Chapter13CurrentLiabilitiesandContingencies

EXERCISESRequirement1
Exercise131
Cash................................................................
Notespayable..............................................

6,000,000

6,000,000

Requirement2
Interestexpense($6,000,000x14%x4/12).........
Interestpayable...........................................

280,000
280,000

Requirement3
Interestexpense($6,000,000x14%x2/12).........
Interestpayable(fromadjustingentry)...............
Notespayable(faceamount)..............................
Cash(total)....................................................

Exercise132 1.

Interestrate

140,000
280,000
6,000,000

6,420,000

Fiscalyearend

13%

December31

Interestrate

Fiscalyearend

10%

October31

$300millionx13%x8/12=$26million
2.
3.
4.

$300millionx10%x6/12=$15million
Interestrate
Fiscalyearend
9%

June30
2
$300millionx9%x /12=$4.5million

Interestrate

Fiscalyearend
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7%

January31

$300millionx7%x9/12=$15.75million

Exercise133

2013

Jan.22 Noentryismadeforalineofcredituntilaloanactuallyismade. It
wouldbedescribedinadisclosurenote.
Mar.1
Cash..........................................................................
Notespayable.........................................................

7,000,000

June1
Interestexpense($6,000,000x10%x3/12)....................
Notespayable(faceamount).........................................
Cash($6,000,000+150,000)......................................

175,000
7,000,000

Nov.1
Cash(difference)..........................................................
Discountonnotespayable($6,000,000x8%x9/12)......
Notespayable(faceamount).....................................

5,640,000
360,000

7,000,000

7,175,000

6,000,000

Dec.31
Theeffectiveinterestrateis8.5106%($360,000$5,640,000)x12/9.So,
properly,interestshouldberecordedatthatratetimestheoutstandingbalance
timestwotwelfthsofayear:
Interestexpense($5,640,000x8.5106%x2/12)..............
Discountonnotespayable....................................

80,000
80,000

Howeverthesameresultsareachievedifinterestisrecordedatthediscount
ratetimesthematurityamounttimestwotwelfthsofayear:
Interestexpense($6,000,000x8%x2/12).....................
Discountonnotespayable....................................
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80,000
80,000

Intermediate Accounting, 7e

Exercise133(concluded)

2014

Aug.1
Interestexpense($6,000,000x8%x7/12)*....................
Discountonnotespayable....................................
Notespayable(balance)...............................................
Cash(maturityamount).............................................

280,000
280,000
6,000,000

6,000,000

*or,($5,640,000x8.5106%x7/12)=$280,000

Exercise134

1. Noncurrentliability:$22million

Thecurrentliabilityclassificationincludes(a)situationsinwhichthecreditor
hastherighttodemandpaymentbecauseanexistingviolationofaprovisionof
thedebtagreementmakesitcallableand(b)situationsinwhichdebtisnotyet
callable, but will be callable within the year if an existing violation is not
correctedwithinaspecifiedgraceperiodunlessit's probable theviolation
willbecorrectedwithinthegraceperiod.Inthiscase,theexistingviolationis
expectedtobecorrectedwithin6months.
2. Currentliability:$9million
Thedebtshouldbereportedasacurrentliabilitybecauseitispayableinthe
upcomingyear,willnotberefinancedwithlongtermobligations,andwillnot
bepaidwithabondsinkingfund.
3. Currentliability:$15million
The requirement to classify currently maturing debt as a current liability
includesdebtthatiscallablebythecreditorintheupcomingyearevenifthe
debtisnotexpectedtobecalled

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Exercise135

Requirement1

Thisisalosscontingency.Theremaybeafuturesacrificeofeconomicbenefits
(costofsatisfyingthewarranty)duetoanexistingcircumstance(thewarranted
awningshavebeensold)thatdependsonanuncertainfutureevent(customer
claims).
Theliabilityisprobablebecauseproductwarrantiesinevitablyentailcosts.A
reasonablyaccurateestimateofthetotalliabilityforaperiodispossiblebased
onpriorexperience. So,thecontingentliabilityforthewarrantyisaccrued.
Theestimatedwarrantyliabilityiscreditedandwarrantyexpenseisdebitedin
2013,theperiodinwhichtheproductsunderwarrantyaresold.
Requirement2
2013Sales
Accountsreceivable............................................
Sales................................................................

7,500,000

Accruedliabilityandexpense
Warrantyexpense(4%x$7,500,000).........................
Estimatedwarrantyliability............................

300,000

Actualexpenditures
Estimatedwarrantyliability...............................
Cash,wagespayable,partsandsupplies,etc..

