Ch13 Intermediate Accounting

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Ch13 - intermediate accounting
Intermediate accounting (고려대학교)
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CHAPTER 13
Current Liabilities, Provisions, and Contingencies
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Concepts
Topics Questions Exercises Exercises Problems for Analysis
1. Concept of liabilities; 1, 2, 3, 1, 5 1, 2 1
definition and classification 4, 6, 8
of current liabilities.
2. Accounts and notes 7, 11 1, 2, 3 2 1, 2 1, 2

payable; dividends payable.
3. Short-term obligations 9, 10 4, 5 3, 4, 5 3
expected to be refinanced.
4. Deposits and advance 5, 12 6 2

payments.
5. Compensated absences 13, 14, 15 10, 11 6, 7

and bonuses.
6. Collections for third parties. 16, 17 7, 8, 9 8, 9, 10, 3, 4

11, 22
7. Provisions and contingent 18, 19, 20, 12, 13 17, 20, 10, 11, 13 4, 5, 6
liabilities (General). 21, 22, 24, 21, 22
26
8. Warranties. 23, 25 15, 16 12, 13, 5, 6, 7, 6, 7

22, 21 12, 14
9. Consideration Payables 17 14, 19, 22 8, 9,

12, 14
10. Self-insurance, litigation, 27, 28, 29, 12, 13, 14, 15, 16, 17, 2, 10, 5, 6
claims, assessments, 30 18, 19, 20 18, 20 11, 13
restructurings, and
environmental liabilities.
11. Presentation and analysis. 31, 32, 33 1, 23, 24, 9 3

25
Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-1

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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Brief Concepts
Learning Objectives Exercises Exercises Problems for
Analysis
1, 2, 3,
1. Describe the nature, 4, 5, 6, 7, 1, 2, 3, 4, 5, 1, 2, 3, 4 1, 2, 3
valuation, and reporting of 8, 9, 10, 11 6, 7, 8, 9,
current liabilities. 10, 11
12, 13, 14,
2. Explain the accounting for 15, 16, 17, 18, 12, 13, 14, 2, 5, 6, 7, 8, 5, 6, 7
different types of provisions. 19, 15, 16, 17, 9, 10, 11,
18, 19, 12, 13, 14
20, 21
3. Explain the accounting for 12, 13, 18 17 10, 11, 13 4

loss and gain contingencies.
4. Indicate how to present and 22, 23, 9, 13

analyze liability-related 24, 25
information.
13-2 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)

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ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)
E13.1 Statement of financial position classification. Simple 10–15
E13.2 Accounts and notes payable. Moderate 15–20
E13.3 Refinancing of short-term debt. Simple 10–12
E13.4 Refinancing of short-term debt. Simple 10–15
E13.5 Debt classifications Simple 15-20
E13.6 Compensated absences. Moderate 25–30
E13.7 Compensated absences. Moderate 25–30
E13.8 Adjusting entry for sales tax and VAT. Simple 5–7
E13.9 Adjusting entry for sales tax and VAT. Simple 10
E13.10 Payroll tax entries. Simple 10–15
E13.11 Payroll tax entries. Simple 15–20
E13.12 Warranties. Simple 10–15
E13.13 Warranties. Moderate 15–20
E13.14 Premium entries. Simple 15–20
E13.15 Restructuring issues. Simple 15–20
E13.16 Restructuring. Simple 15–20
E13.17 Provisions and contingencies. Moderate 20–30
E13.18 Environmental liability. Moderate 25–30
E13.19 Premiums. Moderate 25-35
E13.20 Provisions. Moderate 20–30
E13.21 Provisions. Moderate 20–30
E13.22 Financial statement impact of liability transactions. Moderate 20–25
E13.23 Ratio computations and discussion. Simple 10–15
E13.24 Ratio computations and analysis. Simple 20–25
E13.25 Ratio computations and effect of transactions. Moderate 15–25
P13.1 Current liability entries and adjustments. Simple 25–30

P13.2 Liability entries. Simple 25–35
P13.3 Payroll tax entries. Moderate 20–30
P13.4 Payroll tax entries. Simple 20–25
P13.5 Warranties. Simple 15–20
P13.6 Extended warranties. Simple 10–20
P13.7 Warranties. Moderate 25–35
P13.8 Premium entries. Moderate 15–25
P13.9 Premium entries and financial statement presentation. Moderate 30–45
P13.10 Litigation claim: entries and essay. Simple 25–30

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Assignment Characteristics Table (Continued)
Level of Time
Item Description Difficulty (minutes)
P13.11 Contingencies: entries and essays. Moderate 35–45
P13.12 Warranties and premiums. Moderate 20–30
P13.13 Liability errors. Moderate 25–35
P13.14 Warranty and coupon computation. Moderate 20–25
CA13.1 Nature of liabilities. Moderate 20–25

CA13.2 Current versus non-current classification. Moderate 15–20
CA13.3 Refinancing of short-term debt. Moderate 30–40
CA13.4 Contingencies. Simple 15–20
CA13.5 Possible environmental liability. Simple 15–20
CA13.6 Warranties and litigation provisions. Simple 15–20
CA13.7 Ethics of Warranties. Moderate 20–25

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ANSWERS TO QUESTIONS
1. Current liabilities are obligations reasonably expected to be settled within the normal operating
cycle or within twelve months after the reporting date. Non-current liabilities consist of all liabilities
not properly classified as current liabilities.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
2. You might explain to your friend that the IASB defines a liability as part of its conceptual
framework. The formal definition of liabilities is a present obligation of the enterprise arising from
past events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits. A liability has three essential characteristics: (1) it is a
present obligation; (2) it arises from past events and (3) it results in an outflow of resources.
3. As a lender of money, the banker is interested in the priority his/her claim has on the company’s
assets relative to other claims. Close examination of the liability section and the related footnotes
discloses amounts, maturity dates, collateral, subordinations, and restrictions of existing contractual
obligations, all of which are important to potential creditors. The assets and earning power are
likewise important to a banker considering a loan.
4. By definition, current liabilities are obligations reasonably expected to be settled within its normal
operating cycle or within twelve months after the reporting date.
5. Unearned revenue is a liability that arises from current sales but for which some future services or
products are owed to customers in the future. At the time of a sale, customers pay not only for the
delivered product, but they also pay for future products or services (e.g., another plane trip, hotel
room, or software upgrade). In this case, the company recognizes revenue from the current product
and part of the sale proceeds is recorded as a liability (unearned revenue) for the value of future
products or services that are “owed” to customers. Market analysts indicate that an increase in the
unearned revenue liability, rather than raising a red flag, often provides a positive signal about
sales and profitability. When the sales are growing, its unearned revenue account should grow.
Thus, an increase in a liability may be good news about company performance. In contrast, when
unearned revenues decline, the company owes less future amounts but this also means that sales
of new products may have slowed.
6. Payables and receivables generally involve an interest element. Recognition of the interest element
(the cost of money as a factor of time and risk) results in valuing future payments at their current
value. The present value of a liability represents the debt exclusive of the interest factor.
7. A zero-interest-bearing note is initially recorded at the amount of cash received (or the present
value of the note). The present value of the note equals the face value of the note at maturity less
the interest charged by the lender for the term of the note. As time passes, interest is accrued as
an increase to the note payable.

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Questions Chapter 13 (Continued)
8. Liabilities that are due on demand (callable by the creditor) should be classified as a current
liability. Classification of the debt as current is required because it is a reasonable expectation that
existing working capital will be used to satisfy the debt. Liabilities often become callable by the
creditor when there is a violation of the debt agreement. Only if the creditor agrees before the
reporting date to provide a grace period that extends at least twelve months past the reporting date
can the debt be classified as non-current.
9. A company should exclude a short-term obligation from current liabilities only if (1) it intends to
refinance the obligation on a long-term basis, and (2) it has an unconditional right to defer
settlement of the liability for at least twelve months after the reporting date.
10. The ability to defer settlement of short-term debt may be demonstrated by entering into a financing
agreement that clearly permits the company to refinance the debt on a long-term basis on terms that
are readily determinable before the next reporting date.
11. A cash dividend formally authorized by the board of directors would be recorded by a debit to
Retained Earnings and a credit to Dividends Payable. The Dividends Payable account should be
classified as a current liability.
An accumulated but undeclared dividend on cumulative preference shares is not recorded in the
accounts as a liability until declared by the board, but such arrearages should be disclosed either
by a footnote to the statement of financial position or parenthetically in the share capital section.
A share dividend distributable, formally authorized and declared by the board, does not appear as
a liability because a share dividend does not require future outlays of assets or services and is
revocable by the board prior to issuance. Even so, an undistributed share dividend is generally
reported in the equity section since it represents retained earnings in the process of transfer to
share capital.
12. Unearned revenue arises when a company receives cash or other assets as payment from a
customer before conveying (or even producing) the goods or performing the services which it has
committed to the customer.
Unearned revenue is assumed to represent the obligation to the customer to refund the assets
received in the case of nonperformance or to perform according to the agreement and thus earn
the unrestricted right to the assets received. While there may be an element of unrealized profit
included among the liabilities when unearned revenues are classified as such, it is ignored on the
grounds that the amount of unrealized profit is uncertain and usually not material relative to the
total obligation.
Unearned revenues arise from the following activities:

(1) The sale by a transportation company of tickets or tokens that may be exchanged or used to
pay for future fares.
(2) The sale by a restaurant of meal tickets that may be exchanged or used to pay for future meals.
(3) The sale of gift certificates by a retail store.
(4) The sale of season tickets to sports or entertainment events.
(5) The sale of subscriptions to magazines.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

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13. Compensated absences are employee absences such as vacation, illness, maternity, paternity,
and jury leaves for which it is expected that employees will be paid.
14. A liability should be accrued for the cost of compensated absences if the employer has an
obligation to make payment to an employee even after terminating his or her employment (vested
rights) or if the employees can carry forward the rights to future periods if not used in the period in
which earned (accumulated rights).
15. Vested rights with respect to compensated absences exist if the employer has an obligation to
make payment to an employee even after terminating his or her employment. Accumulated rights
are those that employees can carry forward to future periods if not used in the period in which
earned. Non-accumulated rights do not carry forward, but lapse if not used within the period
earned. Vested and accumulated rights are accrued by the employer as these are earned by the
employee. Non-accumulated rights are recognized only when the absence commences.
16. Employers generally hold back from each employee’s wages amounts to cover income taxes
(withholding), the employee’s share of social security taxes, and other items such as union dues or
health insurance. In addition, the employer must set aside amounts to cover the employer’s share
of social security taxes. These latter amounts are recorded as payroll expenses and will lower
Battle’s income. In addition, the amount set aside (both the employee and the employer share) will
be reported as current liabilities until they are remitted to the appropriate third party.
17. Value-added taxes (VAT) are used by tax authorities more than sales taxes (over 100 countries
require that companies collect a value-added tax). A value-added tax is a consumption tax. This
tax is placed on a product or service whenever value is added at a stage of production and at final
sale. A VAT is a cost to the end user which is normally a private individual similar to a sales tax.
However, a VAT should not be confused with a sales tax. A sales tax is collected only once at the
consumer's point of purchase. No one else in the production or supply chain is involved in the
collection of the tax. In a VAT taxation system, the VAT is collected every time a business
purchases products from another business in the product's supply chain.
18. A provision is defined as a liability of uncertain timing or amount and is sometimes referred to as an
estimated liability. Common types of provisions are obligations related to litigation, warranties,
product guarantees, business restructurings, and environmental damage.
19. A provision should be recorded and a charge accrued to expense only if:
(a) the company has a present obligation (constructive or legal) as a result of a past event,
(b) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation, and
(c) a reliable estimate can be made of the amount of the obligation.

