Question 1:

CACL-0078
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A company receives an advance payment for special-order goods that are to be
manufactured and delivered within 6 months. The advance payment should be
reported in the companys balance sheet as a
Deferred charge.
Contra asset
account.
Current liability.
Noncurrent
liability.
This answer is correct. ASC Topic 605 specifically identifies deposits and
prepayments for goods or services to be provided at a future time ("unearned
revenues") as liabilities. In this case, the goods are to be manufactured and
delivered within 6 months. Because the liability will be settled within the next year,
it should be classified as current.
Question 2:
CACL-0071
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Which of the following is classified as an accrued liability?
Liability for federal
Liability for employer's share
unemployment taxes
of FICA taxes
Yes
Yes
Yes
No
No
No
No
Yes
This answer is correct. Accrued liabilities include expenses which have been
incurred but not yet paid. Both federal unemployment tax and the employers share
of FICA taxes represent the employers payroll tax expense which is incurred as
employees earn wages, but which is only paid periodically. Therefore, both types of
expense represent accrued liabilities.
Question 3:
CACL-0085
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Bell Co. is a defendant in a lawsuit that could result in a large payment to the
plaintiff. Bells attorney believes that there is a 90% chance that Bell will lose the
suit, and estimates that the loss will be anywhere from $5,000,000 to $20,000,000
and possibly as much as $30,000,000. None of the estimates are better than the
others. What amount of liability should Bell report on its balance sheet related to
the lawsuit?
$0
$

5,000,000
$20,000,0
00
$30,000,0
00
This answer is correct. The requirement is to determine the amount of liability that
Bell should report on its balance sheet related to the lawsuit. In this case, ASC Topic
450 requires accrual of the lower limit of the estimate of probable loss, and
disclosure of the possible amounts. Therefore, this answer is correct; Bell should
accrue $5,000,000.
Question 4:
AICPA.940522FAR-FA
Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the
state directly for actual unemployment claims.
Acme believes that actual unemployment claims will be 2% of eligible gross wages
and has chosen to reimburse the state. Eligible gross wages are defined as the first
$10,000 of gross wages paid to each employee. Acme had five employees each of
whom earned $20,000 during 2004.
In its December 31, 2004 balance sheet, what amount should Acme report as
accrued liability for unemployment claims?
$1,00
0
$1,50
0
$2,00
0
$3,00
0
The wage limit on unemployment tax is $10,000. Thus, the total accrued liability,
which is also the unemployment tax amount, is 5($10,000)(.02) = $1,000.
Question 5:
CACL-0133
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Hope Corporation prepares its financial statements in accordance with IFRS. Hope
intends to refinance a $500,000 note payable due on March 1, year 2. The company
expects the note to be refinanced for a period of five years. Under what
circumstances can Hope report the note payable as a noncurrent liability on its
December 31, year 1 statement of financial position?
If Hope has the intent and ability to refinance before December 31, year 1.
If Hope has executed an agreement to refinance prior to the issuance of the
financial statements on March 31, year 2.
If Hope has the intent and ability to refinance before the issuance of the financial
statements on March 31, year 2.
If Hope has executed an agreement to refinance by December 31, year 1.
This answer is correct. IFRS requires that Hope have executed an agreement to
refinance at the balance sheet date in order to classify the debt as a noncurrent

liability. Inasmuch as no agreement existed at the balance sheet date, the note
payable must be classified as a current liability.
Question 6:
CACL-0099
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An expropriation of assets which is imminent and for which the amount of loss can
be reasonably estimated should be
Accru Disclos
ed
ed
No
No
No
Yes
Yes
Yes
Yes
No
This answer is correct because per ASC Topic 450, an estimated loss from
contingencies shall be accrued and charged to income when it is probable that an
asset has been impaired or a liability incurred and when the amount of the loss can
be reasonably estimated. Both of these requirements are met by the expropriation
of assets described in this question. Therefore, this loss contingency should be
accrued. Additionally, the nature of the contingency should be disclosed in a note to
the financial statements.
Question 7:
CACL-0054
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Willem Co. reported the following liabilities at December 31, year 1:
Accounts payabletrade
Short-term borrowings
Mortgage payable, current portion
$100,000
Other bank loan, matures June 30,
year 2

$
750,000
400,000
3,500,0
00
1,000,0
00

The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, year 2,
with the first principal payment due January 15, year 3. Willems audited financial
statements were issued February 28, year 2. What amount should Willem report as
current liabilities at December 31, year 1?
$ 850,000
$
1,150,000
$
2,250,000
$
1,250,000

This answer is correct. Current liabilities are those liabilities expected to require the
use of current assets or the creation of other current liabilities. Accounts payable-trade and short-term borrowings are classified as current liabilities because they are
expected to be repaid within one year or the current operating cycle. The current
portion of long-term debt for the mortgage payable of $100,000 should also be
classified as a current liability because it is due and payable within one year.
Therefore, this answer is correct because current liabilities are equal to $1,250,000
($750,000 + $400,000 + $100,000). The $1,000,000 refinanced loan may be
reclassified as a long-term liability.
Question 8:
CACL-0110
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Morgan Company determined that: (1) it has a material obligation relating to
employees rights to receive compensation for future absences attributable to
employees services already rendered, (2) the obligation relates to rights that vest,
and (3) payment of the compensation is probable. The amount of Morgans
obligation as of December 31, year 1, is reasonably estimated for the following
employee benefits:
Vacation
pay
Holiday
pay

$100,0
00
25,000

What total amount should Morgan report as its liability for compensated absences in
its December 31, year 1 balance sheet?
$0
$
25,000
$100,00
0
$125,00
0
This answer is correct. A liability for compensated absences should be accrued if the
obligation is attributable to employees services already rendered, the obligation
relates to rights which vest or accumulate, payment is probable, and the amount is
reasonably estimable. All four conditions are met. Per ASC Topic 710, both the
vacation pay and holiday pay are considered compensated absences. Therefore,
$125,000 ($100,000 + $25,000) should be accrued for compensated absences.
Question 9:
CACL-0102
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Tone Company is the defendant in a lawsuit filed by Witt in year 1 disputing the
validity of a copyright held by Tone. At December 31, year 1, Tone determined that
Witt would probably be successful against Tone for an estimated amount of
$400,000. Appropriately, a $400,000 loss was accrued by a charge to income for

the year ended December 31, year 1. On December 15, year 2, Tone and Witt
agreed to a settlement providing for cash payment of $250,000 by Tone to Witt, and
transfer of Tones copyright to Witt. The carrying amount of the copyright on Tones
accounting records was $60,000 at December 15, year 2. What would be the effect
of the settlement on Tones income before income tax in year 2?
No effect.
$ 60,000
decrease.
$ 90,000
increase.
$150,000
increase.
This answer is correct. At 12/31/Y1, the contingent liability from the lawsuit met ASC
Topic 450s criteria for accrual (probable and reasonably estimable), so a loss and
liability of $400,000 was recognized. In year 2, the lawsuit was settled and the
actual loss was $310,000 ($60,000 copyright transfer and $250,000 cash payment).
This is a change in estimate which should be accounted for in the period of change
per ASC Topic 250. Therefore the $90,000 difference will be reflected in year 2
income. The journal entry on 12/15/Y2 to record the settlement would be
400,00
Lawsuit liability
0
Gain from settlement of
lawsuit
90,000
250,00
Cash
0
Copyright
60,000
Question 10:
CACL-0066
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On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for
the refinancing of an existing note payable scheduled to mature in February, year 2.
The terms of the refinancing included extending the maturity date of the note by
three years. On January 15, year 2, the note was refinanced. How should Taylor
report the note payable in its December 31, year 1 balance sheet?
A current liability.
A long-term liability.
A long-term note
receivable.
A current note
receivable.
This answer is correct. The requirement is to identify how the note payable would be
presented. A note is normally considered a current liability if it is due and payable in
one year. However, if a company has both the intent and ability to refinance the
debt on a long-term basis (ASC 470-10-45-14), the note can be classified as a longterm liability in the December 31, year 1, balance sheet. Therefore, this answer is
correct.

