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Chapter 13: Q18Q (page 691)

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

Short Answer

Expert verified

Determining current liability is a near debt obligation that is measured exactly, while contingent liability is a liability that may or may not occur contingent on the happening of an uncertain future event.

Step by step solution

01

Step 1- Meaning of Determinable Current Liability

Determinable current liabilities are those liabilities that are determined to be payable within period of one year

Example- Accounts payable, Short term loan, etc

02

Step 3- Comparing and differentiating Determinable current liability and contingent liability

BASIS

Determinable current liability

Contingent liability

Definition

Obligations that are measured exactly

Liability that may occur depending upon uncertain future event

Accountability

Under current liabilities

Disclosed as notes usually but loss/expense if any is accounted as part of prudence

Measurability

It can be measured exactly

It may or may not be estimated since the happening of the event is uncertain

Examples

Accounts payable, commercial paper, dividends payable

Potential Lawsuits, product warranties, pending investigations

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Most popular questions from this chapter

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for \(13,200. During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment

Alvarado Company sells a machine for \(7,400 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the total warranty cost is \)390 per machine (\(170 parts and \)220 labor).

Instructions

Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

(a) Sale of machinery and warranty expense incurred in 2017.

(b) Warranty accrual on December 31, 2017.

(c) Warranty costs incurred in 2018.

(d) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2017?

(Equity Investments) Kenseth Company has the following securities in its portfolio on December 31, 2017.

None of these investments are accounted for under the equity method.

Investments Cost Fair Value

1,500 shares of Gordon, Inc., common \( 73,500 \) 69,000

5,000 shares of Wallace Corp., common 180,000 175,000

400 shares

of Martin, Inc., preferred 60,000 61,600

\(313,500 \)305,600

All of the securities were purchased in 2017.

In 2018, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., common, @ \(45 less fees of \)1,200

April 1 Bought 700 shares of Earnhart Corp., common, @ \(75 plus fees of \)1,300

Kenseth鈥檚 portfolio of equity securities appeared as follows on December 31, 2018.

Investments Cost Fair Value

5,000 shares of Wallace Corp., common \(180,000 \)175,000

700 shares of Earnhart Corp., common 53,800 50,400

400 shares of Martin, Inc., preferred 60,000 58,000

\(293,800 \)283,400

Instructions

Prepare the general journal entries for Kenseth Company for:

(a) The 2017 adjusting entry.

(b) The sale of the Gordon stock.

(c) The purchase of the Earnhart stock.

(d) The 2018 adjusting entry for the portfolio.

Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

GRECO RESORT

TRIAL BALANCE

AUGUST 31, 2017

Debit

Credit

Cash

\( 19,600

Prepaid Insurance

4,500

Supplies

2,600

Land

20,000

Buildings

120,000

Equipment

16,000

Accounts Payable

\) 4,500

Unearned Rent Revenue

4,600

Mortgage Payable

60,000

Common Stock

91,000

Retained Earnings

9,000

Dividends

5,000

Rent Revenue

76,200

Salaries and Wages Expense

44,800

Utilities Expenses

9,200

Maintenance and Repairs Expense

3,600

\(245,300

\)245,300

Other data:

  1. The balance in prepaid insurance is a one-year premium paid on June 1, 2017.
  2. An inventory count on August 31 shows \(450 of supplies on hand.
  3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
  4. Unearned Rent Revenue of \)3,800 was earned prior to August 31.
  5. Salaries of \(375 were unpaid at August 31.
  6. Rentals of \)800 were due from tenants at August 31.
  7. The mortgage interest rate is 8% per year.

Instructions

(a) Journalize the adjusting entries on August 31 for the 3-month period June 1鈥揂ugust 31. (Omit explanations.)

(b) Prepare an adjusted trial balance on August 31.

(Warranties) Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 400 computers at a unit price of \(2,500. On the basis of past experience, the 2-year warranty costs are estimated to be \)155 for parts and \(185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?

(c) In 2018, the actual warranty costs to Brooks Corporation were \)21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2018.
See all solutions

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