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20. A current liability such as accounts payable is susceptible to precise measurement because the date
of payment, the payee, and the amount of cash needed to discharge the obligation are reasonably
certain. There is nothing uncertain about (1) the fact that the obligation has been incurred and (2) the
amount of the obligation.
A provision is a liability of uncertain timing or amount and has greater uncertainty about the timing
or amount of the future expenditure required to settle the obligation.
21. In determining whether a provision should be recognized, in addition to assessing whether a past
event has occurred and a reliable estimate can be developed, a company must also assess
whether the outflow of resources is probable. The term probable is defined as “more likely than
not” to occur. This phrase is interpreted to mean the probability of occurrence is greater than 50
percent. If the probability is 50 percent or less, the provision is not recognized.
With respect to contingencies, Illustrations 13-16 and 13-18 in the text summarize the general
guidelines for the accounting and reporting of contingent liabilities and assets. As indicated there,
virtually certain corresponds to a high probability of occurrence (at least 90%). Thus, a provision
would be recorded under these circumstances. Contingent assets are not recognized on the
statement of financial position unless realization of the contingent asset is virtually certain—that is,
it is no longer considered a contingent asset and is recognized as an asset. Again, virtually certain
is generally interpreted to be at least a probability of 90 percent or more. Disclosure related to a
contingent asset is required when probable (more likely than not). No disclosure is required when
the probability of inflow of economic benefits is less the 50%.
22. A legal obligation generally results from a contract or legislation. A constructive obligation is an
obligation derived from the company’s actions where (a) by an established pattern of past practice,
published policies, or a sufficiently specific current situation, the company has indicated to other
parties that it will accept certain responsibilities; and (b) as a result, the company has created a
valid expectation on the part of those other parties that it will discharge those responsibilities.
23. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the
contract at the time the product is sold. This type of warranty is included in the sales price of the
company's product and does not create a separate performance obligation. At each financial
statement date, a company accrues warranty expense for expected costs under the assurance
warranty.
24. Under IFRS, companies may not record provisions for future operating losses. Such provisions do
not meet the definition of a liability, since the amount is not the result of a past transaction (the
losses have not yet occurred). Therefore, the liability has not been incurred. Furthermore,
operating losses reflect general business risks for which a reasonable estimate of the loss could
not be determined. Note that use of provisions in this way is one of the examples of earnings
management discussed in Chapter 4. By reducing income in good years through the use of
contingencies, companies can smooth out their income from year-to-year.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: International, AICPA FC: Reporting, AICPA PC: Communication

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25. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the
contract at the time the product is sold. This type of warranty is included in the sales price of the
company's product and does not create a separate performance obligation. Warranties that
provide an additional service beyond the assurance-type warranty are referred to as service-type
warranty. This warranty is not included in the sales price of the product. As a consequence, it is
recorded as a separate performance obligation.
26. Onerous contracts are ones in which the unavoidable costs of meeting the obligations exceed the
economic benefits expected to be received. Examples include a loss to be recognized on an
unfavorable non-cancellable purchase commitment for inventory, and a lease cancellation fee for a
facility that is no longer being used.
27. A restructuring is a program that is planned and controlled by management and materially changes
either (1) the scope of a business undertaken by the company; or (2) the manner in which the
business is conducted. Costs that should not be included in a restructuring provision include
investment in new systems, lower utilization of facilities, costs of training or relocating staff, costs
of moving assets or operations, administration or marketing costs, allocation of corporate
overhead, and expected future operating costs or expected operating losses unless they relate to
an onerous contract.
28. An environmental provision must be recognized when a company has an existing legal obligation
associated with the retirement of a long-lived asset and when the amount can be reasonably
estimated.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: Legal, AICPA FC: Reporting, AICPA PC: Communication
29. The absence of insurance does not mean that a liability has been incurred at the date of the financial
statements. Until the time that an event occurs there can be no diminution in the value of property
or incurrence of a liability. If an event has occurred which exposes an enterprise to risks of injury to
others and/or damage to the property of others, then a contingent liability exists. Expected future
injury, damage, or loss resulting from lack of insurance need not be recorded or disclosed if no
contingent liability exists. A contingent liability exists only if an uninsurable event which causes probable
loss has occurred. Lack of insurance is not in itself a basis for recording a liability or loss.
30. In determining whether or not to record a liability for pending litigation, the following factors must
be considered:
(a) The time period in which the underlying cause for action occurred.
(b) The probability of an unfavorable outcome.
(c) The ability to make a reliable estimate of the amount of loss.
Before recording a liability for threatened litigation, the company must determine:
(a) The degree of probability that a suit may be filed or a claim or assessment may be asserted,
and
(b) The probability of an unfavorable outcome.
If both are probable, the loss reliably estimable, and the cause for action dated on or before the
date of the financial statements, the liability must be accrued.

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31. There are several defensible recommendations for listing current liabilities: (1) in order of maturity,
(2) in descending order of amount, (3) in order of liquidation preference. The authors’ recent review
of published financial statements disclosed that a significant majority of the published financial
statements examined listed “notes payable” first, regardless of relative amount, followed most often by
“accounts payable,” and ending the current liability section with “current portion of long-term debt.”
32. The acid-test ratio and the current ratio are both measures of the short-term debt-paying ability of
the company. The acid-test ratio excludes inventories and prepaid expenses on the basis that these
assets are difficult to liquidate in an emergency. The current ratio and the acid-test ratio are similar
in that both numerators include cash, short-term investments, and net receivables, and both
denominators include current liabilities.
33. (a) A liability for goods purchased on credit should be recorded when title passes to the purchaser.
If the terms of purchase are f.o.b. destination, title passes when the goods purchased arrive; if
f.o.b. shipping point, title passes when shipment is made by the vendor.
(b) A provision for an onerous contract is recorded when it is determined that the corporation is a
party to a contract that is considered onerous and as a result has a present obligation, it is
probable that an outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate of the obligation can be made.
(c) A special bonus to employees should be recorded when approved by the board of directors or
person having authority to approve, if the bonus is for a period of time and that period has
ended at the date of approval.
(d) A provision for warranties should be recorded when it is probable that customers will make
warranty claims and the corporation can reasonably estimate the costs involved.
(e) Profit-sharing payments are considered additional wages and the liability should be recorded
in the year the profit-sharing relates to.

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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13.1
July 1
Purchases.......................................................................... 60,000
Accounts Payable.................................................... 60,000
Freight-In........................................................................... 1,200
Cash................................................................. 1,200
July 3
Accounts Payable............................................................. 6,000
Purchase Returns and Allowances........................ 6,000
July 10
Accounts Payable............................................................. 54,000
Cash (€54,000 X 98%).............................................. 52,920
Purchase Discounts................................................ 1,080
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 13.2
November 1, 2018
Cash................................................................................... 40,000
Notes Payable.......................................................... 40,000
December 31, 2018

Interest Expense............................................................... 600
Interest Payable
($40,000 X 9% X 2/12)........................................... 600
February 1, 2019
Notes Payable................................................................... 40,000
Interest Payable................................................................ 600
Interest Expense............................................................... 300
Cash [($40,000 X 9%
X 3/12) + $40,000]................................................. 40,900

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BRIEF EXERCISE 13.3
November 1, 2018
Cash...................................................................................
60,000,000
Notes Payable 60,000,000
December 31, 2018

Interest Expense 900,000
Notes Payable (¥1,350,000 X 2/3) 900,000
February 1, 2019
Interest Expense 450,000
Notes Payable 450,000
Notes Payable 61,350,000

Cash 61,350,000
BRIEF EXERCISE 13.4
(a) While Burr has the intent to refinance, Burr did not have the
unconditional right to defer payment as of December 31. The entire
amount would be reported as current liability.
(b) While Burr has the intent to refinance, Burr did not have the
unconditional right to defer payment as of December 31. The entire
amount would be reported as current liability.
BRIEF EXERCISE 13.5
The debt becomes payable on demand because of the breach of a covenant

and therefore should be reported as a current liability. The agreement with
the lender to provide a waiver of the breach is after the financial reporting
date and does not affect the classification of the debt obligation as of
December 31.

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BRIEF EXERCISE 13.6
8/1/19 Cash...................................................................................
216,000
Unearned Subscription Revenue
(12,000 X €18)........................................................ 216,000
12/31/19 Unearned Subscription Revenue....................................

90,000
Subscription Revenue
(€216,000 X 5/12 = £90,000).................................. 90,000
BRIEF EXERCISE 13.7
(a) Accounts Receivable........................................................31,800

Sales Revenue......................................................... 30,000
Value-Added Taxes Payable
(€30,000 X 6% = €1,800)........................................ 1,800
(b) Cash...................................................................................20,670
Sales Revenue (€20,670 ÷ 1.06 = €19,500)............. 19,500
Value-Added Taxes Payable................................... 1,170
BRIEF EXERCISE 13.8
Cash (€5,000 + €750)......................................................... 5,750

Sales Revenue......................................................... 5,000
(€5,000 X 15%) 750
BRIEF EXERCISE 13.9
Salaries and Wages Expense.......................................... 24,000

Social Security Taxes Payable............................... 1,920
Withholding Taxes Payable.................................... 2,990
Insurance Premiums Payable................................. 250
Cash.......................................................................... 18,840

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BRIEF EXERCISE 13.10

Salaries and Wages Payable (30 X 2 X €700)........ 42,000
December 31, 2018

Salaries and Wages Payable.................................. 350,000
February 15, 2019

Salaries and Wages Payable............................................ 350,000
Cash.......................................................................... 350,000
(a) Lawsuit Loss.....................................................................

900,000
Lawsuit Liability....................................................... 900,000
(b) No entry is necessary. The loss is not accrued because it is not

probable that a liability has been incurred at December 31, 2019.
LO: 2,3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
Buchanan should record a litigation accrual on the patent case, since the
amount is both reliably estimable and probable. This entry will reduce income
by $300,000 and Buchanan will report a litigation liability of $300,000. The
$100,000 self-insurance allowance has no impact on income or liabilities.

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Oil Platform....................................................................... 450,000

Environmental Liability........................................... 450,000
During 2019
Warranty Expense.............................................................
70,000
Inventory....................................................................... 70,000
2019
Cash 1,000,000
Sales............................................................................. 1,000, 000
12/31/19
55,000
Warranty Liability......................................................... 55,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
(a) Cash...................................................................................
1,980,000
Unearned Warranty Revenue
(20,000 X €99)........................................................ 1,980,000
(b) Warranty Expense.............................................................

180,000
Inventory.................................................................. 180,000
(c) Unearned Warranty Revenue........................................... 495,000

Warranty Revenue
(€1,980,000 ÷ 4)..................................................... 495,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

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Premium Expense.............................................................. 96,000

Premium Liability...................................................... 96,000*
*Box top codes expected to be sent in (30% X 360,000

1,200,000)............................................................................
Box top codes already redeemed.................................... 120,000
Estimated future redemptions.......................................... 240,000
Cost of estimated claims outstanding
(240,000 ÷ 3) X ($1.10 + $0.60 – $0.50).......................... $ 96,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
Cargo Company’s lawsuit claim represents a contingent asset because the

odds of winning the case are 75% (probable, but not virtually certain).
Contingent assets are not recognized on the statement of financial position.
Costs that should not be included in a restructuring provision include

marketing costs to rebrand the company image and expected future losses
for keeping the plant open for another year.
Loss on Lease Contract.....................................................1,450,000

Lease Contract Liability............................................ 1,450,000

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SOLUTIONS TO EXERCISES
EXERCISE 13.1 (10–15 minutes)
(a) Current liability.