Question 11:
CACL-0098
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Dell Company sells its products in reusable, expensive containers. The customer is
charged a deposit for each container delivered and receives a refund for each
container returned within two years after the year of delivery. Dell accounts for the
containers not returned within the time limit as being retired by sale at the deposit
amount. Information for year 3. concerning the containers is as follows:
Total
Held by customers at 12/31/Y2 from
deliveries in
Year 1
$ 50,000
Year 2
145,000
Delivered in year 3
Returned in year 3 from deliveries in:
Year 1
$ 30,000
Year 2
85,000
Year 3
95,000

$195,0
00
$260,0
00

$210,0
00

What amount should Dell report as a liability for returnable containers at December
31, year 3?
$165,00
0
$215,00
0
$225,00
0
$245,00
0
This answer is correct. The solutions approach is to set up a T- account for the
liability for returnable containers.

Deposit receipts are credited to the liability, and deposit refunds are debited to the
liability. In addition, the account is debited for forfeited deposits after the 2-year
refund period expires. In this case, the refund period for year 1 deliveries has

expired by 12/31/Y3. Therefore, $20,000 ($50,000 $30,000) of unclaimed year 1

deposits should be removed from the liability account and recorded as sales.
Question 12:
CACL-0049
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Gar, Inc.s trial balance reflected the following liability account balances at
December 31, year 1:
Accounts payable
Bonds payable, due
year 2
Deferred income tax
liability
Discount on bonds
payable
Dividends payable on
2/15/Y2
Income tax payable
Notes payable, due
1/19/Y3

$19,0
00
34,00
0
4,000
2,000
5,000
9,000
6,000

The deferred income tax liability is based on temporary differences stemming from
different depreciation methods for financial reporting and income taxes.
In Gars December 31, year 1 balance sheet, the current liabilities total was
$71,00
0
$69,00
0
$67,00
0
$65,00
0
This answer is correct. ASC 210-10-20 Glossary states that current liabilities are
obligations whose liquidation is reasonably expected to require the use of current
assets or the creation of other current liabilities. This means that generally, current
liabilities are liabilities due within 1 year of the balance sheet date. Clearly,
accounts payable ($19,000), dividends payable ($5,000) and income tax payable
($9,000) are current liabilities. Generally bonds payable are a long-term liability;
however, since these bonds are due in year 2, they must be reported as a current
liability at 12/31/Y1 ($34,000 face less $2,000 discount, or $32,000). Therefore,
total current liabilities are $65,000 ($19,000 + $5,000 + $9,000 + $32,000). The
deferred income tax payable ($4,000) is classified as a long-term liability because it
is related to the noncurrent asset, property, plant, and equipment. Similarly, the
notes payable ($6,000) are classified as long-term because they are due in year 3.
Question 13:

CACL-0135
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Bryce Corp. signed an agreement with Casey, which requires that if Casey does not
meet certain contractual obligations, Casey must forfeit land worth $100,000 to
Bryce. Bryces accountants believe that Casey will not meet its contractual
obligations, and it is probable Bryce will receive the land by the end of year 3. Bryce
uses IFRS for reporting purposes. How should Bryce report the land in its December
31, year 2 financial statements?
As investment property in the asset section of the
balance sheet.
As a contingent asset in the current asset section of the
balance sheet.
In a footnote disclosure if the economic benefits are
probable.
As a contingent asset and other comprehensive income
for the period.
This answer is correct. IFRS provides that a contingent asset is a possible asset that
arises from past events, and is confirmed only by the occurrence of uncertain future
events that are not within the control of the reporting entity. A contingent asset is
not recognized, but it is disclosed in the notes to the financial statements if the
economic benefits are probable.
Question 14:
CACL-0058
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On September 1, year 1, a company borrowed cash and signed a 2-year interestbearing note on which both the principal and interest are payable on September 1,
year 3. The company did not elect the fair value option for reporting this note. At
December 31, year 2, the liability for accrued interest should be
Zero.
For 4 months of
interest.
For 12 months of
interest.
For 16 months of
interest.
This answer is correct because although the interest does not have to be paid until
September 1, year 3, proper accrual accounting requires that at the end of each
year an adjusting entry be made to accrue that years interest expense. Therefore,
at the end of year 1, 4 months interest would be accrued. At the end of year 2, an
additional 12 months of interest would be accrued, which makes the total interest
accrued as of December 31, year 2, equal 16 months.
Question 15:
CACL-0064
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Bake Co.s trial balance included the following at December 31, year 1:
Accounts payable
Bonds payable, due
year 2
Discount on bonds
payable
Deferred income tax
liability

$80,00
0
300,00
0
15,000
25,000

The deferred income tax liability is not related to an asset for financial accounting
purposes and is expected to reverse in year 2. What amount should be included in
the current liability section of Bakes December 31, year 2 balance sheet?
$365,00
0
$390,00
0
$395,00
0
$420,00
0
This answer is correct. The requirement is to determine the amount that should be
included in the current liability section of the balance sheet. The accounts payable
and the bond payable are classified as current liabilities because they are due
within the next 12 months. The bond payable is valued at its carrying value of
$285,000 ($300,000 $15,000 discount). The deferred income tax liability is
classified as a current liability because it not related to an asset and it is expected
to reverse in the next 12 months. This answer is correct because the amount of
current liabilities is equal to $390,000 ($80,000 + $285,000 + $25,000).
Question 16:
CACL-0077
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A retail store sells gift certificates that are redeemable in merchandise. When the
gift certificate was sold for cash, a
Deferred revenue account should be
decreased.
Deferred revenue account should be
increased.
Revenue account should be
decreased.
Revenue account should be increased.
This answer is correct. Per ASC Topic 605, revenue is recognized when it is both
realized and earned. The cash received upon issuance of the gift certificates is not
earned until the gift certificates are redeemed.
Question 17:

CACL-0068
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Agee Corp. pays its outside salespersons fixed monthly salaries and commissions on
net sales. Sales commissions are computed and paid on a monthly basis (in the
month following the month of the sale), and the fixed salaries are treated as
advances against commissions. However, if the fixed salaries for salespersons
exceed their sales commissions earned for a month, such excess is not charged
back to them. Pertinent data for the month of April year 2 for the three salespersons
in sales region 330 are as follows:
Salesper Fixed
son
salary
$
A
5,000
B

7,000

9,000

Totals

$21,000

Net sales
$100,000
200,000
300,000

Commission
rate
4%
6%
6%

$600,000

For sales region 330, what total amount should Agee accrue for sales commissions
payable at April 30, year 2?
$13,00
0
$14,00
0
$34,00
0
$35,00
0
This answer is correct. The requirement is the total amount of sales commissions
payable to be accrued on 4/30/Y2. No sales commissions are due to salesperson A
because his commissions earned ($100,000 4% $4,000) are less than his fixed
salary ($5,000). Note that the excess of the fixed salary over commissions earned is
not charged back against A. Commissions totaling $14,000 are due to salespersons
B and C as computed below.
Commissions
earned
($200,000
B
6%)
($300,000
C
6%)

Fixed salary
paid

Commissions
payable

7,000

= 5,000

9,000

= 9,000
$14,000

Question 18:
CACL-0065
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Arno Corp.s liability account balances at June 30, year 2, included a 10% note
payable in the amount of $1,800,000. The note is dated October 1, year 1, and is
payable in three equal annual payments of $600,000 plus interest. Arno does not
elect the fair value option for reporting this financial liability. The first interest and
principal payment was made on October 1, year 2. In Arnos June 30, year 3 balance
sheet, what amount should be reported as accrued interest payable for this note?
$135,00
0
$
90,000
$
45,000
$
30,000
This answer is correct. Accrued interest payable at 6/30/Y3 is interest which has
been expensed but not yet paid. Interest was last paid on 10/1/Y1, so the accrued
interest payable includes interest expense incurred from 10/1/Y2 through 6/30/Y3 (9
months). The original balance of the note payable was $1,800,000, but the 10/1/Y2
principal payment of $600,000 reduced this balance to $1,200,000. Therefore, the
interest payable at 6/30/Y3 is $90,000 ($1,200,000 10% 9/12).
Question 19:
CACL-0108
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In determining whether to accrue employees compensation for future absences,
among the conditions that must be met are that the obligation relates to rights that
Accumul Ve
ate
st
No
No
No
Yes
Yes
No
Yes
Yes
This answer is correct because per ASC 710, accrual of compensation for future
absences is required if all of the following conditions exist: (1) obligation of
employer to compensate employees arises from services already performed; (2)
obligation arises from vesting or accumulation of rights; (3) probable payment of
compensation; and (4) amount can be reasonably estimated.
Question 20:
CACL-0073
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A state requires quarterly sales tax returns to be filed with the sales tax bureau by
the 20th day following the end of the calendar quarter. However, the state further
requires that sales taxes collected be remitted to the sales tax bureau by the 20th
day of the month following any month such collections exceed $500. These

payments can be taken as credits on the quarterly sales tax return.

Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state
sales tax, which Taft collects and records as sales revenue. The sales taxes paid by
Taft are charged against sales revenue. Taft pays the sales taxes when they are due.
Following is a monthly summary appearing in Tafts first quarter year 2 sales
revenue account:
Deb
Credit
it
Januar
$10,6
$
y
00
Februa
600 7,420
ry
March 9,540
$60 $27,5
0
60
In its financial statements for the quarter ended March 31, year 2, Tafts sales
revenue and sales taxes payable would be
Sales
Sales taxes
revenue payable
$27,560
$1,560
$26,960
$ 600
$26,000
$1,560
$26,000
$ 960
This answer is correct. The amount reported for sales revenue should include
amounts charged customers when inventory is sold, but should exclude amounts
collected for sales taxes. To determine the correct amount for sales revenue, Taft
must divide the total of sales and sales taxes by 100% plus the sales tax percentage
(6%), as indicated below.
Mont
Percent Sales
Total
h
age
revenue
$10,600
$10,000
Jan.
106%
Feb.

$
7,420

Marc
9,540
h
Total

106%
106%

7,000
9,000
$26,000

Sales taxes payable would include all sales taxes collected, less any sales taxes
already remitted.
January sales taxes ($10,600
$10,000)
February sales taxes ($7,420

$
600
420

$7,000)
March sales taxes ($9,540
$9,000)
Total
Less taxes remitted
Sales taxes payable

540
1,56
0
(600
)
$
960

Question 21:
CACL-0090
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Snelling Co. did not record an accrual for a contingent loss, but disclosed the nature
of the contingency and the range of the possible loss. How likely is the loss?
Remote.
Reasonably
possible.
Probable.
Certain.
This answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency
shall be accrued if the loss is both probable and reasonably estimable. If no accrual
is made for a loss contingency because one or both of the conditions above are not
met (as in this case), disclosure of the contingency shall be made where it is at least
reasonably possible that a loss was incurred.
Question 22:
AICPA.901122FAR-TH-FA
Which of the following is generally associated with payables classified as accounts
payable?
Periodic payment of Secured by
interest
collateral
No
No
No
Yes
Yes
No
Yes
Yes
Accounts payable is also labeled: accounts payable, trade. The accounts payable
account is used only for routine trade payables, typically for purchases of inventory
and supplies. Interest accrued is recorded in accrued interest payable, and secured
debt is recorded in other specifically-labeled liability accounts.
Question 23:
CACL-0107
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In determining whether to accrue employees compensation for future absences,
one of the conditions that must be met is that the employer has an obligation to
make payment even if an employee terminates. This an example of a(n)

Vested right.
Accumulated
right.
Contingent
right.
Estimable right.
This answer is correct because vested rights are those rights which are not
contingent on an employees future service; the employer has an obligation to make
payment even if an employee terminates employment (ASC Topic 710).
Question 24:
CACL-0006
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On July 1, year 1, Cody Company obtained a $2,000,000, 180-day bank loan at an
annual rate of 12%. The loan agreement requires Cody to maintain a $400,000
compensating balance in its checking account at the lending bank. Cody would
otherwise maintain a balance of only $200,000 in this account. The checking
account earns interest at an annual rate of 6%. Based on a 360-day year, the
effective interest rate on the borrowing is
12.00
%
12.67
%
13.33
%
13.50
%
This answer is correct. The effective interest rate on a borrowing is the net annual
interest cost divided by the net available proceeds from the borrowing. Codys gross
annual interest cost is $240,000 ($2,000,000 x 12%). Cody is required to maintain a
compensating balance of $400,000, which is $200,000 more than their normal
balance of $200,000. Therefore, Cody earns incremental annual interest revenue of
$12,000 ($200,000 x 6%) on the excess compensating balance. The net annual
interest cost is $228,000 ($240,000 - $12,000). The net available proceeds from the
borrowing is $1,800,000 ($2,000,000 loan less $200,000 excess compensating
balance). Therefore, the effective annual interest rate is 12.67% ($228,000 ??
$1,800,000).
Question 25:
CACL-0052
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On September 1, year 1, a company borrowed cash and signed a 1-year interestbearing note on which both the principal and interest are payable on September 1,
year 2. How will the note payable and the related interest be classified in the
December 31, year 1 balance sheet?

Accrued
interest
Noncurrent
Current liability
liability
Noncurrent
Current liability
liability
Current liability Current liability
Noncurrent
No entry
liability
This answer is correct because current liabilities are those that are scheduled to
mature within 1 year after the balance sheet date or within the entitys operating
cycle, whichever is longer. Since both the principal and accrued interest are due 9
months after the balance sheet date, they would be classified as current liabilities.
Note payable

Question 26:
CACL-0094
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In December year 1, Mill Co. began including one coupon in each package of candy
that it sells and offering a toy in exchange for 50 cents and five coupons. The toys
cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During
December, Mill sold 110,000 packages of candy and no coupons were redeemed. In
its December 31, year 1 balance sheet, what amount should Mill report as
estimated liability for coupons?
$
3,960
$10,56
0
$19,80
0
$52,80
0
This answer is correct. Mill expects 60% of the 110,000 coupons to be redeemed,
resulting in redemptions of 66,000 coupons. Since five coupons must be presented
to receive a toy, it is expected that 13,200 toys (66,000 / 5) will be mailed in the
future as a result of December year 1 sales. The net cost per toy for Mill is 30 (80
50), so the estimated liability for coupons is $3,960 (13,200 30).
Question 27:
CACL-0097
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Fulton Cereal Company inaugurated a new sales promotional program. For every 10
cereal box tops returned to the company, customers receive an attractive prize.
Fulton estimates that only 30% of the cereal box tops reaching the consumer
market will be redeemed. Additional information is as follows:
Units

