearlyextinguishmentofbondspayable,whichwere
originallyissuedatapremium,ismadebypurchaseofthe
bondsbetweeninterestdates.Atthetimeofreacquisition
a.anycostsofissuingthebondsmustbeamortizeduptothe
purchasedate.
b.thepremiummustbeamortizeduptothepurchasedate.
c.interestmustbeaccruedfromthelastinterestdateto
thepurchasedate.
d.allofthese.

2
 DMustpaytheinterest(d)andruntheamortizationsupto
thedateofreacquisition.

7. StarrCo.tookadvantageofmarketconditionstorefunddebt.
ThiswasthefourthrefundingoperationcarriedoutbyStarr
withinthelastthreeyears.Theexcessofthecarrying
amountoftheolddebtovertheamountpaidtoextinguishit
shouldbereportedasa
a.gain,netofincometaxes.
b.loss,netofincometaxes.
c.partofcontinuingoperations.
d.deferredcredittobeamortizedoverthelifeofthenew
debt.

AMustrecognizeandnolongerextraordinarysoincludeasa
lossorgaininnetincome.IfBVisgreaterthancostto
repurchasethentherewillbeagain.

8. Liabilitiesare
a.anyaccountshavingcreditbalancesafterclosingentries
aremade.
b.deferredcreditsthatarerecognizedandmeasuredin
conformitywithgenerallyacceptedaccountingprinciples.
c.obligationstotransferownershipsharestootherentities
inthefuture.
d.obligationsarisingfrompasttransactionsandpayablein
assetsorservicesinthefuture.

Dperdefinitioninconcepts

3
9. (10points)TotalpayrollofThamesCo.was$690,000,of
which$120,000representedamountspaidinexcessof$84,900
tocertainemployees.Incometaxeswithheldwere$170,000.
Thestateunemploymenttaxis1.2%,thefederalunemployment
taxis.8%,andtheF.I.C.A.taxis7.65%onanemployee's
wagesto$84,900.

INSTRUCTIONS
(a)Preparethejournalentryforthewagesandsalaries
paid.
(b)Preparetheentrytorecordtheemployerpayrolltaxes.

(a)WagesandSalariesExpense.............690,000
WithholdingTaxesPayable...........170,000
FICATaxesPayable.................43,605*
Cash................................476,395
*[($690,000$120,000)x7.65%]

(b)PayrollTaxExpense....................57,405
FICATaxesPayable
($570,000x7.65%)43,605
FederalUnemploymentTaxPayable
[$690,000x.8%]........5,520
StateUnemploymentTaxPayable
($690,000x1.2%)....................8,280

4
10. (10points)Belowarethreeindependentsituations.
1.InAugust,2004aworkerwasinjuredinthefactoryinan
accidentpartiallytheresultofhisownnegligence.The
workerhassuedRooneyCo.for$800,000.Counsel
believesitisreasonablypossiblethattheoutcomeof
thesuitwillbeunfavorableandthatthesettlement
wouldcostthecompanyfrom$250,000to$500,000.
2.Asuitforbreachofcontractseekingdamagesof
$2,000,000wasfiledbyanauthoragainstDaneCo.on
October4,2004.Dane'slegalcounselbelievesthatan
unfavorableoutcomeisprobable.Areasonableestimateof
theawardtotheplaintiffisbetween$500,000and
$1,500,000.Noamountwithinthisrangeisabetter
estimateofpotentialdamagesthananyotheramount.
3.Oatsisinvolvedinapendingcourtcase.Oats'lawyers
believeitisprobablethatOatswillbeawardeddamages
of$1,000,000.

INSTRUCTIONS
Discusstheproperaccountingtreatment,includingany
requireddisclosuresandjournalentries,foreach
situation.Givetherationaleforyouranswers.

1.RooneyCo.shoulddiscloseinthenotestothefinancial
statementstheexistenceofapossiblecontingentliability
relatedtothelawsuit.Thenoteshouldindicatetherange
ofthepossibleloss.Thecontingentliabilityshouldnotbe
accruedbecausethelossisnotprobable.

2.DaneCo.shoulddisclosethefollowinginthe
notestothefinancialstatements:theamountofthesuit,
thenatureofthecontingency,thereasonfortheaccrual,
andtherangeofthepossibleloss.