(b) Current liability.
(c) Current liability or non-current liability depending on term of warranty.
(d) Current liability.
(e) Footnote disclosure (assume possible not probable).
(f) Current liability.
(g) Current or non-current liability depending upon the time involved.
(h) Current liability.
(i) Current liability.
(j) Current liability.
(k) Current liability.
(l) Current liability.
(m) Current liability.
(n) Current liability.
(o) Footnote disclosure.
(p) Separate presentation in either current or non-current liability section.
(a) September 1, 2019

Purchases..........................................................................
50,000
October 1, 2019
Accounts Payable.............................................................
50,000
Notes Payable.......................................................... 50,000
Cash...................................................................................
75,000
Notes Payable.......................................................... 75,000
(b) December 31, 2019

Interest Expense...............................................................
1,000
Interest Payable
($50,000 X 8% X 3/12)........................................... 1,000
1,500
Notes Payable ($6,000 X 3/12)................................ 1,500

lOMoARcPSD|35101974
EXERCISE 13.2 (Continued)
(c) 1. Notes payable................................. $50,000

Interest payable.............................. 1,000
$51,000
2. Notes payable ($75,000 + $1,500). $76,500

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
ALEXANDER AG
Partial Statement of Financial Position
December 31, 2018
Current liabilities:
Notes payable (Note 1)...................................................... €1,200,000
NOTE 1:
Short-term debt refinanced. As of December 31, 2018, the company had notes
payable totaling €1,200,000 due on February 2, 2019. These notes were
refinanced on their due date to the extent of €900,000 received from the
issuance of ordinary shares on January 21, 2019. The balance of €300,000
was liquidated using current assets.
Short-term obligation A. While the maturity of the obligation was extended

to March 1, 2021, the agreement was not reached with the lender until
February 1, 2019. Since the agreement was not in place as of the reporting
date (December 31, 2018), the obligation should be reported as a current
liability.
Short-term obligation B. The maturity of the obligation was extended to

February 1, 2020 and the agreement with the lender was signed on
December 18, 2018. Since the agreement was in place as of the reporting
date (December 31, 2018), the obligation is reported as a non-current
liability.

lOMoARcPSD|35101974
1. Debt that is callable on demand by the lender at any time should be

classified as a current liability. The callable on demand feature overrides
the stated maturity of December 31, 2021.
2. When there is a breach of a debt covenant, the debt is normally

classified as a current liability. However, if the company is able to
obtain a period of grace from the lender prior to the reporting date as
Mckee did (the agreement was reached on December 8, 2018), the
debt should be classified as non-current.
3. Mckee should classify £100,000 of the obligation as a current maturity

of long-term debt (current liability) and the £300,000 balance as a non-
current liability.
4. While the maturity of the obligation was extended to February 15,

2021, the agreement was not reached with the lender until January 15,
2019. Since the agreement was not in place as of the reporting date
(December 31, 2018), the obligation should be reported as a current
liability.
(a) 2018
To accrue expense and liability for compensated absences
Salaries and Wages Expense............................... 13,824

Salaries and Wages Payable (Vacation).... 8,640 (1)
Salaries and Wages Payable (Sick Pay).... 5,184 (2)
To record payment for compensated time when used by employees
Salaries and Wages Payable (Sick Pay).............. 3,456 (3)

Cash.............................................................. 3,456

lOMoARcPSD|35101974
2019
To accrue expense and liability for compensated absences
Salaries and Wages Expense............................... 14,976

Salaries and Wages Payable (Vacation).... 9,360 (4)
Salaries and Wages Payable (Sick Pay).... 5,616 (5)
To record payment for compensated time when used by employers
Salaries and Wages Expense.............................. 792

Salaries and Wages Payable (Vacation)............. 7,776 (6)
Salaries and Wages Payable (Sick Pay)............. 4,536 (7)
Cash.............................................................. 13,104 (8)
(1) 9 employees X €12.00/hr. X 8 hrs./day X 10 days = €8,640

(7) 9 employees X €12.00/hr. X 8 hrs./day X (6–4) days = €1,728
9 employees X €13.00/hr. X 8 hrs./day X (5–2) days = +2,808 = €4,536
9 employees X €13.00/hr. X 8 hrs./day X 5 days = +4,680 = €13,104
NOTE: Vacation days and sick days are paid at the employee’s current wage.
Also, if employees earn vacation pay at different pay rates, a consistent pattern
of recognition (e.g., first-in, first-out) could be employed to recognize
liabilities that have been paid.

lOMoARcPSD|35101974
(b) Accrued liability at year-end:
2018 2019
Vacation Sick Pay Vacation Sick Pay
Payable Payable Payable Payable
Jan. 1 balance € 0 € 0 € 8,640 €1,728
+ accrued 8,640 5,184 9,360 5,616
– paid (0) (3,456) (7,776) (4,536)
Dec. 31 balance €8,640(1) €1,728(2) €10,224 (3) €2,808(4)
(1) 9 employees X €12.00/hr. X 8 hrs./day X 10 days = € 8,640
(2) 9 employees X €12.00/hr. X 8 hrs./day X (6–4) days = € 1,728
(3) 9 employees X €12.00/hr. X 8 hrs./day X (10–9) days = € 864

9 employees X €13.00/hr. X 8 hrs./day X 10 days = +9,360
€10,224
(4) 9 employees X €13.00/hr. X 8 hrs./day X (6 + 6 – 4 – 5)

days € 2,808
(a) 2018
To accrue the expense and liability for vacations
Salaries and Wages Expense................. 9,288 (1)

Salaries and Wages Payable......... 9,288
To record sick leave paid

Cash................................................ 3,456
To record vacation time paid

No entry, since no vacation days were used.

lOMoARcPSD|35101974

2019
To accrue the expense and liability for vacations
Salaries and Wages Payable......... 9,864
To record sick leave paid
Cash................................................ 4,680
To record vacation time paid
Salaries and Wages Expense................. 65
Salaries and Wages Payable.................. 8,359 (5)
Cash................................................ 8,424 (6)

(b) Accrued liability at year-end:
2018 2019
Jan. 1 balance € 0 € 9,288
+ accrued 9,288 9,864
– paid (0) (8,359)
Dec. 31 balance €9,288(1) €10,793(2)
(1) 9 employees X €12.90/hr. X 8 hrs./day X 10 days...... € 9,288
(2) 9 employees X €12.90/hr. X 8 hrs./day X 1 day.......... € 929

9 employees X €13.70/hr. X 8 hrs./day X 10 days...... 9,864
€10,793

lOMoARcPSD|35101974
(a) June 30
Sales Revenue.......................................................... 23,700
Sales Taxes Payable...................................... 23,700
Computation:
Sales plus sales tax (R$265,000
+ R$153,700)............................................ R$418,700
Sales exclusive of tax (R$418,700
÷ 1.06)......................................................(395,000)
Sales tax......................................................
R$ 23,700
(b) If the adjusting entry related to a VAT rather than sales tax, it would be
recorded as follows:
Sales Revenue..................................................................
23,700
Value Added Taxes Payable.................................... 23,700
EXERCISE 13.9 (10 minutes)
(a) Cash (€40,000 + €6,000)....................................................46,000

Sales Revenue......................................................... 40,000
Value Added Taxes Payable (€40,000 X 15%)........ 6,000
(b) Eastwood Ranchers does not have a net cash outlay related to the
VAT. Eastwood Ranchers collected €4,500 of VAT, and then remitted
this amount to the tax authority.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

lOMoARcPSD|35101974

Social Security Taxes Payable*.............................. 27,200
Union Dues Payable................................................ 9,000
Cash.......................................................................... 223,800
*[¥340,000 X 8% = ¥27,200]
Payroll Tax Expense......................................................... 27,200

(See previous computation.)
(a) Computation of taxes

Factory
Wages......................................... €140,000
Social security taxes................. 11,200 (8% X €140,000)
Total cost................................... €151,200
Sales
Wages......................................... €32,000
Total cost................................... €34,560
Administrative
Wages......................................... €36,000
Total cost................................... €38,880

lOMoARcPSD|35101974
Schedule
Total Factory Sales Administrative

Wages €208,000 €140,000 €32,000 €36,000
Social Security 16,640 11,200 2,560 2,880
Total Cost €224,640 €151,200 €34,560 €38,880
(b)
Factory Payroll:
Salaries and Wages Expense........................ 140,000
Withholding Taxes Payable................... 16,000
Social Security Taxes Payable.............. 11,200
Cash........................................................ 112,800
Payroll Tax Expense....................................... 11,200

Sales Payroll:
Cash........................................................ 22,440

Administrative Payroll:
Cash........................................................ 27,120


lOMoARcPSD|35101974

July 10, 2019
Cash (200 X £4,000)..........................................................
800,000
Sales Revenue......................................................... 800,000
During 2019
Warranty Expense............................................................. 17,000
Inventory.................................................................. 17,000
December 31, 2019
49,000
Warranty Liability (£66,000-£17,000)...................... 49,000
At Sale
(a) Cash...................................................................................
3,000,000
Sales Revenue......................................................... 3,000,000
During 2019
20,000
Cash, Supplies, Wages Payable............................. 20,000
December 31, 2019

35,000
Warranty Liability (€55,000 − €20,000)................... 35,000
At Sale
(b) Cash...................................................................................
3,000,000
Sales Revenue......................................................... 2,944,000
Unearned Warranty Revenue.................................. 56,000
During 2019
20,000
Cash, Supplies, Wages Payable............................. 20,000

lOMoARcPSD|35101974
December 31, 2019

Unearned Warranty Revenue...........................................
28,000
Warranty Revenue................................................... 28,000
(€56,000 ÷ 2)
LO: 2, Bloom: AP, Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 13-14 (15–20 minutes)
Inventory of Premiums (8,800 X $.80)............................. 7,040

Cash.......................................................................... 7,040
During 2019
Cash (110,000 X $3.30)..................................................... 363,000
Sales Revenue......................................................... 363,000
Premium Expense............................................................. 3,520

Inventory of Premiums [(44,000 ÷ 10) X $.80]........ 3,520
December 31, 2019

Premium Expense............................................................. 1,760*
Premium Liability..................................................... 1,760
*[(110,000 X 60%) – 44,000] ÷ 10 X $.80 = 1,760


lOMoARcPSD|35101974
(1) Lease termination penalties are included. The ¥400,000 penalty to break
the lease should therefore be included.
(2) Allocations of overhead are excluded.
(3) Costs of training staff are excluded.
(4) Use of an outplacement firm to assist with the terminations are

employee termination costs directly related to the restructuring and
should be included.
(5) Termination costs directly related to the restructuring are included.
(6) Costs of moving assets to other divisions are excluded.

lOMoARcPSD|35101974
(a) A restructuring is a program that is planned and controlled by

management and materially changes either (1) the scope of a business
undertaken by the company; or (2) the manner in which that business is
conducted.
Examples include sale of a line of business, eliminating a layer of

management, and closure of operation in a country.
(b) The two provisions are described that the company (1) has a detailed
formal plan for the restructuring; and (2) raises a valid expectation to
those affected by implementation or announcement of the plan.
(c) Dolman may include the following costs as part of the restructuring
provision: employee termination costs related to closing the division;
and onerous contract provisions related to the closing.
1. The IASB requires that, when some amount within the range of ex-
pected loss appears at the time to be a better estimate than any other
amount within the range, that amount is accrued. When no amount
within the range is a better estimate than any other amount, the
expected value (midpoint of the range) should be used. In this case,
therefore, Maverick ASA. would report a liability of €1,100,000 at
December 31, 2019.
2. The loss should be accrued for €6,000,000. The potential insurance

recovery is a contingent asset—it is not recorded until received.
According to IFRS, claims for recoveries may only be recorded if the
recovery is deemed virtually certain.
3. This is a contingent asset because the amount to be received will be in

excess of the book value of the plant. Contingent assets are not
recorded and are disclosed only when the probabilities are high
(virtually certain) that a contingent asset will become reality.
LO: 2,3, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

lOMoARcPSD|35101974
(a) January 1, 2019

Depot..................................................................................
600,000
Cash.......................................................................... 600,000
Depot..................................................................................
39,087
Environmental Liability........................................... 39,087
(b) December 31, 2019

Depreciation Expense......................................................
60,000
Accumulated Depreciation—Depot........................ 60,000
Depreciation Expense......................................................
3,909
Accumulated Depreciation—Depot........................ 3,909*
2,345
Environmental Liability........................................... 2,345**
*$39,087/10
**$39,087 X .06
(c) December 31, 2028

Environmental Liability.................................................... 70,000
Loss on Settlement of Environmental Liability.............. 10,000
Cash.......................................................................... 80,000

lOMoARcPSD|35101974
1. Liability for stamp redemptions, 12/31/18 $13,000,000

Cost of redemptions redeemed in 2019 (6,000,000)
7,000,000
Cost of redemptions to be redeemed in 2020
(5,200,000 X 80%) 4,160,000
Liability for stamp redemptions, 12/31/19 $11,160,000
2. Total coupons issued $800,000