Amounts

Sales of cereal boxes

Purchase of prizes
Prizes distributed to
customers

2,000,0 $1,400,0
00
00
36,000 18,000
28,000

At the end of its year, Fulton recognized a liability equal to the estimated cost of
potential prizes outstanding. What is the amount of this estimated liability?
$
4,000
$16,00
0
$18,00
0
$42,00
0
This answer is correct. The estimated liability at the end of the year is the value of
the prizes expected to be distributed less the value of the prizes actually
distributed. Only 600,000 box tops (2,000,000 box tops x 30%) are expected to be
redeemed. Because 10 box tops must be redeemed for 1 prize, 60,000 prizes
(600,000 box tops/10) are expected to be distributed. Only 28,000 prizes have been
distributed. Thus, 32,000 more prizes are expected to be distributed. Each prize
cost $.50 ($18,000/36,000 prizes). Therefore, Fulton has an estimated liability of
$16,000 (32,000 prizes x $.50)
Question 28:
CACL-0137
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On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World
paid the first of four quarterly payments of $264,200 when due on December 30. In
its December 31 balance sheet, what amount should World report as note payable?
$735,80
0
$750,00
0
$758,30
0
$825,80
0
This answer is correct. Interest expense is calculated as $1,000,000 x 9% x 3/12
months = $22,500. The payment of $264,200 less $22,500 in interest is equal to
$241,700, which is the amount of the payment which is applied to the principal
balance of the note. Therefore, this answer is correct because the carrying value of
the note on December 31 is $758,300 ($1,000,000 $241,700)
Question 29:
CACL-0062
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See Reference...
Bloy Company pays all salaried employees on a biweekly basis. Overtime pay,
however, is paid in the next biweekly period. Bloy accrues salaries expense only at
its December 31 year-end. Data relating to salaries earned in December year 1 are
as follows:
Last payroll was paid on 12/26/Y1, for the 2-week period ended 12/26/Y1.
Overtime pay earned in the 2-week period ended 12/26/Y1 was $4,200.
Remaining work days in year 1 were December 29, 30, and 31, on which days
there was no overtime.
The recurring biweekly salaries total $75,000.
Assuming a 5-day work week, Bloy should record a liability at December 31, year 1,
for accrued salaries of
$22,50
0
$26,70
0
$45,00
0
$49,20
0
This answer is correct. The liability for accrued salaries at 12/31/Y1 should include
all salaries expense which has been incurred, but not yet paid. This would include
the overtime pay earned by employees in the 2-week period ended 12/26/Y1
($4,200), which will not be paid until the next pay period. Accrued salaries would
also include the regular pay for the workdays since 12/26/Y1. There were three such
workdays (December 29, 30, and 31). Since each biweekly pay period results in
$75,000 regular pay for 10 workdays (two 5-day weeks), the accrued salaries for 3
workdays would be 3/10 of $75,000, or $22,500. Therefore, the total liability for
accrued salaries at 12/31/Y1 is $26,700 ($22,500 + $4,200).
Question 30:
CACL-0061
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Bronson Apparel, Inc. operates a retail store and must determine the proper
December 31, year 1 year-end accrual for the following expenses:
The store lease calls for fixed rent of $1,000 per month, payable at the beginning of
the month, and additional rent equal to 6% of net sales over $200,000 per calendar
year, payable on January 31 of the following year. Net sales for year 1 are
$800,000.
Bronson has personal property subject to a city property tax. The citys fiscal year
runs from July 1 to June 30 and the tax, assessed at 3% of personal property on
hand at April 30, is payable on June 30. Bronson estimates that its personal
property tax will amount to $6,000 for the citys fiscal year ending June 30, year 2.
In its December 31, year 1 balance sheet, Bronson should report accrued expenses
of

$39,00
0
$39,60
0
$51,00
0
$51,60
0
This answer is correct. Because fixed rent is paid at the beginning of the month,
there is no need to accrue any fixed rent expense on 12/31/Y1. However, additional
rent of $36,000 [6% ($800,000 - $200,000)] should be recorded as an accrued
expense. Additionally, the property tax expense applicable from 7/1/Y1 to 12/31/Y1
is $3,000 ($6,000 6/12) and will not be paid until 6/30/Y2. Therefore, accrued
expenses on 12/31/Y1 is $39,000 ($36,000 + $3,000).
Question 31:
CACL-0074
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Strand, Inc. provides an incentive compensation plan under which its president
receives a bonus equal to 10% of the corporations income in excess of $200,000
before income tax but after deduction of the bonus. If income before income tax
and bonus is $640,000 and the tax rate is 40%, the amount of the bonus would be
$40,00
0
$44,00
0
$58,18
0
$64,00
0
This answer is correct. The bonus is equal to 10% of income in excess of $200,000
after deducting the bonus. The solutions approach is to set up and solve an
equation.
B

.10 ($640,000
=
$200,000 B)
=.10 ($440,000 B)
=$44,000 .10B

B
B
1.10
=$44,000
B
$44,000 / 1.10 =
B
=
$40,000

Note that the tax rate (40%) is not used. The bonus is based on income before, not
after, taxes.
Question 32:
CACL-0055

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Stark, Inc. has $1,000,000 of notes payable due June 15, year 2. At the financial
statement date of December 31, year 1, Stark signed an agreement to borrow up to
$1,000,000 to refinance the notes payable on a long-term basis. The financing
agreement called for borrowings not to exceed 80% of the value of the collateral
Stark was providing. At the date of issue of the December 31, year 1 financial
statements, the value of the collateral was $1,200,000 and was not expected to fall
below this amount during year 2. On the December 31, year 1 balance sheet, Stark
should classify
$40,000 of notes payable as short-term and $960,000 as longterm obligations.
$200,000 of notes payable as short-term and $800,000 as longterm obligations.
$1,000,000 of notes payable as short-term obligations.
$1,000,000 of notes payable as long-term obligations.
This answer is correct. For a currently maturing liability to be classified as long-term,
a company must show intent and ability to refinance the obligation (per ASC 47010-45-14). Stark, Inc. intends to refinance the entire $1,000,000; however, Stark
only has the ability to refinance $960,000 (.8 x $1,200,000) due to the financing
agreement that limits borrowing to 80% of the value of collateral. Thus, $40,000
($1,000,000 - $960,000) is considered short-term and $960,000 is considered longterm.
Question 33:
CACL-0105
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Gain contingencies are usually recognized in the income statement when
Realized.
Occurrence is reasonably possible and the amount can be
reasonably estimated.
Occurrence is probable and the amount can be reasonably
estimated.
The amount can be reasonably estimated.
This answer is correct. "Contingency" designates a claim or right whose existence is
uncertain but which may become valid property rights eventually. Accountants have
adopted a conservative policy in the area of gain contingencies. Per ASC Topic 450,
gain contingencies should not be reflected in the accounts since to do so might be
to recognize revenue prior to its realization.
Question 34:
CACL-0100
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In March year 2, an explosion occurred at Nilo Co.s plant, causing damage to area
properties. By May year 2, no claims had yet been asserted against Nilo. However,
Nilos management and legal counsel concluded that it was reasonably possible that
Nilo would be held responsible for negligence, and that $3,000,000 would be a

reasonable estimate of the damages. Nilos $5,000,000 comprehensive public

liability policy contains a $300,000 deductible clause. In Nilos December 31, year 2
financial statements, for which the auditors fieldwork was completed in April year
3, how should this casualty be reported?
As a footnote disclosing a possible liability of $3,000,000.
As an accrued liability of $300,000.
As a footnote disclosing a possible liability of $300,000.
No footnote disclosure or accrual is required for year 3 because the event
occurred in year 2.
This answer is correct. Per ASC Topic 450, a loss contingency should be accrued if it
is probable that a liability has been incurred at the balance sheet date and the
amount of the loss is reasonably estimable. Although this contingency is reasonably
estimable, it is not probable. Therefore, no loss is accrued. However, since the
contingency is reasonably possible, it will be disclosed in the footnotes to the
12/31/Y2 financial statements. The possible loss will be disclosed as $300,000. The
additional potential liability above the deductible would be covered by the insurance
policy, and would not be a loss for Nilo.
Question 35:
CACL-0059
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A company has the following liabilities at year-end:
Mortgage note payable; $16,000 due within 12 months
Short-term debt that the company is refinancing with
long-term debt
Deferred tax liability arising from depreciation

$355,0
00
175,00
0
25,000

What amount should the company include in the current liability section of the
balance sheet?
$0
$
16,000
$
41,000
$191,00
0
This answer is correct. Determine the amount to be included in the current liability
section of the balance sheet. Although the mortgage note payable is a long-term
liability, the amount due within the next 12 months, $16,000, should be reclassified
to the current liability section of the balance sheet. The short-term debt that the
company is refinancing with long-term debt is reclassified as a long-term liability if
the company has both the intent and the ability to consummate the refinancing.
Deferred tax assets and liabilities are classified as current or noncurrent based upon
the related asset or liability account. For depreciation, the related asset account is a
noncurrent asset, and the deferred tax liability is included in the noncurrent liability
section of the balance sheet. Therefore, the only item which should be included in