124,800

7,500,000

300,000

124,800

Requirement3
WarrantyLiability

__________________________________________

Actualexpenditures124,800

300,000 Estimatedliability

175,200 Balance

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Intermediate Accounting, 7e

PROBLEMSRequirement1
Problem131
SchillingMotors
Cash......................................................................... 42,000,000
Notespayable.......................................................
42,000,000
FirstBank
Notesreceivable....................................................... 42,000,000
Cash.....................................................................
42,000,000
Requirement2
Adjustingentries(December31,2013)
SchillingMotors
Interestexpense($42,000,000x12%x2/12).................
Interestpayable.....................................................

840,000

FirstBank
Interestreceivable.....................................................
Interestrevenue($42,000,000x12%x2/12).............

840,000

840,000

840,000

Maturity(March31,2014)
SchillingMotors
Interestexpense($42,000,000x12%x3/12)................. 1,260,000
Interestpayable(fromadjustingentry)........................
840,000
Notespayable(faceamount)....................................... 42,000,000
Cash(total).............................................................
44,100,000
FirstBank
Cash(total)................................................................. 44,100,000
Interestrevenue($42,000,000x12%x3/12)...............

1,260,000

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Interestreceivable(fromadjustingentry)..................
Notesreceivable(faceamount)...............................

840,000
42,000,000

Problem131(concluded) Requirement3
Issuanceofnote(November1,2013)
Cash(difference)......................................................... 39,900,000
Discountonnotespayable($42,000,000x12%x5/12)
2,100,000
Notespayable(faceamount).........................................
42,000,000
Adjustingentry(December31,2013)
Interestexpense($42,000,000x12%x2/12).................
840,000
Discountonnotespayable....................................

840,000

Maturity(March31,2014)
Interestexpense($42,000,000x12%x3/12)................. 1,260,000
Discountonnotespayable....................................

1,260,000

Notespayable(faceamount)....................................... 42,000,000
Cash.....................................................................
42,000,000
Effectiveinterestrate:
Discount($42,000,000x12%x5/12) $

Cashproceeds
$39,900,000
Interestratefor4months
5.26315%
x12/5
___________
Annualeffectiverate
12.63%

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2,100,000

Intermediate Accounting, 7e

1. This is a loss contingency. Finley can use the information

Problem132 occurringaftertheendoftheyearindeterminingappropriate
disclosure.ItisunlikelythatFinleywouldchoosetoaccruethe
$36millionlossbecausethejudgmentwillbeappealedandthat
outcomeisuncertain.Adisclosurenoteisappropriate:
_______________________________
NoteX:Contingency
Inalawsuitresultingfromadisputewithasupplier,ajudgmentwasrendered
againstFinleyCorporationintheamountof$34millionplusinterest,atotalof$36
million at January 25, 2014. Finley plans to appeal the judgment. While
managementandlegalcounselarepresentlyunabletopredicttheoutcomeorto
estimatetheamountofanyliabilitythecompanymayhavewithrespecttothis
lawsuit,itisnotexpectedthatthismatterwillhaveamaterialadverseeffectonthe
company.

2. No disclosure is required because an EPA claim is as yet unasserted, and an

assessmentisnot probable. Evenifanunfavorableoutcomeisthoughttobe
probableintheeventofanassessmentandtheamountisestimable,disclosureis
notrequiredunlessanunassertedclaimisprobable.
Problem132(concluded) 3. Thisisagaincontingency.Gaincontingenciesarenot
accrued even if the gain is probable and reasonably
estimable.Thegainshouldberecognizedonlywhen
realized.
Though gain contingencies are not recorded in the accounts, they should be
disclosedinnotestothefinancialstatements.
_______________________________
NoteX:Contingency
FinleyistheplaintiffinapendinglawsuitfiledagainstAAAsphaltfordamages
duetolostprofitsfromrejectedcontractsandforunpaidreceivables.Thecaseisin
finalappeal.Noamounthasbeenaccruedinthefinancialstatementsforpossible
collectionofanyclaimsinthislitigation.
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4. Thisisalosscontingency.Finleycanusetheinformationoccurringaftertheend
oftheyearindeterminingappropriatedisclosure. Finleyshouldaccruethe$55
millionlossbecausetheultimateoutcomeappearssettledandthelossisprobable.
Losslitigation...........................................
Liabilitylitigation..................................

55,000,000

55,000,000

Adisclosurenotealsoisappropriate:
_________________________________
Notes:Litigation
InOctober2012,theStateofMontanafiledsuitagainsttheCompany,seekingcivil
penalties and injunctive relief for violations of environmental laws regulating
hazardous waste. On February 3, 2014, the Company announced that it had
reachedasettlementwithstateauthoritiesonthismatter.Basedupondiscussions
withlegalcounsel,theCompany,hasaccruedandchargedtooperationsin2013,
$55milliontocovertheanticipatedcostofallviolations.TheCompanybelieves
thattheultimatesettlementofthisclaimwillnothaveamaterialadverseeffecton
theCompany'sfinancialposition.

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Intermediate Accounting, 7e