Redemption rate 60%
To be redeemed 480,000
Handling charges ($480,000 X 10%) 48,000
Total cost $528,000
Total cost $528,000

Total payments to retailers 330,000
Liability for unredeemed coupons $198,000
3. Boxes 700,000
Redemption rate 70%
Total redeemable 490,000
Coupons to be redeemed (490,000 – 250,000) 240,000

Cost ($6.50 – $4.00) $2.50
Liability for unredeemed coupons $600,000

lOMoARcPSD|35101974
1. The present value of the major overhaul payments (£3,200,000) should

be included as part of the cost of the ship. The ship should be
recorded at £23,200,000.
January 1, 2019
Ship 23,200,000
Cash 20,000,000
Environmental Liability 3,200,000
December 31, 2019

Depreciation Expense 580,000
Accumulated Depreciation—Ship 580,000
Note: Bruegger would also accrue interest at the effective rate on the
Environmental Liability.
2. The lease is considered an onerous contract because the unavoidable

costs of meeting the obligations under the lease exceed the benefits
(facilities will no longer be used). The expected costs to satisfy the
onerous contract (the £62,000 penalty for non-payment) are accrued.
December 31, 2019

Loss on Lease Contract 62,000
Lease Contract Liability 62,000
3. The company should recognize the costs associated with dismantling

the plant upon building the plant as it has a legal obligation associated
with its retirement.
January 2, 2020
Nuclear Power Plant 40,000,000
Cash 40,000,000
Nuclear Power Plant 1,000,000

Environmental Liability 1,000,000

lOMoARcPSD|35101974
1. Total warranty liability at December 31, 2019 is $5,000,000 as

computed below
*Expected warranty costs
% Units Cost per Total Costs

Unit
No defects 60% 600,000 $ 0 $ 0
Major defects 30% 300,000 15 4,500,000
Minor defects 10% 100,000 5 500,000
Total 100% 1,000,000 $5,000,000
2. The expected amount of $400,000 should be reported as income taxes

payable at December 31, 2019.

lOMoARcPSD|35101974
# Assets Liabilities Equity Net Income
1. I I NE NE
2. NE NE NE NE
3. NE I D D
4. I I NE NE
5. NE I D D
6. I I I I
7. D I D D
8. NE I D D
9. NE I D D
10. I I NE NE
11. NE I D D
12. I I I I
13. D D NE NE
14. NE I D D
15. D NE D D
16. NE D I I

lOMoARcPSD|35101974
Current Assets ¥210,000

(a) Current ratio = = = 3.00 times
Current Liabilities ¥70,000
Current ratio measures the short-term ability of the company to meet

its currently maturing obligations.
Cash + Short-term Investments + Net Receivables

(b) Acid-test ratio =
Current Liabilities
¥115,000
= = 1.64 times
¥70,000
Acid-test ratio also measures the short-term ability of the company to

meet its currently maturing obligations. However, it eliminates assets
that might be slow moving, such as inventories and prepaid expenses.
Total Liabilities ¥210,000

(c) Debt to assets = = = 48.84%
Total Assets ¥430,000
This ratio provides the creditors with some idea of the corporation’s
ability to withstand losses without impairing the interests of creditors.
Net Income ¥25,000

(d) Return on assets = = = 5.81%
Average Total Assets ¥430,000
This ratio measures the return the company is earning on its average
total assets and provides one indication related to the profitability of
the enterprise.

lOMoARcPSD|35101974
¥733,000
(a) (1) Current ratio = = 3.05
¥240,000
¥52,000 + ¥158,000 + ¥80,000

(2) Acid-test ratio = = 1.21
¥240,000
(3) Accounts receivable turnover =

¥80,000 + ¥158,000
¥1,640,000 ÷ = 13.8 times (or approximately
2
every 26 days)
(4) Inventory turnover =

¥360,000 + ¥440,000
¥800,000 ÷ = 2 times (or approximately
2
every 183 days)
(5) Return on assets =

¥1,400,000 + ¥1,630,000
¥320,000 ÷ = 21.12%
2
(6) Profit margin on sales =

¥320,000 ÷ ¥1,640,000 = 19.51%
(b) Financial ratios should be evaluated in terms of industry peculiarities

and prevailing business conditions. Although industry and general
business conditions are unknown in this case, the company appears
to have a relatively strong current position. The main concern from a
short-term perspective is the apparently low inventory turnover. The
return on assets and profit margin on sales are extremely good and
indicate that the company is employing its assets advantageously.

lOMoARcPSD|35101974
(a) (1) €318,000 ÷ €87,000 = 3.66 times
€200,000 + €170,000 = 4.43 times

(2) €820,000 ÷ 2 (or approximately 82 days).
(3) €1,400,000 ÷ $95,000 = 14.74 times (or approximately 25 days).
(4) €210,000 ÷ 52,000 (€260,000 ÷ €5) = €4.04
(5) €210,000 ÷ €1,400,000 = 15.0%
(6) €210,000 ÷ €488,000 = 43.03%
(b) (1) No effect on current ratio, if already included in the allowance

for doubtful accounts.
(2) Weaken current ratio by reducing current assets.
(3) Improve current ratio by reducing current assets and current

liabilities by a like amount.
(4) No effect on current ratio.
(5) Weaken current ratio by increasing current liabilities.
(6) No effect on current ratio.

lOMoARcPSD|35101974
TIME AND PURPOSE OF PROBLEMS

Problem 13.1 (Time 25–30 minutes)
Purpose—to present the student with an opportunity to prepare journal entries for a variety of situations
related to liabilities. The situations presented are basic ones including purchases and payments on
account, and borrowing funds by giving a note. The student is also required to prepare year-end
adjusting entries.

Purpose—to present the student with the opportunity to prepare journal entries for several different
situations related to liabilities. The situations presented include accruals and payments related to sales,
use, and environmental liabilities.

Purpose—to present the student with an opportunity to prepare journal entries for four weekly payrolls.
The student must compute income tax to be withheld, and social security tax.

Purpose—to provide the student with the opportunity to prepare journal entries for a monthly payroll.
The student must compute income tax to be withheld, and social security tax.

Purpose—to provide the student with an opportunity to prepare journal entries and statement of
financial position presentations for warranty costs. Entries in the sales year and one subsequent year
are required. While the problem is basic in nature it does test the student’s ability to understand and
apply the sales warranty method.

Purpose—to provide the student with a basic problem covering the sales-warranty method. The student
is required to prepare journal entries in the year of sale and in subsequent years when warranty costs
are incurred. Also required are statement of financial position presentations for the year of sale and one
subsequent year. The problem highlights the differences between assurance and service-type
warranties in the accounts and on the statement of financial position.

Purpose—to provide the student with an opportunity to prepare journal entries for warranty costs. The
student is also required to indicate the proper statement of financial position disclosures for the year of
sale.

Purpose—to provide the student with a basic problem in accounting for premium offers. The student is
required to prepare journal entries relating to sales, the purchase of the premium inventory, and the
redemption of coupons. The student must also prepare the year-end adjusting entry reflecting the esti-
mated liability for premium claims outstanding. A very basic problem.

lOMoARcPSD|35101974
Time and Purpose of Problems (Continued)

Purpose—to present the student with a slightly complicated problem related to accounting for premium
offers. The problem is more complicated in that coupons redeemed are accompanied by cash payments,
and in addition to the cost of the premium item postage costs are also incurred. The student is required
to prepare journal entries for various transactions including sales, purchase of the premium inventory,
and redemption of coupons for two years. The second year’s entries are more complicated due to the
existence of the liability for claims outstanding. Finally the student is required to indicate the amounts
related to the premium offer that would be included in the financial statements for each of two years.
This very realistic problem challenges the student’s ability to account for all transactions related to
premium offers.

Purpose—to present the student with the problem of determining the proper amount of and disclosure
for a contingent liability due to lawsuits. The student is required to prepare a journal entry and a
footnote. The student is also required to discuss any liability incurred by a company due to the risk of
loss from lack of insurance coverage. A straightforward problem dealing with contingent liabilities.

Purpose—to provide the student with a comprehensive problem dealing with contingent liabilities. The
student is required to prepare journal entries for each of five independent situations. For each situation
the student must also discuss the appropriate disclosure in the financial statements. The situations pre-
sented include a lawsuit, an expropriation, and a self-insurance situation. This problem challenges the
student not only to apply the guidelines set forth in IFRS, but also to develop reasoning as to how
the guidelines relate to each situation.

Purpose—to provide the student with a problem to calculate warranty expense, warranty liability, premium
expense, inventory of premiums, and estimated premium liability.

Purpose—to present the student with a comprehensive problem in determining various liabilities and
present findings in writing. Issues addressed relate to contingencies, warranties, and litigation.

Purpose—to present the student with a comprehensive problem in determining the amounts of various
liabilities. The student must calculate (for independent situations) the estimated liability for warranties,
and an estimated liability for premium claims outstanding. Journal entries are not required. This problem
should challenge the better students.

lOMoARcPSD|35101974
SOLUTIONS TO PROBLEMS
PROBLEM 13.1
(a) February 2
Purchases (€70,000 X 98%).................................... 68,600
Accounts Payable.......................................... 68,600
February 26
Purchase Discounts Lost........................................ 1,400
Cash................................................................ 70,000
April 1
Trucks....................................................................... 50,000
Cash................................................................ 4,000
Notes Payable................................................ 46,000
August 1
Retained Earnings (Dividends Declared).............. 300,000
Dividends Payable......................................... 300,000
September 10
Dividends Payable................................................... 300,000
Cash................................................................ 300,000
(b) December 31
1. No adjustment necessary
2. Interest Expense (€46,000 X 12% X 9/12).......... 4,140

Interest Payable............................................. 4,140
3. No adjustment necessary

lOMoARcPSD|35101974
PROBLEM 13.2
December 5
1. Cash...................................................................................
500
Returnable Deposit (Liability)................................. 500
December 1–31
2. Cash...................................................................................
798,000
Sales Revenue (€798,000 ÷ 1.05)............................ 760,000
(€760,000 X .05).....................................................38,000
December 10
3. Trucks (€120,000 X 1.05)...................................................
126,000
Cash..........................................................................
126,000
December 31
4. Parking Lot........................................................................
84,000
Environmental Liability...........................................84,000

lOMoARcPSD|35101974
PROBLEM 13.3
Entries for Payroll 1

Salaries and Wages Expense.......................................... 1,040.00*
Withholding Taxes Payable (10% X $1,040)*......... 104.00
Social Security Taxes Payable (8% X $1,040)....... 83.20
Union Dues Payable (2% X $1,040)........................ 20.80
Cash.......................................................................... 832.00
*$200 + $150 + $110 + $250 + $330 = $1,040
Payroll Tax Expense......................................................... 83.20

Entries for Payroll 2 and 3

Salaries and Wages Expense.......................................... 1,040.00*
Withholding Taxes Payable (10% X $1,040).......... 104.00
Cash.......................................................................... 832.00
*The total salaries and wages for payroll 2 and 3 are the same, also the
salaries and wages paid for vacation time are considered payment of
salaries and wages in those two periods.

Social Security Taxes Payable
(8% X $1,040)......................................................... 83.20

lOMoARcPSD|35101974
PROBLEM 13.3 (Continued)
Entries for Payroll 4

Salaries and Wages Expense.......................................... 1,040.00
Withholding Taxes Payable (10% X $1,040).......... 104.00
Cash.......................................................................... 832.00

Monthly Payment of Payroll Liabilities

Withholding Taxes Payable ($104.00 X 4)....................... 416.00
Social Security Taxes Payable ($83.20 X 8).................... 665.60
Union Dues Payable ($20.80 X 4)..................................... 83.20
Cash.......................................................................... 1,164.80

lOMoARcPSD|35101974
PROBLEM 13.4
(a)
Earnings September Income Tax Social
Name to Aug. 31 Earnings Withholding Security
B. D. Williams £ 6,800 £ 800 £ 80 £ 64
D. Raye 6,500 700 70 56
K. Baker 7,600 1,100 110 88
F. Lopez 13,600 1,900 190 152
A. Daniels 105,000 13,000 1,300 1,040
B. Kingston 112,000 16,000 1,600 1,280
Total £251,500 £33,500 £3,350 £2,680

Cash.......................................................................... 27,470
(b) Payroll Tax Expense.........................................................2,680

(c) Withholding Taxes Payable..............................................3,350

Social Security Taxes Payable.........................................5,360
Cash.......................................................................... 8,710

lOMoARcPSD|35101974
PROBLEM 13.5
(a) Cash (400 X £2,500)..........................................................