the current liability section of the balance sheet is the $16,000 of long-term debt
that is due within the next 12 months.
Question 36:
CACL-0063
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On October 1, year 1, a company borrowed cash and signed a 3-year interestbearing note on which both the principal and interest are payable on October 1,
year 4. The company did not elect to use the fair value option for reporting financial
liabilities. At December 31, year 3, accrued interest should
Be reported on the balance sheet as a current liability.
Be reported on the balance sheet as a noncurrent
liability.
Be reported on the balance sheet as part of long-term
notes payable.
Not be reported on the balance sheet as a liability.
This answer is correct. ASC 210-10-20 Glossary states that current liabilities are
obligations whose liquidation is reasonably expected to require the use of existing
resources properly classified as current assets. Current liabilities include liabilities
coming due in 1 year. Since the principal and interest are both payable within the
next year, the accrued interest should be reported on the balance sheet as a current
liability.
Question 37:
CACL-0067
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On December 1, year 1, Paxton Co. had a note payable due on August 1, year 2. On
January 20, year 2, Paxton signed a financing agreement to borrow the balance of
the note payable from a lending institution to refinance the note. The agreement
does not expire within one year, and no violation of any provision in the financing
agreement exists. On February 1, year 2, Paxton was informed by its financial
advisor that the lender is not expected to be financially capable of honoring the
agreement. Paxtons financial statements were issued on March 31, year 2. How
should Paxton classify the note on its balance sheet at December 31, year 1?
As a current liability because the financing agreement was signed after the balance
sheet date.
As a current liability because the lender is not expected to be financially capable of
honoring the agreement.
As a long-term liability because the agreement does not expire within one year.
As a long-term liability because no violation of any provision in the financing
agreement exists.
This answer is correct. The requirement is to identify how Paxton should classify the
note on its balance sheet at year-end. According to ASC 470-10-45-14, three
conditions must be met to disclose the short-term obligation as a long-term liability:
the agreement does not expire within one year, no violation of any provision in the
financing agreement exists at the balance sheet date, and the lender is expected to
be financially capable of honoring the agreement. This answer is correct because

this item indicates that the lender is not expected to be financially capable of
honoring the agreement.
Question 38:
CACL-0086
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During year 2, a former employee of Dane Co. began a suit against Dane for
wrongful termination in November year 1. After considering all of the facts, Danes
legal counsel believes that the former employee will prevail and will probably
receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being
the most likely amount. Danes financial statements for the year ended December
31, year 1, will not be issued until February year 2. In its December 31, year 1
balance sheet, what amount should Dane report as a liability with respect to the
suit?
$0
$1,000,0
00
$1,300,0
00
$1,500,0
00
This answer is correct. If the loss is probable and reasonably estimable, the most
likely amount should be recorded as a loss on the income statement, and a
corresponding liability should be reported on the balance sheet. The most likely
amount of the loss is $1,300,000.
Question 39:
CACL-0060
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On December 31, year 1, Key Co. received two $10,000 noninterest-bearing notes
from customers in exchange for services rendered. The note from Alpha Co., which
is due in nine months, was made under customary trade terms, but the note from
Omega Co., which is due in two years, was not. The market interest rate for both
notes at the date of issuance is 8%. The present value of $1 due in nine months at
8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts
should these two notes receivable be reported in Keys December 31, year 1
balance sheet?
Alp Ome
ha ga
Yes Yes
Yes No
No Yes
No No
This answer is correct. The requirement is to determine the amounts that should be
reported for the two notes receivable. Notes that arise from customers in the normal
course of business and are due in one year are classified as current liabilities and

recorded at their maturity value. Notes that are due in more than one year are
classified as long-term liabilities and are recorded at their present value (ASC 31010-30-2 and 835-30-25-4). This answer is correct because the Alpha note should be
recorded at $10,000, and the Omega note should be recorded at its present value of
$8,570 (.857 x $10,000).
Question 40:
CACL-0050
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Which of the following is generally associated with payables classified as accounts
payable?
Periodic payment of Secured by
interest
collateral
Yes
Yes
Yes
No
No
Yes
No
No
This answer is correct because in general, accounts payable are liabilities to
suppliers that are incurred in the regular course of a companys business. Shortterm liabilities such as accounts payable do not usually provide for the periodic
payment of interest or a security interest in collateral.
Question 41:
CACL-0051
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Office supplies were ordered by Dwyer Company from Orcutt Company on
December 15, year 1. The terms of sale were FOB destination. Orcutt shipped the
office supplies on December 28, year 1, and Dwyer received them on January 3,
year 2. When should Dwyer record the account payable?
December 15,
year 1.
December 28,
year 1.
December 31,
year 1.
January 3, year 2.
This answer is correct because when goods are shipped FOB destination, title does
not pass to the buyer until the goods have been delivered. The purchase and
related liability will not be recorded by Dwyer until title passes, which is on the date
the supplies are receivedJanuary 3, year 2.
Question 42:
CACL-0134
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On May 1, year 2, Winston Corporation received notification of legal action against

the firm. Winstons attorneys determine that it is probable the company will lose the
suit, and the loss is estimated at $5,000,000. Winstons accountants believe this
amount is material and should be disclosed. Winston prepares its financial
statements in accordance with IFRS. How should the estimated loss be disclosed in
Winstons financial statements at December 31, year 2?
As a loss recorded in other comprehensive income.
As a provision for loss reported in the balance sheet and a loss on the
income statement.
As a contingent liability reported in the balance sheet and a loss on the
income statement.
In the footnotes to the financial statements as a contingency.
This answer is correct. IFRS defines a provision as a liability that is uncertain in
timing or amount. Provisions are made for estimated liabilities and recorded as a
loss in earnings for the period if the outcome is probable and measurable.
Question 43:
CACL-0141
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Finch Co. reported a total asset retirement obligation of $257,000 in last years
financial statements. This year, Finch acquired assets subject to unconditional
retirement obligations measured at undiscounted cash flow estimates of $110,000
and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the
settlement of previously recorded asset retirement obligations and recorded an
accretion expense of $26,000. What amount should Finch report for the asset
retirement obligation in this years balance sheet?
$238,00
0
$264,00
0
$280,00
0
$306,00
0
This answer is correct. The asset retirement obligation (ARO) is recorded at its fair
value in the period in which it is incurred. Subsequently, it is adjusted for revisions
in estimates and the passage of time. The beginning balance in the asset retirement
obligation account is $257,000. The fair value of the additional unconditional
retirement obligations incurred during the year was $68,000 and increases the ARO.
The $87,000 paid toward the settlement of obligations decreases the ARO. The
$26,000 accretion expense is the expense recognized on the ARO due to the
passage of time and will increase the ARO. ($257,000 + $68,000 $87,000 +
$26,000 = $264,000).
Question 44:
CACL-0109
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If the payment of compensation is probable, the amount can be reasonably

estimated, and the obligation relates to rights that vest, employees compensation
for future absences should be
Accrued if attributable to employees services already rendered.
Accrued if attributable to employees services not already
rendered.
Accrued if attributable to employees services whether already
rendered or not.
Recognized when paid.
This answer is correct because per ASC Topic 710, a liability for compensated
absences should be accrued if the obligation is attributable to employees services
already rendered, the obligation relates to rights which vest or accumulate,
payment is probable, and the amount is reasonably estimable. This completes the
conditions in ASC 710-10-25-1 which are necessary to accrue the liability.
Question 45:
CACL-0053
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Royal Corporations liabilities at 12/31/Y1 were as follows:
Trade accounts payable
16% notes payable issued 11/1/Y1, maturing 7/1/Y2
14% debentures payable issued 2/1/Y1; final installment
due 2/1/Y5;
balance at 12/31/Y1, including annual installment of
$50,000 due 2/1/Y2

$100,0
00
30,000
300,00
0
$430,0
00

Royals 12/31/Y1, financial statements were issued on 3/31/Y2. On 1/5/Y2 the entire
$300,000 balance of the 14% debentures was refinanced by issuance of a long-term
obligation. In addition, on 3/1/Y2, Royal consummated a noncancelable agreement
with the lender to refinance the 16% note payable on a long-term basis, on readily
determinable terms that have not yet been implemented. Both parties are
financially capable of honoring the agreement, and there have been no violations of
any of the agreements provisions. The total amount of Royals short-term
obligations that may properly be excluded from current liabilities at 12/31/Y1 is
$0
$30,00
0
$50,00
0
$80,00
0
This answer is correct. Per ASC 470-10-45-14, an enterprise may exclude a shortterm obligation from current liabilities only if (1) it intends to refinance the
obligation on a long-term basis and (2) it demonstrates an ability to consummate

the refinancing. The $50,000 current installment of the 14% debentures qualify for
exclusion because those debentures were actually refinanced on a long-term basis.
When a financing agreement is used to provide evidence of ability to consummate,
the agreement must: be noncancelable, be long-term, and possess readily
determinable terms. In addition, the company must not be in violation of the
agreement, and both the lender and investor must be financially capable of
honoring the agreement. Since all these requirements are met by the described
financing agreement, the $30,000 note payable may also be excluded from current
liabilities. Therefore, $80,000 would be properly excluded.
Question 46:
CACL-0076
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Jackson Corporation provides an incentive compensation plan under which its
president is to receive a bonus equal to 10% of Jacksons income in excess of
$100,000 before deducting income tax but after deducting the bonus. If income
before income tax and the bonus is $320,000, the amount of the bonus should be
$44,00
0
$32,00
0
$22,00
0
$20,00
0
This answer is correct. Before multiplying by 10%, $100,000 and the amount of the
bonus must be deducted from $320,000. The bonus can be calculated by setting up
the following equation.
B

10% ($320,000
=
$100,000 B)
=$22,000 .1B

B
1.1
=$22,000
B
B =$20,000

Thus the bonus is $20,000.

