CH 13

Practice Quiz_Chap13
Start Date: 26 Jan 2013 at 08:00 PM
Due Date: 5 Feb 2013 at 11:00 PM
Student Access after Due Date: Yes. Attempts after Due Date will be Marked Late
Graded: Yes
Question 1
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Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior
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year. The company has consulted with its attorney and determined that it is possible
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that they may lose the case. The attorneys estimated that there is a 40% chance of
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losing. If this is the case, their attorney estimated that the amount of any payment
would be $500,000. What is the required journal entry as a result of this litigation?
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Debit Litigation Expense for $500,000 and credit Litigation liability for
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$500,000.
Debit Litigation Expense for $200,000 and credit Litigation Liability for
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$200,000.
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No journal entry is required.

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Debit Litigation Expense for $300,000 and credit Litigation Liability for
$300,000.
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Likelihood of loss is only possible, not probable.
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Question 2
A company buys an oil rig for $3,000,000 on January 1, 2012. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $600,000
(present value at 10% is $231,330). 10% is an appropriate interest rate for this
company. What expense should be recorded for 2012 as a result of these events?
Depreciation expense of $300,000 and interest expense of $23,133
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Depreciation expense of $360,000
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($3,000,000 + $231,330) ÷ 10 = $323,133; $231,330 × .10 = $23,133.

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Question 3
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight
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Question 4
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coupons, customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40
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percent of the coupons will be redeemed. Data for 2012 and 2013 are as follows:
2012 2013
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Bags of dog food sold 500,000 600,000

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Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

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The premiums liability at December 31, 2012 is

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$15,000.
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$30,000.
$11,250.
$26,250.
[(200,000 – 120,000) ÷ 8] × $3 = $30,000.
Question 5
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coupons, customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40
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percent of the coupons will be redeemed. Data for 2012 and 2013 are as follows:
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Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000

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Coupons redeemed 120,000 150,000

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The premiums liability at December 31, 2013 is

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$31,875.
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$33,750.
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$63,750.
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$16,875.
{[(600,000 × .4) – 150,000] ÷ 8} × $2 = $33,750.

$33,750 + $30,000 = $63,750.
Question 6
On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an
annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the
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first two years' rent of $280,000 and a security deposit of $280,000. This deposit will not be
returned to Heins upon expiration of the lease but will be applied to payment of rent for the
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last two years of the lease. What portion of the $560,000 should be shown as a current and
long-term liability, respectively, in Beyer's December 31, 2012 balance sheet?
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Current Liability
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$280,000 $140,000
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$280,000 $280,000
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$0 $560,000
$140,000 $280,000
$140,000 and $280,000.
Question 7
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On September 1, 2012, Herman Co. issued a note payable to National Bank in the
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amount of $1,800,000, bearing interest at 12%, and payable in three equal annual
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principal payments of $600,000. On this date, the bank's prime rate was 11%. The
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first payment for interest and principal was made on September 1, 2013. At
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December 31, 2013, Herman should record accrued interest payable of
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$48,000.
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$72,000.
$44,000.
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$66,000.
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Question 8
Included in Vernon Corp.'s liability account balances at December 31, 2012, were the
following:
7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000
8% note payable issued April 1, 2012, payable in six equal annual

installments of $150,000 beginning April 1, 2013 600,000
Vernon's December 31, 2012 financial statements were issued on March 31, 2013. On
January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by
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issuance of a long-term obligation payable in a lump sum. In addition, on March 10,
2013, Vernon consummated a noncancelable agreement with the lender to refinance the
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7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet
been implemented. On the December 31, 2012 balance sheet, the amount of the notes
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payable that Vernon should classify as short-term obligations is
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$0.
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$175,000.
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$125,000.
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$50,000.
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Conceptual—both notes have been refinanced by long-term obligations.

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Question 9
Yount Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Yount's past experience indicates
that only 80% of the stamps sold to licensees will be redeemed. Yount's liability for
stamp redemptions was $6,000,000 at December 31, 2011. Additional information for
2012 is as follows:
Stamp service revenue from stamps sold to licensees $4,000,000
Cost of redemptions 2,720,000
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If all the stamps sold in 2012 were presented for redemption in 2013, the redemption
cost would be $2,000,000. What amount should Yount report as a liability for stamp
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redemptions at December 31, 2012?
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$5,280,000
$4,880,000
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$3,280,000
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$7,280,000
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($2,000,000 × .8) + $6,000,000 – $2,720,000 = $4,880,000.

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Question 10
In March 2013, an explosion occurred at Kirk Co.'s plant, causing damage to area
properties. By May 2013, no claims had yet been asserted against Kirk. However,
Kirk's management and legal counsel concluded that it was reasonably possible that
Kirk would be held responsible for negligence, and that $4,000,000 would be a
reasonable estimate of the damages. Kirk's $5,000,000 comprehensive public
liability policy contains a $400,000 deductible clause. In Kirk's December 31, 2012
financial statements, for which the auditor's fieldwork was completed in April 2013,
how should this casualty be reported?
As a note disclosing a possible liability of $400,000.
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As an accrued liability of $400,000.
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No note disclosure of accrual is required for 2012 because the event occurred
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in 2013.
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As a note disclosing a possible liability of $4,000,000.
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Conceptual.
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Practice Quiz_Chap13

Start Date: 26 Jan 2013 at 08:00 PM

Due Date: 5 Feb 2013 at 11:00 PM

No journal entry is required.

Likelihood of loss is only possible, not probable.

Depreciation expense of $300,000 and interest expense of $23,133

($3,000,000 + $231,330) ÷ 10 = $323,133; $231,330 × .10 = $23,133.

Bags of dog food sold 500,000 600,000

Leashes purchased 18,000 22,000

Coupons redeemed 120,000 150,000

The premiums liability at December 31, 2012 is

[(200,000 – 120,000) ÷ 8] × $3 = $30,000.

Leashes purchased 18,000 22,000

Coupons redeemed 120,000 150,000

The premiums liability at December 31, 2013 is

{[(600,000 × .4) – 150,000] ÷ 8} × $2 = $33,750.

$140,000 and $280,000.

8% note payable issued April 1, 2012, payable in six equal annual

Conceptual—both notes have been refinanced by long-term obligations.

Stamp service revenue from stamps sold to licensees $4,000,000

Cost of redemptions 2,720,000

($2,000,000 × .8) + $6,000,000 – $2,720,000 = $4,880,000.

As a note disclosing a possible liability of $400,000.

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