1,000,000
Warranty Expense (400 X [£155 + £185])........................ 136,000
Sales Revenue......................................................... 1,000,000
Warranty Liability..................................................... 136,000
(b) Current Liabilities:

Warranty Liability (£136,000 ÷ 2)............................ £68,000
Long-term Liabilities:
Warranty Liability (£136,000 ÷ 2)............................ £68,000
(c) Warranty Liability..............................................................

61,300
Inventory.................................................................. 21,400

lOMoARcPSD|35101974
PROBLEM 13.6
(a) Cash...................................................................................
294,300
Sales Revenue (300 X R$900)................................. 270,000
Unearned Warranty Revenue (270 X $90)................ 24,300
(b) Current Liabilities:

Unearned Warranty Revenue (R$24,300/3)............ R$ 8,100
(Note: Warranty costs assumed to be
incurred equally over the three-
year period)
Unearned Warranty Revenue
(R$24,300 X 2/3).................................................... R$16,200
(c) Unearned Warranty Revenue...........................................8,100

Warranty Revenue................................................... 8,100
Warranty Expense.............................................................6,000
Inventory.................................................................. 2,000
(d) Current Liabilities:

Unearned Warranty Revenue.................................. R$ 8,100
Unearned Warranty Revenue.................................. R$ 8,100
LO:2, Bloom: AP, Difficulty: Simple, Time: 10-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

lOMoARcPSD|35101974
PROBLEM 13.7
(a) Cash...................................................................................
4,440,000
Sales Revenue (600 X $7,400)................................... 4,440,000
Warranty Expense ([600 X $390] / 2)................................

117,000
Inventory ($170 X 600 X 1/2)..................................... 51,000
Salaries and Wages Payable
($220 X 600 X 1/2).................................................... 66,000
December 31, 2019

(b) Warranty Expense.............................................................
117,000
Warranty Liability...................................................... 117,000*
*(600 X $390) − $117,000
(c) Warranty Liability..............................................................

117,000
Inventory 51,000
Salaries and Wages Payable.................................... 66,000
(d) As of 12/31/19 the statement of financial position would disclose a

current liability in the amount of $117,000 for Warranty Liability.

lOMoARcPSD|35101974
PROBLEM 13.8
Inventory of Premiums..................................................... 60,000

Cash.......................................................................... 60,000
(To record purchase of 40,000 puppets at
€1.50 each)
During 2020
Cash................................................................................... 1,800,000
Sales Revenue......................................................... 1,800,000
(To record sales of 480,000 boxes at
€3.75 each)
Premium Expense............................................................. 34,500

Inventory of Premiums............................................ 34,500
[To record redemption of 115,000 coupons.
Computation: (115,000 ÷ 5) X €1.50 = €34,500]
December 31, 2020

Premium Expense............................................................. 23,100
[To record estimated liability for premium
claims outstanding at December 31, 2020.]
Computation: Total coupons issued in 2020.................. 480,000
Total estimated redemptions (40%)................................. 192,000

Coupons redeemed in 2020............................................. 115,000
Estimated future redemptions......................................... 77,000
Cost of estimated claims outstanding (77,000 ÷ 5) X €1.50 = €23,100

LO: 2, Bloom: AP, Moderate, Time: 15-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

lOMoARcPSD|35101974
PROBLEM 13.9
During 2019
(a)
Cash.......................................................................... 562,500
(To record the purchase of 250,000
MP3 downloads at £2.25 each)
Cash................................................................................... 868,620
Sales Revenue......................................................... 868,620
(To record the sale of 2,895,400 candy bars
at 30 pence each)
Cash [£600,000 – (240,000 X £.50)].................................. 480,000

Premium Expense............................................................. 60,000
[To record the redemption of 1,200,000
wrappers, the receipt of £600,000
(1,200,000 ÷ 5) X £2.50, and the mailing
of 240,000 MP3 downloads]
Computation of premium expense:

240,000 Codes @ £2.25 each =............................£540,000
Postage—240,000 X £.50 =................................... 120,000
£660,000
Less: Cash received—
240,000 X £2.50........................................ 600,000
Premium expense for MP3 downloads
issued................................................................£ 60,000
December 31, 2019

Premium Expense............................................................. 14,500*
(To record the estimated liability for
premium claims outstanding at 12/31/19)
*(290,000 ÷ 5) X (£2.25 + £.50 – £2.50) = £14,500

lOMoARcPSD|35101974
During 2020

Cash.......................................................................... 742,500
(To record the purchase of 330,000 MP3
downloads at £2.25 each)
Cash................................................................................... 823,080
Sales Revenue......................................................... 823,080
(To record the sale of 2,743,600 candy
bars at 30 pence each)
Cash (£750,000 – £150,000).............................................. 600,000

Premium Liability.............................................................. 14,500
Premium Expense............................................................. 60,500
(To record the redemption of 1,500,000
wrappers, the receipt of £750,000
[(1,500,000 ÷ 5) X £2.50], and the mailing
of 300,000 Codes.)
Computation of premium expense:

300,000 Codes @ £2.25 =.....................................£675,000
Postage—300,000 @ £.50 = ............................... 150,000
825,000
Less: Cash received—
(1,500,000 ÷ 5) X £2.50................................. 750,000
Premium expense for Codes issued...................... 75,000
Less: Outstanding claims at 12/31/19
charged to 2019 but redeemed in 2020....... 14,500
Premium expense chargeable to 2020...................£ 60,500
December 31, 2020

Premium Expense.............................................................£ 17,500*
*(350,000 ÷ 5) X (£2.25 + £.50 – £2.50) = £17,500

lOMoARcPSD|35101974
(b) Amount
Account 2019 2020 Classification
Inventory of Premiums £22,500* £90,000** Current asset
Premium Liability 14,500 17,500 Current liability
Premium Expense 74,500*** 78,000**** Selling expense
* £2.25 (250,000 – 240,000)

** £2.25 (10,000 + 330,000 – 300,000)
*** £60,000 + £14,500
**** £60,500 + £17,500
LO: 2, 4, Bloom: AP, Moderate, Time: 30-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

lOMoARcPSD|35101974
PROBLEM 13.10
(a) Because the cause for litigation occurred before the date of the finan-
cial statements (that is, it is a present obligation as a result of past
events) and because it is probable that an outflow of resources will be
required to settle the obligation and a reliable estimate can be made,
Wong Airlines should report a loss and a liability in the December 31,
2018, financial statements. The loss and liability might be recorded as
follows:
Loss from Uninsured Accident

(NT$9,000,000 X 60%)....................................................
5,400,000
Liability for Uninsured Accident............................ 5,400,000
Note to the Financial Statements

Due to an accident which occurred during 2018, the Company is a
defendant in personal injury suits totaling NT$9,000,000. The Company
is charging the year of the casualty with NT$5,400,000 in estimated
losses, which represents the amount that the company legal counsel
estimates will finally be awarded.
(b) Wong Airlines need not establish a liability for risk of loss from lack of
insurance coverage itself. IFRS does not require or allow the estab-
lishment of a liability for expected future injury to others or damage to
the property of others even if the amount of the losses is reasonably
estimable. The cause for a loss must occur on or before the reporting
date for a contingent liability to be recorded. However, the fact that
Wong is self-insured should be disclosed in a note.

lOMoARcPSD|35101974
PROBLEM 13.11
(a) 1. Loss from Uninsured Accident........................................

250,000
Liability for Uninsured Accident............................ 250,000
2. Loss from Expropriation..................................................

1,925,000
Allowance for Expropriation
[€5,725,000 – (40% X €9,500,000)]........................ 1,925,000
3. No entry required.
4. Loss on Lease Contract...................................................

950,000
Lease Contract Liability.......................................... 950,000
5. No entry required.
(b) 1. A loss and a liability have been recorded in the first case because
(i) the company has a present obligation as of the date of the
financial statements as the result of a past event, (ii) it is probable
that an outflow will be required to settle the obligation, and (iii) a
reliable estimate can be made. That is, the occurrence of the
uninsured accidents during the year plus the outstanding injury
suits and the attorney’s estimate of probable loss required
recognition of a contingent liability.

lOMoARcPSD|35101974
2. An entry to record a loss and establish an allowance due to threat

of expropriation is necessary because the expropriation is imminent
as evidenced by the foreign government’s communicated intent
to expropriate and the virtual certainty of a settlement from the
government. That is, enough evidence exists to reasonably estimate
the amount of the probable loss resulting from impairment of assets
at the reporting date. The amount of the loss is measured by the
amount that the carrying value (book value) of the assets exceeds
the expected compensation. At the time the expropriation occurs,
the related assets are written off against the allowance account.
In this problem, we established a valuation account because
certain specific assets were impaired. A valuation account was
established rather than a liability account because the net
realizability of the assets affected has decreased. A more appro-
priate presentation would, therefore, be provided for statement of
financial position purposes on the realizability of the assets. It
does not seem appropriate at this point to write off the assets
involved because it may be difficult to determine all the specific
assets involved, and because the assets still have not been
expropriated.

lOMoARcPSD|35101974
3. Even though Polska’s chemical product division is uninsurable

due to high risk and has sustained repeated losses in the past, as
of the reporting date no assets have been impaired or liabilities
incurred nor is an amount reasonably estimable. Therefore, this
situation does not satisfy the criteria for recognition of a
contingent liability. Also, unless a casualty has occurred or there is
some other evidence to indicate impairment of an asset prior to the
issuance of the financial statements, there is no disclosure
required relative to a contingent liability. The absence of insurance
does not of itself result in the impairment of assets or the
incurrence of liabilities. Expected future injuries to others or
damage to the property of others, even if the amount is reasonably
estimable, does not require recording a loss or a liability. The cause
for loss or litigation or claim must have occurred on or prior to the
reporting date and the amount of the loss must be reasonably
estimable in order for a contingent liability to be recorded.
Disclosure is required when one or both of the criteria for a
contingent liability are not satisfied and there is a reasonable
possibility that a liability may have been incurred or an asset
impaired, or, it is probable that a claim will be asserted and there
is a reasonable possibility of an unfavorable outcome.
4. By moving to another factory, Polska has a lease contract with

unavoidable costs of meeting the obligations that exceed the
economic benefits expected to be received. This is considered an
onerous contract and the expected costs to satisfy the onerous
contract should be accrued.
5. Possible favorable outcomes from pending court cases are

considered contingent assets. Contingent assets are not
recognized unless the outcome is virtually certain. The outcome in
Polska’s situation is not virtually certain. The evidence provided
does not even support that the outcome is probable (an attorney
opinion should be provided). Without evidence that the outcome
is probable, the litigation should not be disclosed.
LO: 2,3, Bloom: AP, Difficulty: Moderate, Time: 35-45, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

lOMoARcPSD|35101974
PROBLEM 13.12
(a) Actual costs incurred.............................................................. $94,000

Estimated costs at 12/31/19.................................................... 20,000*
Total Expense..........................................................................
*([$5,700,000 X 2%] – $94,000) $ 114,000
(b) Estimated liability for warranties—1/1/19.............................. $ 136,000

2019 warranty expense accrual (Requirement a)................. 20,000
Subtotal........................................................................... 156,000
Actual warranty costs during 2019........................................ (94,000)
Estimated liability from warranties—12/31/19...................... $ 62,000
(c) Coupons issued (1 coupon/$1 sale)...................................... 1,500,000

Estimated redemption rate..................................................... .60
Estimated number of coupons to be redeemed................... 900,000
Exchange rate (200 coupons for a player)............................ ÷ 200
Estimated number of premium players
to be issued........................................................................... 4,500
Net cost of players ($32 – $20)............................................... X 12
Premium expense for 2019............................................ $ 54,000
(d) Inventory of premium players—1/1/19................................... $ 37,600