Question 47:
CACL-0095
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Baker Co. sells consumer products that are packaged in boxes. Baker offered an
unbreakable glass in exchange for two box tops and $1 as a promotion during the
current year. The cost of the glass was $2.00. Baker estimated at the end of the
year that it would be probable that 50% of the box tops will be redeemed. Baker
sold 100,000 boxes of the product during the current year and 40,000 box tops were
redeemed during the year for the glasses. What amount should Baker accrue as an

estimated liability at the end of the current year, related to the redemption of box
tops?
$0
$5,000
$20,00
0
$25,00
0
This answer is correct. The requirement is to determine the amount that should be
accrued as an estimated liability. The estimated liability at the end of the current
year is calculated as follows: boxes sold 100,000 50% estimated to be redeemed
= 50,000 box tops estimated to be redeemed. Since 40,000 box tops have been
redeemed, this leaves an estimated 10,000 box tops to be redeemed. It takes 2 box
tops and $1 to receive the unbreakable glass. Therefore, 5,000 (10,000 2)
unbreakable glasses are estimated to be redeemed. The cost of the glasses is $2.00
each, and 5,000 units $2.00 = $10,000, which is the estimated cost of the
glasses. However, the customer must pay $1.00 per glass, so the estimated liability
is $5,000 ($10,000 cost less $5,000 customer payment), and this answer is correct.
Question 48:
CACL-0075
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After three profitable years, Dodd Co. decided to offer a bonus to its branch
manager, Cone, of 25% of income over $100,000 earned by his branch. For year 1,
income for Cones branch was $160,000 before income taxes and Cones bonus.
Cones bonus is computed on income in excess of $100,000 after deducting the
bonus, but before deducting taxes. What is Cones bonus for the year year 1?
$12,00
0
$15,00
0
$25,00
0
$32,00
0
This answer is correct because the bonus is equal to $12,000.
To calculate the bonus, let x = Bonus.
x

.25 [($160,000 x)
=
$100,000]
=.25 ($60,000 x)
=$15,000 .25x

x
x
1.25
=$15,000
x
x
=$12,000
Question 49:

CACL-0111
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The following information pertains to Rik Co.s two employees:

Na Weekly
me salary
Rya $800
n
Todd600

Number of
weeks
worked in
year 2
52

Vacation rights
vest or
accumulate
Yes

52

No

Neither Ryan nor Todd took the usual 2-week vacation in year 2. In Riks December
31, year 2 financial statements, what amount of vacation expense and liability
should be reported?
$2,80
0
$1,60
0
$1,40
0
$0
This answer is correct. ASC 710-10-25-1 states that accrual of a liability for future
vacation pay is required if all of the conditions below are met.
Obligation arises from employee services already
performed.
Obligation arises from vesting or accumulation of
2.
rights.
3. Payment is probable.
4. Amount can be reasonably estimated.
1.

These criteria are met for Ryan but not for Todd since Todds rights do not vest or
accumulate. Rik Co. would record $1,600 ($800 per week x 2 weeks vacation) as an
expense and liability for future vacation pay owed to Ryan.
Question 50:
CACL-0101
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On March 1, year 1, a suit was filed against Dean Company for patent infringement.
Deans legal counsel believes an unfavorable outcome is probable, and estimates
that Dean will have to pay between $500,000 and $900,000 in damages. However,
Deans legal counsel is of the opinion that $600,000 is a better estimate than any
other amount in the range. The situation was unchanged when the December 31,
year 1 financial statements were released on February 24, year 2. How much of a
liability should Dean report on its balance sheet at December 31, year 1 in
connection with this suit?

$0
$500,00
0
$600,00
0
$900,00
0
This answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency
should be accrued only if it is probable that a liability exists at the balance sheet
date and if the loss is reasonably estimable. The contingency meets the probable
requirement. In addition, the best estimate of the loss is $600,000. Therefore, a
contingent loss of $600,000 should be reported on December 31, year 1.
Question 51:
CACL-0057
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Verona Co. had $500,000 in short-term liabilities at the end of the current year.
Verona issued $400,000 of common stock subsequent to the end of the year, but
before the financial statements were issued. The proceeds from the stock issue
were intended to be used to pay the short-term debt. What amount should Verona
report as a short-term liability on its balance sheet at the end of the current year?
$0
$100,00
0
$400,00
0
$500,00
0
This answer is correct. The requirement is to determine the amount of short-term
liability that should be presented on the balance sheet. ASC 470-10-45-14 allows
classification of short-term liabilities expected to be refinanced to be classified as
noncurrent assuming that the short-term liabilities do not arise from the normal
course of business (e.g., accounts payable and accrued liabilities). Therefore this
answer is correct because the $400,000 may be reclassified as noncurrent.
Question 52:
CACL-0092
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A new product introduced by Maude Corporation carries a 2-year warranty against
defects. The estimated warranty costs related to dollar sales are as follows:
Year of sale3
%
Year after 5
sale
%

Sales and actual warranty expenditures for the years ended December 31, year 1
and year 2 are as follows:
Actual warranty
Sales expenditures
Year $400,0 $10,000
1
00
Year
35,000
2
500,00
0
What amount should Maude report as its estimated warranty liability as of
December 31, year 2?
$
2,000
$12,00
0
$27,00
0
$37,00
0
This answer is correct. The solutions approach is to prepare a T- account for the
liability. The warranty liability is the estimated warranty expense less the actual
warranty expenditures. Maudes estimated warranty is 8% (3% + 5%) of sales.

Therefore, Maude should report $27,000 as warranty liability.

Question 53:
CACL-0088
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A loss contingency for which the amount of loss can be reasonably estimated should
be accrued when the occurrence of the loss is
Reasonably
Rem
possible
ote
Yes
No
Yes
Yes
No
No
No
Yes
This answer is correct because ASC Topic 450 requires accrual of a loss contingency
only if both of the following conditions are met: (1) the future losses are probable

and (2) the loss amount can be reasonably estimated. Loss contingencies that do
not meet one or both of these criteria, but that are at least reasonably possible
should be disclosed, but not accrued. Loss contingencies that have only a remote
possibility of occurrence are generally not even disclosed.
Question 54:
CACL-0103
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Abbot Co. is being sued for illness caused to local residents as a result of negligence
on the companys part in permitting the local residents to be exposed to highly toxic
chemicals from its plant. Abbots lawyer states that it is probable that Abbot will
lose the suit and be found liable for a judgment costing Abbot anywhere from
$500,000 to $2,500,000. However, the lawyer states that the most probable cost is
$1,000,000. As a result of the above facts, Abbot should accrue
A loss contingency of $500,000 and disclose an additional contingency of up
to $2,000,000.
A loss contingency of $1,000,000 and disclose an additional contingency of
up to $1,500,000.
A loss contingency of $1,000,000 but not disclose any additional
contingency.
No loss contingency but disclose a contingency of $500,000 to $2,500,000.
This answer is correct because ASC Topic 450 requires that estimated losses from
loss contingencies be accrued if the contingency is probable (as opposed to
reasonably possible or remote) and the amount of loss can be reasonably
estimated. ASC Topic 450 states that a range of loss rather than an estimate of a
single loss amount is a basis for recording a probable loss. Furthermore, the loss
should be recorded at the best estimate within the range. If there is no best
estimate, one should use the minimum. The excess of the recorded amount within
the range should be disclosed. Accordingly, a $1,000,000 loss contingency should
be recorded in the accounts, because the lawyer stated that the most probable loss
was $1,000,000. Additionally, $1,500,000 should be disclosed as a possible
contingency because the range of the possible loss was up to $2,500,000.
Question 55:
CACL-0089
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Wyatt Co. has a probable loss that can only be reasonably estimated within a range
of outcomes. No single amount within the range is a better estimate than any other
amount. The loss accrual should be
Zero.
The maximum of the
range.
The mean of the
range.
The minimum of the
range.

