Exam 7: Accounting for Liabilities

Rugh Company has been sued by two customers who claim to have been injured by products Rugh sold.The two lawsuits are unrelated to each other.For lawsuit #1,Rugh expects to lose the suit,and its attorney estimates that the amount of the damages awarded to the customer will be $500,000.For lawsuit #2,Rugh believes that loss of the suit is possible but not probable.The attorney thinks the amount of the damages may be $15,000. Required: Describe the correct accounting treatment for lawsuit #1 and lawsuit #2.

Discuss one advantage of issuing bonds versus borrowing money from a bank.

On January 1,2012,Ortiz Co.paid $100,000 to retire its bonds payable that matured on that date.Indicate the effects of retiring these bonds.

In accounting for a contingent liability,if the likelihood of the obligation is possible,a company must

General uncertainties,such as the effect of competition on a business's operations,are not accounted for as contingent liabilities.

What criterion is used for classifying assets as current? Provide three examples of current assets.

A contingent liability is

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a discount?

On January 1,2012,Sol Company issued bonds with a face value of $100,000 at 105.The bonds will mature in 5 years.Interest at 10% was payable in cash on December 31 of each year.The premium will be amortized using the straight line method.Based on this information,the amount of interest expense shown on the 2012 income statement and the cash flow from operating activities shown on the 2012 statement of cash flows would be:

When a warranty repair job is completed,what is the effect on the accounting equation?

Discuss the advantages of establishing a line of credit.

Current liabilities include

Rosen Hardware Company recorded the following sales for the first quarter of 2012: These amounts do not include sales taxes.The company is in a state with a sales tax rate of 6 percent. Required: a)Calculate the amount of sales tax that the company collected from its customers for each month. b)For each month,indicate the effect of the sales and collection of sales tax on the statements model,below.Show dollar amounts of increases and decreases; enter NA if an item is not affected.In the cash flows column,designate cash flows as operating activities (OA),investing activities (IA).or financing activities (FA). c)On March 31,Rosen Hardware remitted to the state the total amount of sales tax for the quarter.Indicate in the statements model the effect of this transaction.

At December 31,Ransom Company recorded the interest that had accrued on its outstanding note payable.

What is a bond discount? What is a bond premium? How do they affect the interest expense on bonds?

Bonds payable are usually classified on the balance sheet as:

San Jose Company issued 5-year $200,000 face value bonds at 105 on January 1,2012.The stated interest rate on these bonds is 9%.Use the straight line method to complete the amortization schedule below.

Villarente Company issued 5-year $200,000 face value bonds at 95 on January 1,2012.The stated interest rate on these bonds is 9%,and the effective interest rate is 10.33%.Use the effective interest rate method to complete the amortization schedule below.

On January 1,2012,Washta Company issued a long-term note.The note required an annual payment that included a reduction in the principal balance and the payment of interest.Show how the issuance of the note affected the financial statements.

Which of the following reflects the effect of the year-end adjusting entry to record estimated warranty expense?