Premium players purchased during 2019
(6,500 X $32).......................................................................... 208,000
Premium players available..................................................... 245,600
Premium players exchanged for coupons
during 2019 (1,200,000/200 X $32)....................................... 192,000
Inventory of premium players—12/31/19............................... $ 53,600
(e) Estimated liability for premiums—1/1/19.............................. $ 44,800

2019 premium expense (Requirement c)............................... 54,000
Subtotal........................................................................... 98,800
Actual redemptions during 2019
[1,200,000/200 X ($32 – $20)]............................................... 72,000
Estimated liability for premiums—12/31/19.......................... $ 26,800

lOMoARcPSD|35101974
PROBLEM 13.13
1. Memo prepared by:

Date:
Millay LTD
December 31, 2019
Recognition of Warranty Expense
During June of this year, the client began the manufacture and sale of a
new line of dishwasher. Sales of 120,000 dishwashers during this period
amounted to £60,000,000. These dishwashers were sold under a one-year
assurance warranty, and the client estimates warranty costs to be £25 per
appliance.
As of the balance sheet date, the client paid out £1,000,000 in warranty
expenses which was also the amount expensed in its income statement. No
recognition of any further liability associated with the warranty had been
made.
Millay must recognize warranty expense for both actual and expected
warranty costs in the year of sale. The client should have made the
following journal entries:
Cash ..................................................................... 60,000,000

Sales Revenue (120,000 X £500)............... 60,000,000
(To record sale of 120,000 dishwashers)
Warranty Expense............................................... 1,000,000

Inventory..................................................... 1,000,000
(To record warranty costs incurred)
Warranty Expense............................................... 2,000,000

Warranty Liability....................................... 2,000,000*
(To accrue for future warranty costs)
*£3,000,000 (120,000 X £25) – £1,000,000

lOMoARcPSD|35101974

Date:
Millay LTD
December 31, 2019
Contingent Liability from Violation

Of EPA Regulations
I contacted the client’s counsel via a routine attorney letter, asking for
information about possible litigation in which the company might be
involved. Morgan Chye, Millay’s attorney, informed me about court action
taken against Millay for dumping toxic waste in the Loden River.
Although the litigation is pending, Chye believes that the suit will probably
be lost. A reliable estimate of clean up costs and fines is £2,750,000. The
client neither disclosed nor accrued this loss in the financial statements.
Because this obligation existed as of the date of the statement of financial

position, it is probable that resources will be used to settle the obligation,
and an amount can be reliably estimated, it must be accrued as a provision.
I advised the client to record the following entry to accrue this liability.
Loss from Environmental Cleanup...................... 2,750,000

Environmental Liability................................ 2,750,000

lOMoARcPSD|35101974

Date:
Millay LTD
December 31, 2019
Contingent Liability on
Patent Infringement Litigation
In answer to my attorney letter requesting information about any possible

litigation associated with the client, Morgan Chye informed me that the
client is in the middle of a patent infringement suit with Megan Drabek over
a hydraulic compressor used in several of Millay’s appliances. The loss of
this suit is possible. Millay did not in any way disclose this information.
Because the loss is possible, but not probable, and can be estimated at
£5,000,000, it should be disclosed in the notes to the financial statements.
I advised the client to include as a footnote to the financial statements a
discussion of this pending litigation along with the attorney’s assessment
that the loss is possible. In addition, I advised the client to disclose the
estimated amount of this contingent liability.
LO: 2,3,4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

lOMoARcPSD|35101974
PROBLEM 13.14
1. Estimated warranty costs:

On 2018 sales $ 800,000 X .10................................. $ 80,000
On 2019 sales $1,100,000 X .10................................. 110,000
On 2020 sales $1,200,000 X .10................................. 120,000
Total estimated costs......................................... 310,000
Total warranty expenditures.............................. (85,700*)
Balance of liability, 12/31/20................................................ $224,300
*2018—$6,500; 2019—$17,200, and 2020—$62,000.
The liability account has a balance of $224,300 at 12/31/20 based on

the difference between the estimated warranty costs (totaling $310,000)
for the three years’ sales and the actual warranty expenditures
(totaling $85,700) during that same period.
2. Computation of liability for premium claims outstanding:

Unredeemed coupons for 2019
($9,000 – $8,000)...................................................... $ 1,000
2019 coupons estimated to be redeemed
($30,000 X .40).......................................................... 12,000
Total..................................................................... $13,000

lOMoARcPSD|35101974
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 13.1 (Time 20–25 minutes)

Purpose—to provide the student with the opportunity to define a liability, to distinguish between current
and non-current liabilities, and to explain accrued liabilities. The student must also describe how
liabilities are valued, explain why notes payable are usually reported first in the current liabilities
section, and to indicate the items that may comprise “compensation to employees.”

Purpose—to provide the student with three situations that require the application of judgment about the
current or non-current nature of the items. The student must think about when typical short-term items
might not be classified as current.

Purpose—to provide the student with a comprehensive case covering refinancing of short-term debt.
Four situations are presented in which the student must determine the proper classification and
disclosure of the debt in the financial statements. In order to thoroughly resolve the issues presented,
the student is expected to research the IFRS.

Purpose—to provide the student with an opportunity to comment on the proper treatment in the
financial statements of a contingent liability incurred after the reporting date but before issuance of the
financial statements. In order to thoroughly answer the case the student will need to understand IAS 1.

Purpose—to provide the student with an opportunity to specify the conditions by which a contingent
liability can be recorded in the accounts. The student is also required to indicate the proper disclosure
in the financial statements of the situations where the amount of loss cannot be reliabily estimated.

Purpose—to provide the student with an opportunity to discuss how product warranty costs and the fact
that a company is being sued should be reported.

Purpose—to provide the student with an opportunity to examine the ethical issues related to estimates
for bad debts and warranty obligations.

lOMoARcPSD|35101974
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 13.1
(a) A liability is defined as a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits. In other words, it is an obligation to transfer some type of resource in the future
as a result of a past transaction.
(b) Current liabilities are obligations that are (1) expected to be settled within its normal operating
cycle; or (2) expected to be settled within twelve months after the reporting date.
(c) Accrued liabilities (sometimes called accrued expenses) arise through accounting recognition of
unpaid expenses that come into existence as a result of past contractual commitments or past
services received. Examples are salaries and wages payable, interest payable, property taxes
payable, income taxes payable, payroll taxes payable, bonus payable, postretirement benefits
payable, and so on.
(d) Theoretically, liabilities should be measured by the present value of the future outlay of cash
required to liquidate them. But in practice, current liabilities are usually recorded in accounting
records and reported in financial statements at their maturity value. Because of the short time
periods involved—frequently less than one year—the difference between the present value of a
current liability and the maturity value is not large. The slight overstatement of liabilities that results
from carrying current liabilities at maturity value is accepted on the grounds it is immaterial.
(e) Notes payable are listed first in the statement of financial position because in liquidation they
would probably be paid first.
(f) The item compensation to employees might include:
1. Wages, salaries, or bonuses payable.

2. Compensated absences payable.
3. Postretirement benefits payable.
LO: 1, Bloom: K, Difficulty: Moderate, Time: 20-25, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 13.2
1. Since the notes payable are due in less than one year from the reporting date, they would
generally be reported as a current liability. The only situation in which this short-term obligation
could possibly be excluded from current liabilities is if Rodriguez Corp. intends to refinance it. For
those notes to qualify for exclusion from current liabilities, the company must meet the following
criteria:
(1) It must intend to refinance the obligation on a long-term basis, and

(2) It must have an unconditional right as of the reporting date to defer settlement of the liability
for at least 12 months after the reporting date.
Entering into a financing arrangement that clearly permits the company to refinance the debt on a
long-term basis on terms that are readily determinable before the next reporting date is one way to
satisfy the second condition.

lOMoARcPSD|35101974
CA 13.2 (Continued)
2. Generally, deposits from customers would be classified as a current liability. However, the
classification of deposits as current or non-current depends on the time involved between the date
of deposit and the termination of the relationship that required the deposit. In this case, the $6,250,000
would be excluded from current liabilities only if the equipment would not be delivered for more
than one year (or one operating cycle).
3. Salaries payable is an accrued liability which in almost all circumstances would be reported as a
current liability (could not be excluded).
CA 13.3
(a) No. IFRS indicate that refinancing a short-term obligation on a long-term basis also requires that a
company have an unconditional right as of the reporting date to defer settlement of the liability for at
least 12 months after the reporting date.
(b) No. The events described will not have an impact on the financial statements. Since Kobayashi
Ltd’s refinancing of the long-term debt maturing in March 2019 does not meet the conditions set
forth in IFRS that obligation should be included in current liabilities. The ¥10,000,000 should
continue to be classified as current at December 31, 2018.
A short-term obligation, other than one classified as a current liability, shall be excluded from
current liabilities if the entity’s intent to refinance the short-term obligation on a long-term basis is
supported by an unconditional right to defer the settlement of the liability for at least 12 months after
the reporting date.
(c) Yes. The debt should be included in current liabilities. The issuance of ordinary shares in January
does not meet the criteria to have an unconditional right to defer the settlement of the liability for at
least 12 months after the reporting date.
(d) Yes. The ¥10,000,000 should be shown as a current liability on the December 31, 2018 statement
of financial position. While the terms of the agreement permit management to refinance on a long-
term basis, the agreement was not in force at December 31, 2018.
CA 13.4
Because the casualty occurred subsequent to the reporting date, it meets the criteria of a contingent
liability; that is, an asset had not been impaired or a liability incurred at the reporting date. Contingent
liabilities are not be accrued by a charge to expense due to the explosion. However, because it had
become known before the financial statements were issued that assets were impaired and liabilities
were incurred after the reporting date, disclosure is necessary to keep the financial statements from
being misleading. The financial statements should indicate the nature of and an estimate of the loss to
the company’s assets as a result of the explosion and the nature of and an estimate of the contingent
liability anticipated from suits that will be filed and claims asserted for injuries and damages.
If the loss to assets or the liability incurrence can be reasonably estimated, disclosure may best be
made by supplementing the historical financial statements with pro forma financial data giving effect
to the loss as if it had occurred at the date of the financial statements.

lOMoARcPSD|35101974
CA 13.5
(a) Three conditions must exist before a provision is recorded:
1. A company has present obligation (legal or constructive) as a result of a past event.

2. It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation;
3. A reliable estimate can be made of the amount of the obligation.
(b) When some amount within the range appears at the time to be a better estimate than any other
amount within the range, that amount is accrued. When no amount within the range is a better
estimate than any other amount, the expected dollar amount (the midpoint) of the range is
accrued.
(c) The following disclosure in the notes is required:
1. The nature of the contingent liability.

2. An estimate of the possible loss or range of loss or a statement that an estimate cannot be
made.
3. An estimate of its financial effect.
4. An indication of uncertainties related to the amount or timing of payment; and
5. The possibility of any reimbursement.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
CA 13.6
Part 1. For Product Grey, the estimated product warranty costs should be accrued by a charge to
expense and a credit to a liability because the following conditions were met:
1. A company has a present obligation (legal or constructive) as a result of a past event;

settle the obligation;
3. A reliable estimate can be made of the amount of the obligation (1% of sales).
For Product Yellow, the estimated product warranty costs should not be accrued by a charge to income
because the amount of loss cannot be reliably estimated. Since only two of the conditions are satisfied,
a disclosure by means of a note should be made.
Part 2. The probable judgment (£1,000,000) should be accrued by a charge to expense and a credit to
a liability because the following conditions were met.
1. A company has a present obligation (legal or constructive) as a result of a past event.

settle the obligation because Constantine’s lawyer states that it is probable that Constantine
will lose the suit.
3. A reliable estimate can be made of the amount of the obligation because Constantine’s lawyer
states that the most probable judgment is £1,000,000.
Constantine should disclose in its financial statements or notes the following:
The amount of the suit (£4,000,000).