This answer is correct. Per ASC Topic 450, a loss contingency should be accrued if it
is probable that a liability has been incurred at the balance sheet date and the
amount of the loss is reasonably estimable. This loss must be accrued because it
meets both criteria. ASC Topic 450 requires that when some amount within an
estimated range is a better estimate than any other amount in the range, that
amount is accrued. If no amount within the range is a better estimate than any
other amount, the amount at the low end of the range is accrued and the amount at
the high end is disclosed.
Question 56:
CACL-0093
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Bold Company estimates its annual warranty expense at 2% of annual net sales.
The following data are available:
Net sales for year 2

$4,000,000

Warranty liability account: December

31, year 1
Warranty payments during year 2

$
60,000
credit
50,000
debit

After recording the year 2 estimated warranty expense, the warranty liability
account would show a December 31, year 2 balance of
$10,00
0
$70,00
0
$80,00
0
$90,00
0
This answer is correct. The solutions approach is to prepare a T- account for the
liability. The estimated warranty expense is 2% of annual net sales. Therefore, the
liability account is credited for $80,000 (2% $4,000,000) in year 2. Since $50,000
of warranty expenditures were made during year 2, the ending balance in the
liability account is $90,000.

Question 57:
CACL-0091
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The following information pertains to a fire insurance policy in effect during calendar
year 1, covering Vail Co.s inventory:
Face amount of $800,0
policy
00
Deductible clause50,000
Amount of
4,000
premium
Coinsurance
80%
clause
Vails inventory averages $1,000,000 uniformly throughout the year. Vails income
tax rate is 40%. How much of a contingent liability should Vail accrue at December
31, year 1, to cover possible future fire losses?
$0
$
30,000
$
46,000
$120,00
0
This answer is correct. The requirement is to determine the amount Vail should
accrue as a contingent liability at 12/31/Y1 to cover possible future fire losses. This
answer is correct because per ASC Topic 450, a contingent liability shall only be
accrued if the likelihood of occurrence is probable and the amount of the loss can be
reasonably estimated. An event such as a possible future fire loss is not considered
probable at 12/31/Y1 based on the information given nor can an amount of the loss
from such an event be reasonably estimated. Thus, an accrual at 12/31/Y1 is not
required.
Question 58:
CACL-0083
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Wall Co. sells a product under a two-year warranty. The estimated cost of warranty
repairs is 2% of net sales. During Walls first two years in business, it made the
following sales and incurred the following warranty repair costs:
Year 1
Total sales
Total repair costs
incurred
Year 2

$250,0
00
4,500

Total sales

$300,0
00

Total repair costs

incurred

5,000

What amount should Wall report as warranty expense for year 2?

$1,00
0
$5,00
0
$5,90
0
$6,00
0
This answer is correct. Warranty expense is estimated at 2% of net sales each year.
Warranty expense in Year 2 is calculated as $6,000 (2% $300,000 sales).
Question 59:
CACL-0096
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Blake Foods Corporation mails coupons to consumers which may be presented by a
stated expiration date at retail food stores to obtain discounts on certain Blake
products. Retailers are reimbursed for the face value of coupons redeemed, plus
10% of coupon value as compensation for handling costs. Blake honors requests for
coupon redemption by retailers received up to 3 months after the consumer
expiration date. In Blakes experience, 60% of the coupons issued ultimately are
redeemed. Information with respect to the two separate series of coupons issued
by Blake during year 1 is as follows:
Series A
June 30,
year 1
Total face value of coupons issued
$100,000
Total payments to retailers as of December $ 60,500
31, year 1
Consumer expiration date

Series B
December 31,
year 1
$200,000
$ 40,500

What amount should Blake report as a liability for unredeemed coupons at

December 31, year 1?
$0
$79,50
0
$91,50
0
$97,00
0
This answer is correct. Two separate series of coupons were mailed to consumers
during year 1. The first series expired on 6/30/Y1 and the problem indicated that
Blake honors requests for coupon redemption by retailers only up to 3 months after
the consumer expiration date. Therefore, no liability should be accrued for the
Series A coupons. Payments of $40,500 have been made to retailers on the Series B
coupons which expired on 12/31/Y1. To find the 12/31/Y1 liability, the $40,500
payments must be compared with the total expected payments to be made on the

Series B coupons. Since Blakes experience is that 60% of the coupons will be
redeemed, $120,000 face value of Series B coupons are expected to be redeemed
(60% $200,000). Additionally, $12,000 is expected to be paid to retailers for
handling ($120,000 10%). Thus, an accrued liability of $91,500 is required
($132,000 expected total payments $40,500 payments to date).
Question 60:
CACL-0056
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A company has outstanding accounts payable of $30,000 and a short-term
construction loan in the amount of $100,000 at year-end. The loan was refinanced
through issuance of long-term bonds after year-end but before issuance of financial
statements. How should these liabilities be recorded in the balance sheet?
Long-term liabilities of $130,000.
Current liabilities of $130,000.
Current liabilities of $30,000, long-term liabilities of $100,000.
Current liabilities of $130,000, with required footnote disclosure of the
refinancing of the loan.
This answer is correct. Accounts payable is classified as a current liability. Although
the construction loan was originally due at year-end, if the company has both the
intent and ability to refinance with long-term debt, the $100,000 construction loan
may be reclassified at year-end as a long-term liability. Therefore, this answer is
correct because current liabilities of $30,000 and long-term liabilities of $100,000
should be reported on the balance sheet.
Question 61:
CACL-0104
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Grim Corporation operates a plant in a foreign country. It is probable that the plant
will be expropriated. However, the foreign government has indicated that Grim will
receive a definite amount of compensation for the plant. The amount of
compensation is less than the fair market value but exceeds the carrying amount of
the plant. The contingency should be reported
As a valuation allowance as a part of
stockholders equity.
As a fixed asset valuation allowance account.
In the notes to the financial statements.
In the income statement.
This answer is correct. A gain contingency results from the plant expropriation
because the amount of compensation to be received from the foreign government
exceeds the carrying amount of the plant. Per ASC Topic 450, contingencies that
might result in gains usually are not reflected in the accounts since to do so might
be to recognize revenue prior to its realization. Furthermore, adequate disclosure
shall be made of contingencies that might result in gains, but care shall be
exercised to avoid misleading implications as to the likelihood of realization.
Question 62:

CACL-0139
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Milton Co. pledged some of its accounts receivable to Good Neighbor Financing
Corporation in return for a loan. Which of the following statements is correct?
Good Neighbor Financing cannot take title to the receivables if Milton does not
repay the loan. Title can only be taken if the receivables are factored.
Good Neighbor Financing will assume the responsibility of collecting the receivables.
Milton will retain control of the receivables.
Good Neighbor Financing will take title to the receivables and will return title to
Milton after the loan is paid.
This answer is correct because pledging accounts receivable is treated as a
borrowing with the accounts receivable used as collateral for the loan. Therefore,
Milton retains control of the receivables.
Question 63:
CACL-0138
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Conlon Co. is the plaintiff in a patent-infringement case. Conlon has a high
probability of a favorable outcome, and can reasonably estimate the amount of the
settlement. What is the proper accounting treatment of the patent infringement
case?
A gain contingency for the minimum estimated amount of
the settlement.
A gain contingency for the estimated probable settlement.
Disclosure in the notes only.
No reporting is required at this time.
This answer is correct. US GAAP does not permit the recognition of contingency
gains in the financial statements. Therefore, this answer is correct because the
contingency gain would be reported only in the notes to the financial statements.
Question 64:
CACL-0081
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Fell, Inc. operates a retail grocery store that is required by law to collect refundable
deposits of $.05 on soda cans. Information for year 2 follows:
Liability for returnable deposits
12/31/Y1
Cans of soda sold in year 2
Soda cans returned in year 2

$150,000
10,000,0
00
11,000,0
00

On February 1, year 2, Fell subleased space and received a $25,000 deposit to be

applied toward rent at the expiration of the lease in year 6. In Fells December 31,

year 2 balance sheet, the current and noncurrent liabilities for deposits were
Curren Noncurr
t
ent
$125,0
$0
00
$100,0
$ 25,000
00
$100,0
$0
00
$
$100,000
25,000
This answer is correct. The 12/31/Y2 liability for returnable deposits can be
determined by setting up a T-account.