Theaccrualismadebecauseitisprobablethataliability
Hasbeenincurredandtheamountofthelosscanbe
reasonablyestimated.Thelowestamountoftherangeof
possiblelossesisusedwhennoamountisabetterestimate
thananyotheramount.
LossonLegalAction500,000
ContingentLiability 500,000

3.Oatsshouldnotrecordthegaincontingencyuntilitis
realized.Usually,gaincontingenciesareneitheraccruednor
disclosed.The$1,000,000gaincontingencyshouldbe

5
disclosedonlyiftheprobabilitythatitwillberealizedis
veryhigh.

6
11. (10points)KinerEquipmentCompanysellscomputersfor
$2,000eachandalsogiveseachcustomera2yearwarrantythat
requiresthecompanytoperformperiodicservicesandtoreplace
defectiveparts.During2004,thecompanysold700computers.
Basedonpastexperience,thecompanyhasestimatedthetotal2
yearwarrantycostsas$40forpartsand$80forlabor.(Assume
salesalloccuratDecember31,2004.)

In2005,Kinerincurredactualwarrantycostsrelativeto
2004computersalesof$10,000forpartsand$24,000for
labor.

INSTRUCTIONS
(a) UndertheEXPENSEWARRANTYtreatment,givetheentries
toreflecttheabovetransactions(accrualmethod)for
2004and2005.
(b) Thetransactionsofpart(a)createwhatbalanceunder
currentliabilitiesinthe2004balancesheet?

(a)2004

AccountsReceivable....................1,400,000
Sales................................1,400,000

WarrantyExpense.......................84,000
EstimatedLiabilityUnderWarranties.84,000

2005

EstimatedLiabilityUnderWarranties...34,000
Inventory............................10,000
AccruedPayroll.......................24,000

(b)2004CurrentLiabilitiesEstimatedLiabilityUnder
Warranties$42,000.(Theremainderofthe$84,000liability
isalongtermliability.)

7
12. (10points)Preparejournalentriestorecordthefollowing
retirement.(Showcomputationsandroundtothenearest
dollar.)

TheDecember31,2004balancesheetofMarinCo.included
thefollowingitems:
7.5%bondspayabledueDecember31,2012$800,000
Unamortizeddiscountonbondspayable32,000

ThebondswereissuedonDecember31,2002at95,with
interestpayableonJune30andDecember31.(Usestraight
lineamortization.)

OnApril1,2005,Marinretired$160,000ofthesebondsat
101plusaccruedinterest.

Firstamortizeinteresttodate

InterestExpense.............................3,200
Cash($160,000x7.5%x3/12)..............3,000
DiscountonBondsPayable
($32,000x1/5x1/8x3/12).............200

BondsPayable.................................160,000
LossonRedemptionofBonds..................7,800
DiscountonBondsPayable
[(1/5x$32,000)$200].................6,200
Cash........................................161,600

8
13. (10points)OnJune1,2004,JansonBottleCompanysold
$1,000,000inlongtermbondsfor$877,600.Thebondswill
maturein10yearsandhaveastatedinterestrateof8%and
ayieldrateof10%.ThebondspayinterestannuallyonMay
31ofeachyear.Thebondsaretobeaccountedforunderthe
effectiveinterestmethod.

INSTRUCTIONS
(a)Constructabondamortizationtableforthisproblemto
indicatetheamountofinterestexpenseanddiscount
amortizationateachMay31.Includeonlythefirstfour
years.Makesureallcolumnsandrowsareproperly
labeled.(Roundtothenearestdollar.)
(b)Assumingthatinterestanddiscountamortizationare
recordedeachMay31,preparetheadjustingentrytobe
madeonDecember31,2006.(Roundtothenearestdollar.)

(a)DebitCreditCarrying
CreditInterestBondAmount
DateCashExpenseDiscountofBonds

6/1/04$877,600
5/31/05$80,000$87,760$7,760885,360
5/31/0680,00088,5368,536893,896
5/31/0780,00089,3909,390903,286
5/31/0880,00090,32810,328913,614

(c)InterestExpense......................52,144*
InterestPayable....................46,666**
DiscountonBondsPayable...........5,478

*7/12x$89,390(fromTable)=$52,144
**7/12x8%x$1,000,000=$46,666

9
14. (10points)Determinethemarketpriceofan$800,000,ten
year,10%(paysinterestsemiannually)bondissuesoldto
yieldaneffectiverateof12%.

Semiannualso20periodsat6%whendiscounting.
Bondpaymentis800,000*10%/2=40,000

Annuity
PVofordinaryannuity(20periods,6%)*40,000
11.46992*40,000=458,797

Maturity
PVof$1(20periods,6%)*800,000
0.31180*800000=249,444

458,797+249,444=708,241

10