ACC 318 CH 13 || with Certified Answers.
Barrow Industries determines that it will spend $1,400,000 to obtain flood insurance on its
property, while estimated average losses are only $1,100,000 per year. As such, Barrow decides
to self-insure its property for flood damage. During 2020, Barrow sustains $650,000 in flood
losses. What total expense and loss should Barrow recognize for 2020? correct answers Self-
insurance is an assumption of risk. As a result, any losses incurred are recognized as they happen
at their actual value ($650,000 in this case). In addition, because the company is not actually
purchasing insurance by assuming its own risk, there is no insurance expense.
On May 5, 2020, JT Engineering owned a machine that originally cost $400,000. Accumulated
depreciation on the machine was $210,000 and estimated salvage was $20,000. On May 6, the
machine was irreparably damaged by Oesterle Industries and became worthless. In November
2020, a court awarded $190,000 in damages to JT. Oesterle appealed the decision. At December
31, 2020, the case was awaiting appeal. JT's attorneys believe it is highly probable the appeal
will be denied. Based on this information, JT should accrue a gain contingency of correct
answers $0.
Charlie Company leased a building to Delta Industries on January 1, 2020 for a 10-year term at
$140,000 rent per year. On that date, Delta paid two-years rent and a security deposit of
$280,000, for a total payment of $560,000. The security deposit will not be returned to Delta at
lease expiration but will be applied to the last two years of rent. How much of the $560,000
should Charlie record as a current liability and how much as a long-term liability on its
December 31, 2020 balance sheet? correct answers Current liability of $140,000; long-term
liability of $280,000
Wells Enterprises introduced a new machine in January 2020. The machine carries a two-year
warranty, and estimated warranty costs are 2% of sales within the first 12 months and 3% of
sales within the second 12 months. 2020 sales were $700,000 and its 2021 sales were $900,000.
Warranty expenditures in these two years were $10,500 and $31,500, respectively. Assuming
Wells uses the assurance warranty method, what should it report as estimated warranty expense
for 2021? correct answers During 2021, Wells would estimate $45,000 in warranty costs for sales
made in 2021 (2% + 3%) x $900,000 = $45,000.
, On October 1, 2020, Bravo Tech borrowed $350,000. Bravo must pay $360,000 on March 1,
2021. What is the value of the note payable on October 1, 2020? What is the interest recognized
from October 1 to December 31,2020? correct answers Because this is an interest-bearing note,
the value of the note on October 1 is the amount borrowed, $350,000. To determine the interest
recognized, Bravo's interest payment of $10,000 ($360,000 -$350,000) must be divided by 5 to
determine the monthly interest, so $10, = $2,000. The period from October 1 to December
31 represents 3 months of interest, so $6,000 should be recognized ($2,000 * 3).
During 2020, Dentifrice Toothpaste offers a cash rebate of $1 on each $4 tube of toothpaste sold.
Dentifrice anticipates 10% of the rebates will be redeemed. During 2020, 3,000,000 tubes are
sold and $160,000 rebate forms are redeemed. How should Dentifrice record the rebate expense
and liability on its December 31, 2020 financial statements? correct answers The rebate expense
is the cost of the anticipated redemptions. In this case, the cost is $300,000 (3,000,000 coupons
distributed *0.10 anticipated redemptions *$1 per redemption). The liability is the difference
between the anticipated amount and the actual amount, which is $140,000 in this case ($300,000
- $160,000).
On March 1, 2020, First National Bank agrees to lend $85,000 to JT Engineering if JT signs an
$85,000, 5.5%, four-month note. If JT prepares financial statements monthly, what will its
interest expense be each month? Round to the nearest dollar. correct answers JT's monthly
interest will be ($85,000 * 5.5% * 1/12), or $390.
Harden Enterprises sells extended service contracts on digital cameras sold through major
retailers. Contracts are four years in duration. In 2020, Harden sold 52,000 contracts at a cost of
$90 each. Harden spent $300,000 servicing the contracts in 2020. How much net profit related to
these contracts should Harden recognize in 2020 correct answers Harden should recognize
revenue on a straight-line basis over the life of the contract. To do so it must divide the total sales
of contracts by four to determine revenue of $1,170,000 for the current year ([52,000 * $90] / 4).
Then, it must subtract the costs spent in the current year to fulfill the contracts to determine net
profits of $870,000 ($1,170,000 - $300,000).
On March 1, 2020, First National Bank agrees to lend $25,000 to JT Engineering if JT signs a
$25,000, 6%, four-month note. At maturity on July 1, 2020, how much must JT pay First
National? correct answers At maturity, JT must pay the face value of the note ($25,000) plus
$500 interest ($25,000 * 6% * 4/12), for a total of $25,500.