Deposits (10,000,000 $.05 = $500,000) are debited to cash and credited to the
liability account, while deposits returned (11,000,000 $.05 = $550,000) are
debited to the liability account and credited to cash. The 12/31/Y2 balance of
$100,000 is a current liability since the outstanding deposits are expected to be
returned within the next year. The year 6 rent collected in advance ($25,000) is a
noncurrent liability since the obligation will not be satisfied within 1 year of the
balance sheet date.
Question 65:
CACL-0087
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Which of the following contingencies should generally be accrued on the balance
sheet as a liability when the occurrence of the contingent event is reasonably
possible and its amount can be reasonably estimated?
Expropriation of Product warranty
assets
obligation
No
No
No
Yes
Yes
Yes
Yes
No
This answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency
should be accrued if the likelihood of occurrence is probable and the amount of the
loss can be reasonably estimated. In this case, the likelihood of occurrence is only
reasonably possible, so neither would be accrued.

Question 66:
CACL-0084
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An estimated loss from a loss contingency that is probable and for which the
amount of the loss can be reasonably estimated should
Not be accrued but should be disclosed in the notes to the financial statements.
Be accrued by debiting an appropriated retained earnings account and crediting a
liability account or an asset account.
Be accrued by debiting an expense account and crediting an appropriated retained
earnings account.
Be accrued by debiting an expense account and crediting a liability account or an
asset account.
This answer is correct because ASC Topic 450 requires that an estimated loss from a
contingency be accrued by a charge to income and the recording of a liability if the
loss is both probable and reasonably estimable. Loss contingencies that do not meet
one or both of these criteria, but that are at least reasonably possible should be
disclosed, but not accrued.
Question 67:
CACL-0070
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Pak Co.s professional fees expense account had a balance of $82,000 at December
31, year 1, before considering year-end adjustments relating to the following:
Consultants were hired for a special project at a total fee not to exceed $65,000.
Pak has recorded $55,000 of this fee based on billings for work performed in year
1.
The attorneys letter requested by the auditors dated January 28, year 2, indicated
that legal fees of $6,000 were billed on January 15, year 2, for work performed in
November year 1, and unbilled fees for December year 1 were $7,000.
What amount should Pak report for professional fees expense for the year ended
December 31, year 1?
$105,00
0
$
95,000
$
88,000
$
82,000
This answer is correct. The professional fees expense amount of $82,000 must be
adjusted if any year 1 expenses have been incurred, but not yet paid or recorded
(accrued expenses). No adjustment is necessary for the consulting work since Pak
has recorded $55,000 of expense based on work performed in year 1. However, an
adjustment must be made for attorney fees since at 12/31/Y1 neither the fees for
November year 1 ($6,000) or December year 1 ($7,000) have been recorded. These

amounts must be recorded as an expense and liability at 12/31/Y1, resulting in total

professional fees expense of $95,000 ($82,000 + $6,000 + $7,000).
Question 68:
CACL-0072
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Bloy Corp.s payroll for the pay period ended October 31, year 1, is summarized as
follows:
Department
payroll

Total
wages

Factory

$
60,000

Sales

22,000

Office

18,000

Amount of wages
Federal
subject to
income
payroll
tax withheld
taxes
Unemploym
FICA
ent
$
$56,000
$18,000
7,000
3,000
2,000

$100,000 $12,000

16,000
8,000
$80,000

2,000

$20,000

Assume the following payroll tax rates:

FICA for employer and
employee
Unemployment

7%
each
3%

What amount should Bloy accrue as its share of payroll taxes in its October 31, year
1 balance sheet?
$18,20
0
$12,60
0
$11,80
0
$
6,200
This answer is correct. The employers payroll taxes include the employers share of
FICA taxes (7% x $80,000 = $5,600) and the unemployment taxes (3% x $20,000 =
$600). Therefore, Bloy should accrue $6,200 ($5,600 + $600) as its share of payroll
taxes in the 10/31/Y1 balance sheet. Note that Bloy would report an additional
10/31/Y1 liability of $5,600 for the employees share of FICA taxes and $12,000 for
federal income taxes, which would be withheld from employees paychecks.
Question 69:

CACL-0069
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For the week ended June 30, year 1, Free Co. paid gross wages of $20,000, from
which federal income taxes of $2,500 and FICA were withheld. All wages paid were
subject to FICA tax rates of 7% each for employer and employee. Free makes all
payroll-related disbursements from a special payroll checking account. What
amount should Free have deposited in the payroll checking account to cover net
payroll and related payroll taxes for the week ended June 30, year 1?
$21,40
0
$22,80
0
$23,90
0
$25,30
0
This answer is correct. Net payroll is gross wages paid minus taxes taken out for the
employees. The federal income tax of $2,500 was given and the FICA tax was given
as 7% to both employer and employee. FICA tax is calculated by multiplying the
gross wages ($20,000) by 7% to get $1,400. This $1,400 is due both from the
employer and the employee. Net payroll will equal
$20,0
00

2,500

1,400
$16,1
00

Gross wages
Federal income
tax
Employee FICA
tax

Payroll taxes due are

$2,5 Federal income
00
tax
+
Employee FICA
1,400 tax
+
Employer FICA
1,400 tax
$5,3
00
Free Co. will have to deposit $21,400 ($16,100 + $5,300) in order to cover both the
net payroll and the related payroll taxes.
Question 70:
CACL-0106
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On November 1, year 1, Beni Corp. was awarded a judgment of $1,500,000 in

connection with a lawsuit. The decision is being appealed by the defendant, and it is
expected that the appeal process will be completed by the end of year 2. Benis
attorney feels that it is highly probable that an award will be upheld on appeal, but
that the judgment may be reduced by an estimated 40%. In addition to footnote
disclosure, what amount should be reported as a receivable in Benis balance sheet
at December 31, year 1?
$1,500,0
00
$
900,000
$
600,000
$0
This answer is correct. ASC Topic 450 states that gain contingencies are not
reflected in the accounts until realized. Since the case is unresolved at 12/31/Y1
none of this contingent gain should be recorded as revenue in year 1.
Question 71:
CACL-0082
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Reserves for contingencies for general or unspecified business risks should
Be accrued in the financial statements and disclosed in the notes
thereto.
Not be accrued in the financial statements but should be disclosed in
the notes thereto.
Not be accrued in the financial statements and need not be disclosed in
the notes thereto.
Be accrued in the financial statements but need not be disclosed in the
notes thereto.
This answer is correct because ASC Topic 450 states that no accrual, loss, or
disclosure should be made for general or unspecified business risks and that they
need not be disclosed. An estimated loss for a loss contingency shall be accrued
only if the loss is probable and the amount of the loss is reasonably estimated.
General or unspecified business risks do not meet these conditions.
Question 72:
CACL-0136
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Ande Co. estimates uncollectible accounts expense using the ratio of past actual
losses from uncollectible accounts to past net credit sales, adjusted for anticipated
conditions. The practice follows the accounting concept of
Consistency.
Going concern.
Matching.
Substance over
form.

This answer is correct because estimating uncollectible accounts expense based on

net credit sales is an application of the matching principle where expenses are
matched to the related revenue earned.