Question : 31.A suit for breach of contract seeking damages of $3,000,000 : 1253495

31.A suit for breach of contract seeking damages of $3,000,000 was filed against Clark Corporation on March 1, 2009. Clark’s legal counsel believes that anegative outcome is highly probable. A reasonable estimate of the court’s award to the plaintiff is $600,000. Settlement is expected to occur during the latter part of 2009. What accounting is necessary for the year ending June 30, 2009?

a.   Note disclosure only

b.Accrue a contingent liability of $3,000,000 and provide note disclosure explaining the contingency

c.   Accrue a contingent liability of $600,000 and provide note disclosure explaining the contingency

d.No disclosure or accrual necessary

32.Abbott Co. has 5 employees who worked the entire year. Each employee earns 6 paid vacation days annually. Vacation days may be taken during December of 2009 and all of 2010. All unused vacation days are paid when the employee leaves the company. The daily wage in 2009 per employee is $100. This is an example of

a.a definite liability.

b.a third party liability.

c.a gain contingency.

d.unearned revenue.

33.Which one of the following is a current liability?

a. Portions of notes payable due beyond the next accounting period

b. Sales taxes paid on new equipment acquired

c. Estimated costs of hurricanes which might develop in the Caribbean during next hurricane season

d. Football tickets sold to customers for games in the coming season

34.Current liabilities include

a. amounts due from suppliers for credits on accounts given on returns which had previously been paid.

b. taxes withheld from employees’ payroll checks which must be remitted to the IRS.

c. amounts paid for warranty repairs during the current year.

d. cash dividends to be declared by the board of directors during the next six months.

Use the information from Cen, Inc. to answer questions 35 and 36.

Cen, Inc. reported the following on its December 31, 2010, balance sheet:

Current liabilities:

2010

2009

One-year short-term notes payable, net of discount of

$ 9,800

$6,400

$300 and $400, respectively

Accrued interest on notes payable

340

280

Current portion of long-term debt

1,250

2,340

Trade accounts payable

500

700

35.How much is the maturity value of the one-year note payable that is outstanding at the end of 2010?

a.$9,500

b.$9,800

c.$10,100

d.$10,400

36.Which statement is true concerning Cen’s interest?

a.Central paid a total of $60 interest during 2010.

b.Interest was incurred during the year on more than one note.

c.Interest of $3,200 was accrued and paid during 2010.

d.The ‘accrued interest on notes payable’ amount relates to the one-year short-term notes payable.

37.Which one of the following would most likely be reported as a current liability?

a.   Frequent flyer program miles accumulated by airline travelers

b.Self insurance risks on anticipated losses

c.Customers merchandise returns exchanged for different merchandise

d.The CEO’s stock option package for the current year

38. Liabilities are

a. sometimes credit and other times debit balances.

b. deferred amounts which will be recognized on the balance sheet when the actual due date arrives.

c. obligations arising from past transactions and payable in assets or services in the future.

d. obligations to transfer ownership of one company to other entities.

39.What business transaction must occur in order to reduce Estimated Warranty Payable?

a.Goods under warranty are repaired in the period after the sale

b.Warranty costs are accrued at the end of the accounting period

c.Sale of goods on account

d.Customers take advantage of cash discounts for early payment

40.A contingent liability

a. is definite in existence, but its amount and due date are not yet known.

b. has the same requirements as a contingent gain.

c. must be accrued even when it is not reasonably estimable.

d. is disclosed only in the financial statement notes if highly probable and the amount can be estimated.