The nature of the accrual.
The nature of the provision.
The range of possible loss (£400,000 to £2,000,000).
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

lOMoARcPSD|35101974
CA 13.7
(a) No, Hamilton should not follow his owner’s directive if his (Hamilton’s) original estimates are
reasonable.
(b) Rich Clothing Store benefits in lower rental expense. The Dotson Company is harmed because the
misleading financial statement deprives it of its rightful rental fees. In addition, the current
shareholders of Rich Clothing Store are harmed because the lower net income reduces the current
value of their holdings.
(c) Rich is acting unethically to avoid the terms of his rental agreement at the expense of his landlord
and his own shareholders.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, Professional Demeanor

lOMoARcPSD|35101974
FINANCIAL REPORTING PROBLEM
(a) M&S’s short-term borrowings were £297.5 million at April 2, 2016.
2016
£m
Current
Bank loans and overdrafts1 297.1
Finance lease liabilities 0.4
297.5
(b) 1. Working capital = Current assets less current liabilities.
(£643,400,000) = (£1,461,400,000 – £2,104,800,000)
Current assets
2. Current ratio =
Current liabilities
£1,461,400,000
0.69 times =
£2,104,800,000
While M&S’s working capital and current ratios are low, this may not
indicate a weak liquidity position. Many large companies carry relatively
high levels of accounts payable, which charge no interest. For example,
M&S has over £1.5 billion of these short-term obligations, which can
be viewed as very cheap forms of financing. Nonetheless, the negative
working capital and a current ratio below 1 indicate that liquidity may be
a problem. Comparisons to industry are required to fully assess
liquidity.

lOMoARcPSD|35101974
FINANCIAL REPORTING PROBLEM (Continued)
(c) 26 Contingencies and commitments
A. Capital commitments
2016
£m
Commitments in respect of properties in the course of
construction 129.2
Software capital commitments 17.1
146.3
B. Other material contracts
In the event of a material change in the trading arrangements with

certain warehouse operators, the Group has a commitment to purchase
property, plant and equipment which is currently owned and operated by
the warehouse operators on the Group’s behalf (at values ranging from
historical net book value to market value).
C. Commitments under operating leases
The Group leases various stores, offices, warehouses and equipment

under non-cancellable operating lease agreements. The leases have
varying terms, escalation clauses and renewal rights.
2016
£m
Total future minimum rentals payable under non-cancellable
operating leases are as follows:
Within one year 311.3
Later than one year and not later than five years 1,108.4
Later than five years and not later than ten years 1,099.4
Later than ten years and not later than 15 years 542.8
Later than 15 years and not later than 20 years 351.9
Later than 20 years and not later than 25 years 225.8
Later than 25 years 970.3
Total 4,609.9
The total future sublease payments to be received are £36.1m (last year
£41.2m).

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COMPARATIVE ANALYSIS CASE
(a) The working capital position of the two companies is as follows:
adidas
Current assets....................................... € 7,497
Current liabilities................................... (5,364)
Working capital...................................... € 2,133
Puma
Current assets....................................... €1,684.8
Current liabilities................................... (880.0)
Working capital...................................... € 804.8

lOMoARcPSD|35101974
COMPARATIVE ANALYSIS CASE (Continued)
(b) The overall liquidity of both companies is good as indicated from the
ratio analysis provided below (all computations in millions). Note that
Puma’s cash coverage ratios are negative. This is due to a build up
inventories in 2015, which can be followed using the inventory
turnover ratio.
adidas Puma
Current cash debt €1,090 €–37.1
= .22 = <0
coverage €5,364 + €4,378 €880.0 + €822.6
2 2
Cash debt €1,090 €–37.1

= .15 = <0
coverage €7,696 + €6,800 €1,001.0 + €931.6
2 2
€7,497 €1,684.8
Current ratio = 1.40 = 1.91
€5,364 €880.0
Acid-test €7,497 – €3,113 €1,684.8 – €657.0

= .82 = 1.17
ratio €5,364 €880.0
Accounts receivables €16,915 €3,387.4

= 8.47 = 7.27
turnover €2,049 + €1,946 €483.1 + €449.2
2 2
Inventory €8,748 €1,847.2

turnover €3,113 + = 3.10 €657.0 + €571.5 = 3.01
€2,526
2 2

lOMoARcPSD|35101974
(c) adidas discusses its contingencies in the following notes:

38 Commitments and contingencies
Other financial commitments
The Group has other financial commitments (continuing operations) for

promotion and advertising contracts, which mature as follows:
Financial commitments for promotion and advertising

(€ in millions)
Dec. 31, 2015 Dec. 31, 2014

Within 1 year 982 836
Between 1 and 5 years 2,593 2,590
After 5 years 2,204 1,766
Total 5,779 5,192
Commitments with respect to promotion and advertising contracts

maturing after five years have remaining terms of up to 15 years from
December 31, 2015.
Information regarding commitments under lease and service

contracts is also included in these Notes / SEE NOTE 28.
Litigation and other legal risks
The Group is currently engaged in various lawsuits resulting from the

normal course of business, mainly in connection with distribution
agreements as well as intellectual property rights. The risks regarding
these lawsuits are covered by provisions when a reliable estimate of the
amount of the obligation can be made / SEE NOTE 20. In the opinion of
Management, the ultimate liabilities resulting from such claims will not
materially affect the assets, liabilities, financial position and profit or
loss of the Group.
In connection with the financial irregularities at Reebok India

Company in 2012, various legal uncertainties were identified. The risks
cannot be assessed conclusively. However, based on legal opinions and
internal assessments, Management assumes that the effects will

lOMoARcPSD|35101974
not have any material influence on the assets, liabilities, financial

position and profit or loss of the Group.
28 Leasing and service arrangements
Operating leases
The Group leases primarily retail stores as well as offices, warehouses

and equipment. The contracts regarding these leases with expiration
dates of between 1 and 22 years partly include renewal options and
escalation clauses. Rent expenses (continuing operations), which partly
depend on net sales, amounted to €680 million and €643 million for the
years ending December 31, 2015 and 2014, respectively.
Future minimum lease payments for minimum lease durations on a

nominal basis are as follows:
Minimum lease payments for operating leases (€ in millions)
Dec. 31, 2015 Dec. 31, 2014

Within 1 year 516 476
Between 1 and 5 years 1,143 959
After 5 years 540 277
Total 2,199 1,712
Finance leases
The Group also leases various premises for administration and

warehousing which are classified as finance leases.
The net carrying amount of these assets of €8 million and

€10 million was included in property, plant and equipment as of
December 31, 2015 and 2014, respectively. For the year ending
December 31, 2015, interest expenses (continuing operations) were
€0 million (2014: €0 million) and depreciation expenses (continuing
operations) were €4 million (2014: €4 million).

lOMoARcPSD|35101974
Minimum lease payments for finance leases in 2015 include land

leases with a remaining lease term of 97 years. The minimum lease
payments under these contracts amount to €12 million. The estimated
amount representing interest is €9 million and the present value
amounts to €2 million.
The net present values and the minimum lease payments under
these contracts over their remaining terms up to 2018 and the land
leases with a remaining term of 97 years are as follows:
Minimum lease payments for finance leases (€ in millions)
Dec. 31, 2015 Dec. 31, 2014

Lease payments falling due:
Within 1 year 3 3
Between 1 and 5 years 3 5
After 5 years 12 11
Total minimum lease payments 18 19
Less: estimated amount representing
interest (9) (9)
Present value of minimum lease
payments 9 10
There of falling due:
Within 1 year 3 3
After 5 years 3 3
Service arrangements
The Group has outsourced certain logistics and information technology

functions, for which it has entered into long-term contracts. Financial
commitments under these contracts mature as follows:
Financial commitments for service arrangements (€ in millions]
Dec. 31, 2015 Dec. 31, 2014

Within 1 year 97 75
After 5 years — 18
Total 350 194

lOMoARcPSD|35101974

20 Other provisions
Other provisions consist of the following:
Other provisions (€ in millions)
Currency
Jan.1, translation Dec.31, There of
2015 differences Usage Reversals Additions Transfers 2015 non-current
Marketing 79 0 (77) (0) 20 — 21 —
Personnel 48 2 (31) (2) 44 (2) 59 5
Returns, allowances
and warranty 200 6 (145) (2) 141 (12) 189 —
Taxes, other than
income taxes 27 0 (7) (0) 9 — 29 0
Sundry 154 (1) (46) (22) 122 — 207 45
Other provisions 508 7 (306) (26) 336 (14) 505 50
Marketing provisions mainly consist of provisions for promotion

contracts.
Provisions for personnel mainly consist of provisions for short-and
long-term variable compensation components as well as of provisions
for social plans relating to restructuring measures. With regard to
provisions for early retirement, claims for reimbursement in an amount
of €0 million (2014: €0 million) are shown under other non-current
assets.
Provisions for returns, allowances and warranty primarily arise due
to bonus agreements with customers and the obligation of fulfilling
customer claims with regard to the return of products sold by the
Group. The amount of the provision follows the historical development
of returns, allowances and warranty as well as current agreements.
Provisions for taxes other than income taxes mainly relate to value
added tax, real estate tax and motor vehicle tax.
Sundry provisions mainly include provisions for customs risks,
earn-out components for Runtastic as well as provisions for litigation
and other legal risks.
The reversal of sundry provisions in 2015 is mainly related to the

completion of customs audits and a risk reassessment.

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Management follows past experience from similar transactions
when assessing the recognition and measurement of other provisions;
in particular external legal opinions are considered for provisions for
customs risks and for litigation and other legal risks. All evidence from
events until the preparation of the consolidated financial statements is
taken into account.
Puma discusses its contingencies in the following notes:
27. Contingencies and Contingent Liabilities
Contingencies
As in the previous year, there were no reportable contingencies.
Contingent Liabilities
As in the previous year, there were no reportable contingent liabilities.
28. Other Financial Obligations
Obligations From Operating Lease

The Group rents and leases offices, warehouses, facilities and fleets of
vehicles, as well as selling space for the Company’s own retail stores.
Rental agreements for the retail business are concluded for terms of
between five and fifteen years. The remaining rental and lease
agreements have residual terms of between one and five years. Some
agreements include options to renew and price adjustment clauses.
Total expenses resulting from these agreements amounted in 2015 to

€143.3 million (previous year: €123.5 million). Some of the expenses are
dependent on sales.
As of the balance sheet date, the obligations from future minimum

rental payments for operating lease agreements are as follows:

lOMoARcPSD|35101974
2015 2014
€ million € million
Under rental and lease agreements:
2016 (2015) 119.6 103.4
2017–2020 (2016–2019) 253.4 215.5
from 2021 (from 2020) 124.9 63.3
Further Other Financial Obligations
Furthermore, the Company has other financial obligations associated
with license, promotional and advertising agreements, which give rise
to the following financial obligations as of the balance sheet date:
2015 2014
€ million € million
Under license, promotional and
advertising agreements:
2016 (2015) 157.4 135.6
2017–2020 (2016–2019) 366.3 388.1
from 2021 (from 2020) 68.4 93.9
In addition, there are industry-standard obligations concerning the

provision of sports equipment under sponsoring agreements.
As customary in the industry, the promotional and advertising

agreements provide for additional payments upon the reaching of
pre-defined goals (e.g. medals, championships). Although these are
contractually agreed upon, they naturally cannot be exactly foreseen in
terms of their timing and amount.
In addition, there are other financial obligations totaling €6.7 million, of

which €1.3 million relate to the years from 2017. These include service
agreements of €5.7 million and obligations associated with the
construction of a building costing €1.0 million.

lOMoARcPSD|35101974
FINANCIAL STATEMENT ANALYSIS CASE 1
NORTHLAND CRANBERRIES
(a) Working capital is calculated as current assets—current liabilities, while

the current ratio is calculated as current assets/current liabilities. For
Northland Cranberries these ratios are calculated as follows:
Current year Prior year

