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Exam 9: Liabilities

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Question 21

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Video-Technical, Inc. was organized to sell a single product for $600 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $50 per unit. During September, total sales were $198,000; 9 units sold during September were found defective and repaired. The accrued liability for product warranties at month-end should be:

A) $ 850
B) $ 400
C) $ 450
D) $1,150
E) None of the above

F) C) and E)
G) A) and D)

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Question 22

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Which of the following transactions that impact current liabilities has a corresponding entry on the income statement?

A) Purchase inventory on credit from company XYZ on January 1
B) Payment to XYZ on February 1 for a January 1 purchase
C) Interest accrued on a note payable
D) Payment to employees in March for wages earned in February

E) B) and D)
F) None of the above

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Question 23

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The following items represent various types of liabilities. 1. A manufacturing company is sued for alleged product liability. The company's attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. 2. Omega has sold products to Bright Eye Jewelers, a retailer that sold the products to customers. The manufacturer's warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement. 3. A customer has filed a lawsuit for a minor amount against Bright Eye Jewelers. Bright Eye's attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff. Identify if the above independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither.

Hanover Investments recently issued bonds with a face value of $1,000,000 and a coupon rate of 5% for 6 years. The market rate of interest is 4% and the bonds pay interest semi-annually. Compute the market value of the bond on the issue date.

C-Mart Industries issued bonds with a face value of $6,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table?

When the market rate of interest was 10%, Wallace Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was:

The times-interest-earned ratio reflects the number of times that the company earned interest during the year.

Core Earth Company gave a creditor a 90-day, 6% note payable for $14,000 on December 1, 2019. Required: a. What amount of interest will be accrued as of December 31, 2019? b. Where will this amount be reported in the company's financial statements?

On January 1, Alicia Company borrowed $25,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments of $4,187 on December 31 of each year. The balance in the Note Payable account after the first payment is made is:

A finance lease transfers only the use of the leased asset to the lessee.

A contingent liability is an obligation that should be:

Once sold, bonds can be traded in the market place similar to shares of stock.

Jared Company issued 6%, 5-year bonds, with par value of $800,000, paying semiannual interest, for $745,464. The annual market rate of interest on the date of issue was 8%. Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date.

On December 1, Flint Company purchased $30,000 of equipment by issuing a 4-month, 10% note payable to Bank of Maryland. Assuming the company's accounting period ends on December 31, the entry recorded by Flint Company on the note maturity date will include:

Modem Appliances, Inc. sells food processors for $150 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $25 per defective unit. Sales for August are $225,000. What is the estimated liability for product warranties for units sold in August?

Gander Mountain took out a one-year, 6%, $50,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements?

On January 1, 2019, Jennings, Inc. issued $400,000, 10-year, 10% bonds for $360,000. The bonds pay interest on June 30 and December 31. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2019?

Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future.

The financial statement effect of an advance payment for services is to increase revenues.

Lawsuits and credit guarantees are examples of contingent liabilities.