Barrow Industries determines that it will spend $1,400,000 to obtain flood insurance on its
property, while estimated average losses are only $1,100,000 per year. As such, Barrow decides
to self-insure its property for flood damage. During 2020, Barrow sustains $650,000 in flood
losses. What total expense and loss should Barrow recognize for 2020? correct answers Self-
insurance is an assumption of risk. As a result, any losses incurred are recognized as they happen
at their actual value ($650,000 in this case). In addition, because the company is not actually
purchasing insurance by assuming its own risk, there is no insurance expense.
On May 5, 2020, JT Engineering owned a machine that originally cost $400,000. Accumulated
depreciation on the machine was $210,000 and estimated salvage was $20,000. On May 6, the
machine was irreparably damaged by Oesterle Industries and became worthless. In November
2020, a court awarded $190,000 in damages to JT. Oesterle appealed the decision. At December
31, 2020, the case was awaiting appeal. JT's attorneys believe it is highly probable the appeal
will be denied. Based on this information, JT should accrue a gain contingency of correct
answers $0.
Charlie Company leased a building to Delta Industries on January 1, 2020 for a 10-year term at
$140,000 rent per year. On that date, Delta paid two-years rent and a security deposit of
$280,000, for a total payment of $560,000. The security deposit will not be returned to Delta at
lease expiration but will be applied to the last two years of rent. How much of the $560,000
should Charlie record as a current liability and how much as a long-term liability on its
December 31, 2020 balance sheet? correct answers Current liability of $140,000; long-term
liability of $280,000
Wells Enterprises introduced a new machine in January 2020. The machine carries a two-year
warranty, and estimated warranty costs are 2% of sales within the first 12 months and 3% of
sales within the second 12 months. 2020 sales were $700,000 and its 2021 sales were $900,000.
Warranty expenditures in these two years were $10,500 and $31,500, respectively. Assuming
Wells uses the assurance warranty method, what should it report as estimated warranty expense
for 2021? correct answers During 2021, Wells would estimate $45,000 in warranty costs for sales
made in 2021 (2% + 3%) x $900,000 = $45,000.
, On October 1, 2020, Bravo Tech borrowed $350,000. Bravo must pay $360,000 on March 1,
2021. What is the value of the note payable on October 1, 2020? What is the interest recognized
from October 1 to December 31,2020? correct answers Because this is an interest-bearing note,
the value of the note on October 1 is the amount borrowed, $350,000. To determine the interest
recognized, Bravo's interest payment of $10,000 ($360,000 -$350,000) must be divided by 5 to
determine the monthly interest, so $10, = $2,000. The period from October 1 to December
31 represents 3 months of interest, so $6,000 should be recognized ($2,000 * 3).
During 2020, Dentifrice Toothpaste offers a cash rebate of $1 on each $4 tube of toothpaste sold.
Dentifrice anticipates 10% of the rebates will be redeemed. During 2020, 3,000,000 tubes are
sold and $160,000 rebate forms are redeemed. How should Dentifrice record the rebate expense
and liability on its December 31, 2020 financial statements? correct answers The rebate expense
is the cost of the anticipated redemptions. In this case, the cost is $300,000 (3,000,000 coupons
distributed *0.10 anticipated redemptions *$1 per redemption). The liability is the difference
between the anticipated amount and the actual amount, which is $140,000 in this case ($300,000
- $160,000).
On March 1, 2020, First National Bank agrees to lend $85,000 to JT Engineering if JT signs an
$85,000, 5.5%, four-month note. If JT prepares financial statements monthly, what will its
interest expense be each month? Round to the nearest dollar. correct answers JT's monthly
interest will be ($85,000 * 5.5% * 1/12), or $390.
Harden Enterprises sells extended service contracts on digital cameras sold through major
retailers. Contracts are four years in duration. In 2020, Harden sold 52,000 contracts at a cost of
$90 each. Harden spent $300,000 servicing the contracts in 2020. How much net profit related to
these contracts should Harden recognize in 2020 correct answers Harden should recognize
revenue on a straight-line basis over the life of the contract. To do so it must divide the total sales
of contracts by four to determine revenue of $1,170,000 for the current year ([52,000 * $90] / 4).
Then, it must subtract the costs spent in the current year to fulfill the contracts to determine net
profits of $870,000 ($1,170,000 - $300,000).
On March 1, 2020, First National Bank agrees to lend $25,000 to JT Engineering if JT signs a
$25,000, 6%, four-month note. At maturity on July 1, 2020, how much must JT pay First
National? correct answers At maturity, JT must pay the face value of the note ($25,000) plus
$500 interest ($25,000 * 6% * 4/12), for a total of $25,500.