Working capital $6,745,759 – $10,168,685 = $–3,422,926 $5,598,054 – $4,484,687 = $1,113,367
Current ratio ($6,745,759/$10,168,685) = .66 ($5,598,054/$4,484,687) = 1.25
Historically, it was generally believed that a company should maintain

a current ratio of at least 2.0. In recent years, because companies
have been able to better maintain their inventory, receivables and
cash, many healthy companies have ratios well below 2.0. However,
Northland Cranberries has negative working capital in the current
year, and current ratios in both years are extremely low. This would be
cause for concern and additional investigation. As you will see in the
next discussion point, there may well be a reasonable explanation.
(b) This illustrates a potential problem with ratios like the current ratio,
that rely on statement of financial condition numbers that present a
company’s financial position at a particular point in time. That point in
time may not be representative of the average position of the company
during the course of the year, and also, that point in time may not be
the most relevant point for evaluating the financial position of the
company. If the company does not like the representation that these
commonly used measures give of the company’s position, it could
change its year-end or suggest other measures that it considers to be
more relevant for a company in this business. Also, it is possible that
by using averages calculated across quarterly data some of this
problem might be alleviated. As discussed in Chapter 5, there are
measures that employ cash flows, which addresses at least part of
the point-in-time problem of statement of financial position ratios.

lOMoARcPSD|35101974
SUZUKI GROUP
(a) It appears that the Suzuki warranty is an assurance-type. If it is

probable that customers will make claims under warranties relating to
goods or services that have been sold, and a reasonable estimate of
the costs involved can be made, the accrual method must be used.
Under the accrual method, a provision for warranty costs is made in
the year of sale or in the year that the productive activity takes place.
(b) When the warranty is sold separately from the product (a service-type
warranty), a deferred revenue approach is employed. Revenue on the
sale of the extended warranty is deferred and is generally recognized
on a straight-line basis over the life of the contract. Revenue is
deferred because the seller of the warranty has an obligation to
perform services over the life of the contract.
(c) The general approach is to use the straight-line method to recognize

deferred revenue on warranty contracts. If historical evidence indicates
that costs incurred do not follow a straight-line approach, then revenue
should be recognized over the contract period in proportion to the costs
expected to be incurred in performing services under the contract.
Only costs that vary with and are directly related to the acquisition of the
contracts (mainly commissions) should be deferred and amortized.
Costs such as employee’s salaries, advertising, and general and
administrative expenses that would have been incurred even if no
contract were acquired should be expensed as incurred.

lOMoARcPSD|35101974
(a) BOP’s working capital and current ratio have declined in 2019 com-
pared to 2018. While this would appear to be bad news, the acid test
ratio has improved. This is due to BOP carrying relatively more liquid
receivables in 2019 (receivable days has increased.) And while
working capital has declined, the amount of the operating cycle that
must be financed with more costly borrowing has declined. That is,
BOP is using relatively inexpensive accounts payable to finance its
operating cycle. Note that the overall operating cycle has declined
because inventory is being managed at a lower level (inventory days
has declined by more than 60 days.)
(b) Answers will vary depending on the companies selected. This activity
is a great spreadsheet exercise.

lOMoARcPSD|35101974
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
During 2019
1. Warranty Expense................................................ 6,000
Cash.................................................................. 6,000
December 31, 2019
Warranty Expense................................................ 39,000

Warranty Liability............................................ 39,000
February 28, 2019

2. Interest Expense................................................... 3,333
Interest Payable.................................................... 1,667
Cash.................................................................. 5,000
€1,667 = (€200,000 X .10) X 1/12

€3,333 = (€200,000 X .10) X 2/12
May 31, 2019

Interest Expense................................................... 5,000
Cash [(€200,000 X .10) X 3/12]........................ 5,000
August 31, 2019

Cash.................................................................. 5,000
November 30, 2019

Cash.................................................................. 5,000
December 31, 2019

Interest Payable [(€200,000 X .10) X 1/12]..... 1,667

lOMoARcPSD|35101974
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

01/01/19
Manufacturing Facility (PPE)............................... 5,192,770
Cash.................................................................. 5,000,000
Environmental Liability
(€500,000 X 0.38554)..................................... 192,770
12/31/19
Depreciation Expense..........................................51,928
Accumulated Depreciation............................. 51,928
Interest Expense...................................................19,277
Environmental Liability................................... 19,277
ANALYSIS
The warranty liability and the interest payable are current liabilities,
so all else being equal, these will decrease both the current and acid-
test ratios. Because of the commitment letter from UBS, the €200,000
loan can be classified as a non-current liability. Without this letter,
YellowCard would likely not be able to demonstrate the ability to defer
settlement of the liability for at least 12 months. This would mean the
€200,000 loan would have to be classified as a current liability, further
depressing YellowCard’s current and acid-test ratios. The environmental
liability can be classified as a non-current liability, so it will not affect
the current and acid-test ratios.
PRINCIPLES
According to the IASB Framework, liabilities are probable future
sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in
the future as a result of past transactions or events. With respect to the
new warranty plan, YellowCard would be currently obligated to provide
repair service to its customers, arising from the prior sales of its
products. So even though customers are making an upfront payment,
YellowCard still has an obligation to provide services in the future. Thus
the company should record the payments as unearned revenue until it
is no longer obligated to make repairs. The new plan would be
accounted for as an extended warranty, which defers a certain
percentage of the original sales price until some future time when the
company incurs actual costs or the warranty expires.

lOMoARcPSD|35101974
RESEARCH CASE
(a) IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
(b) Recognizing a liability from restructuring (IAS 37, 72 – 79)
A constructive obligation to restructure arises only when an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned; (ii) the principal
locations affected; (iii) the location, function, and approximate
number of employees who will be compensated for terminating their
services; (iv) the expenditures that will be undertaken; and (v) when
the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out
the restructuring by starting to implement that plan or announcing
its main features to those affected by it.
Evidence that an entity has started to implement a restructuring plan

would be provided, for example, by dismantling plant or selling assets
or by the public announcement of the main features of the plan.
A public announcement of a detailed plan to restructure constitutes a
constructive obligation to restructure only if it is made in such a way
and in sufficient detail (i.e. setting out the main features of the plan) that
it gives rise to valid expectations in other parties such as customers,
suppliers and employees (or their representatives) that the entity will
carry out the restructuring.
For a plan to be sufficient to give rise to a constructive obligation when

communicated to those affected by it, its implementation needs to be
planned to begin as soon as possible and to be completed in a
timeframe that makes significant changes to the plan unlikely. If it is
expected that there will be a long delay before the restructuring begins
or that the restructuring will take an unreasonably long time, it is
unlikely that the plan will raise a valid expectation on the part of others
that the entity is at present committed to restructuring, because the
timeframe allows opportunities for the entity to change its plans.

lOMoARcPSD|35101974
RESEARCH CASE (Continued)

A management or board decision to restructure taken before the end of
the reporting period does not give rise to a constructive obligation
at the end of the reporting period unless the entity has, before the end
of the reporting period: (a) started to implement the restructuring plan;
or (b) announced the main features of the restructuring plan to those
affected by it in a sufficiently specific manner to raise a valid expectation
in them that the entity will carry out the restructuring. If an entity starts to
implement a restructuring plan, or announces its main features to those
affected, only after the reporting period, disclosure is required under
IAS 10 Events after the Reporting Period, if the restructuring is material
and non-disclosure could influence the economic decisions that users
make on the basis of the financial statements.
Although a constructive obligation is not created solely by a management
decision, an obligation may result from other earlier events together with
such a decision. For example, negotiations with employee representatives
for termination payments, or with purchasers for the sale of an operation,
may have been concluded subject only to board approval. Once that
approval has been obtained and communicated to the other parties, the
entity has a constructive obligation to restructure, if the conditions of
paragraph 72 are met.
In some countries, the ultimate authority is vested in a board whose
membership includes representatives of interest other than those of
management (e.g. employees) or notification to such representatives may
be necessary before the board decision is taken. Because a decision by
such a board involves communication to these representatives, it may
result in a constructive obligation to restructure.
No obligation arises for the sale of an operation until the entity is
committed to the sale, i.e., there is a binding sale agreement.
Even when an entity has taken a decision to sell an operation and
announced that decision publicly, it cannot be committed to the sale
until a purchaser has been identified and there is a binding sale
agreement. Until there is a binding sale agreement, the entity will be
able to change its mind and indeed will have to take another course of
action if a purchaser cannot be found on acceptable terms. When the
sale of an operation is envisaged as part of a restructuring, the assets
of the operation are reviewed for impairment, under IAS 36. When a sale
is only part of a restructuring, a constructive obligation can arise for the
other parts of the restructuring before a binding sale agreement exists.

lOMoARcPSD|35101974
Costs to include (IAS 37, 80)
A restructuring provision shall include only the direct expenditures

arising from the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and (b) not associated with
the ongoing activities of the entity.
Costs to exclude (IAS 37, 81 – 82)
A restructuring provision does not include such costs as: (a) retraining
or relocating continuing staff; (b) marketing; or (c) investment in new
systems and distribution networks. These expenditures relate to the
future conduct of the business and are not liabilities for restructuring at
the end of the reporting period. Such expenditures are recognised on
the same basis as if they arose independently of a restructuring.
Identifiable future operating losses up to the date of a restructuring are

not included in a provision, unless they relate to an onerous contract as
defined in paragraph 10.
As required by paragraph 51, gains on the expected disposal of assets

are not taken into account in measuring a restructuring provision, even
if the sale of assets is envisaged as part of the restructuring.
(c) The current warranty contract is considered an onerous contract. The

required accounting related to an onerous contract is in IAS 37, 81 – 82.
If an entity has a contract that is onerous, the present obligation under

the contract shall be recognised and measured as a provision.
Many contracts (for example, some routine purchase orders) can be

cancelled without paying compensation to the other party, and therefore
there is no obligation. Other contracts establish both rights and
obligations for each of the contracting parties. Where events make such
a contract onerous, the contract falls within the scope of this Standard
and a liability exists which is recognised. Executory contracts that are
not onerous fall outside the scope of this Standard.

lOMoARcPSD|35101974
This Standard defines an onerous contract as a contract in which the

unavoidable costs of meeting the obligations under the contract exceed
the economic benefits expected to be received under it. The unavoidable
costs under a contract reflect the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any
compensation or penalties arising from failure to fulfil it.
Before a separate provision for an onerous contract is established, an

entity recognises any impairment loss that has occurred on assets
dedicated to that contract (see IAS 36).
Hincapie should therefore record a liability for the service contract at

€75,000, the amount of the termination fee.

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Ch13 - intermediate accounting

Intermediate accounting (고려대학교)

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Current Liabilities, Provisions, and Contingencies

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

2. Accounts and notes 7, 11 1, 2, 3 2 1, 2 1, 2

4. Deposits and advance 5, 12 6 2

5. Compensated absences 13, 14, 15 10, 11 6, 7

6. Collections for third parties. 16, 17 7, 8, 9 8, 9, 10, 3, 4

8. Warranties. 23, 25 15, 16 12, 13, 5, 6, 7, 6, 7

9. Consideration Payables 17 14, 19, 22 8, 9,

11. Presentation and analysis. 31, 32, 33 1, 23, 24, 9 3

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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

3. Explain the accounting for 12, 13, 18 17 10, 11, 13 4

4. Indicate how to present and 22, 23, 9, 13

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ASSIGNMENT CHARACTERISTICS TABLE

P13.1 Current liability entries and adjustments. Simple 25–30

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Assignment Characteristics Table (Continued)

CA13.1 Nature of liabilities. Moderate 20–25

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Questions Chapter 13 (Continued)

Unearned revenues arise from the following activities:

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Questions Chapter 13 (Continued)

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Questions Chapter 13 (Continued)

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Questions Chapter 13 (Continued)

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Questions Chapter 13 (Continued)

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13.1

BRIEF EXERCISE 13.2

December 31, 2018

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BRIEF EXERCISE 13.3

December 31, 2018

Notes Payable 61,350,000

BRIEF EXERCISE 13.4

BRIEF EXERCISE 13.5

The debt becomes payable on demand because of the breach of a covenant

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BRIEF EXERCISE 13.6

12/31/19 Unearned Subscription Revenue....................................

BRIEF EXERCISE 13.7

(a) Accounts Receivable........................................................31,800

BRIEF EXERCISE 13.8

Cash (€5,000 + €750)......................................................... 5,750

BRIEF EXERCISE 13.9

Salaries and Wages Expense.......................................... 24,000

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BRIEF EXERCISE 13.10

Salaries and Wages Expense.......................................... 42,000