Mary Smith is the controller of Arnold Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.
(a) On December 20, 2012, an employee filed a legal action against Arnold for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.
(b) Bonuses to key employees based on net income for 2012 are estimated to be $150,000.
(c) On December 1, 2012, the company borrowed $900,000 at 8% per year. Interest is paid quarterly.
(d) Credit sales for the year amounted to $10,000,000. Arnold's expense provision for doubtful accounts is estimated to be 2% of credit sales.
(e) On December 15, 2012, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2013.
(f) During the year, customer advances of $160,000 were received; $50,000 of this amount was earned by December 31, 2012.
For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, enter 0.
(A) - No entry required. The lawsuit does not have merit, so there is not a reasonable chance that they will have to pay.
(B) - $150,000 ...
This solution is comprised of a response which will allow students to understand how to compute the dollar amounts for the reported liabilities in this case scenario.
Intermediate Accounting -- Current Liabilities and Contingencies -- Multiple Choice
36. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
42. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
43. In accounting for compensated absences, the difference between vested rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the
50. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.