Practice Review
Current Liabilities and Contingencies
36. Income tax expense represents the amount of income taxes
a. actually payable to the IRS for the period.
b. applicable to the amount of taxable income for the period.
c. applicable to the amount of accounting income for the period.
d. computed in accordance with the income tax code.
37. An excess of an income tax expense over income tax payable for a period is associated
with
a. an excess of accounting income over taxable income.
b. an excess of taxable income over accounting income.
c. an error.
d. a debit to the Deferred Income Taxes account.
38. An excess of income tax expense over income taxes payable will result recording a
a. debit to Deferred Income Taxes.
b. credit to Deferred Income Taxes.
c. debit to Income Taxes Payable.
d. credit to Income Tax Expense.
39. Notes Payable
Sample Corporation, whose fiscal year ended June 30, 2010, completed the following transactions
involving notes payable:
May 21 Obtained a 60-day extension on an $18,000 trade account payable owed to a supplier by
signing a 60-day, $18,000 note. Interest is in addition to the face value, at the rate of 14 percent.
June 30 Made the end-of-year adjusting entry to accrue interest expense.
July 20 Paid off the note plus interest due the supplier.
Required
1. Prepare entries in journal form for the notes payable transactions.
2. When notes payable appears on the balance sheet, what other current liability would you look for
to be associated with the notes? What would it mean if this other current liability did not appear?
40. Interest Expense on Note Payable
On the last day of August, Sample Company borrowed $240,000 on a bank note for 60
days at 12 percent interest. Assume that interest is stated separately. Prepare the
following entries in journal form: (1) August 31, recording of note; and (2) October 30,
payment of note plus interest.
41. Interest Expense on Discounted Note Payable
On the last day of August, Sample Company borrowed $240,000 on a bank note for 60
days at 12 percent interest. Assume that interest is included in face. Prepare the following
entries in journal form: (1) August 31, recording of note; and (2) October 30, payment of
note plus interest.
42. Product Warranty Liability
Sample Company is engaged in the retail sale of high-definition televisions (HDTVs). Each HDTV has a 24month warranty on parts. If a repair under warranty is required, a charge for the labor is made.
Management has found that 20 percent of the HDTVs sold require some work before the warranty expires.
Furthermore, the average cost of replacement parts has been $60 per repair. At the beginning of January,
the account for the estimated liability for product warranties had a credit balance of $14,300. During
January, 112 HDTVs were returned under the warranty. The cost of the parts used in repairing the HDTVs
was $8,765, and $9,442 was collected as service revenue for the labor involved. During January, the month
before the Super Bowl, Sample Company sold 450 new HDTVs.
Required
1. Prepare entries in journal form to record each of the following: (a) the warranty work completed during
the month, including related revenue; (b) the estimated liability for product warranties for HDTVs sold
during the month.
2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month.
3. If the company's product warranty liability is overestimated, what are the effects on current and future
years' income?
43. Product Warranty Liability
Sample Company manufactures and sells electronic games. Each game costs $50 to produce,
sells for $90, and carries a warranty that provides for free replacement if it fails during the
two years following the sale. In the past, 7 percent of the games sold had to be replaced
under the warranty. During July, Sample sold 6,500 games, and 700 games were replaced
under the warranty.
1. Prepare an entry in journal form to record the estimated liability for product warranties
during the month.
2. Prepare an entry in journal form to record the games replaced under warranty during the
month.
44. Types of Liabilities
Indicate whether each of the following is (a) a definitely determinable liability, (b) an
estimated liability, (c) a commitment, or (d) a contingent liability:
1. Dividends payable
2. Pending litigation
3. Income taxes payable
4. Current portion of long-term debt
5. Vacation pay liability
6. Guaranteed loans of another company
7. Purchase agreement