1. During year 1, ABC Corp was sued for $1,000,000 damages based on the failure of one of its products to perform as advertised. The trial is to begin during February of year 2. ABC and its legal counsel determine it is probable that damages will be assessed and they estimate the probable award at $500,000. The proper reporting of this contingency in year 1 is to

a. report only in the notes to the financial statements
b. report in the income statement and balance sheet at estimated settlement value
c. report in the income statement and balance sheet at value of suit
d. report in the balance sheet at the estimated settlement value

2. (CMA adapted, Jun 92 #21) According to SFAS No. 5, Accounting for Contingencies, a gain from contingencies would

a. be recorded when condemnation awards are probable and can be reasonably estimated.
b. be recorded when damages to be awarded in a copyright infringement suit are highly probable.
c. be recorded when disclosure in the notes to financial statements only could be misleading.
d. not be recorded under any circumstances.

3. (CMA adapted, Dec 91 #26) DalCo, Inc. has 50 employees as of November 30, Year 1, the end of the current fiscal year. These employees earn an average of $400 per week and collectively have earned the right to 120 weeks of paid vacation time during the current fiscal year. This paid vacation time is to be taken in the coming fiscal year (December 1, Year 1 through November 30, Year 2). Vacation not taken in one fiscal year can be carried forward to a future fiscal year upon approval of the employee's supervisor. These requests are almost always honored. There have been no requests for extensions of vacation as of November 30, Year 1. The appropriate accounting treatment for this vacation pay is

a. To accrue vacation pay as of November 30, Year 1, with a debit to wages expense for $48,000 and a credit to vacation wages payable for $48,000.
b. Not to accrue the vacation pay as of November 30, Year 1, but to record it as of December 1, Year 1, with a debit to wages expense for $48,000 and a credit to vacation wages payable for $48,000.
c. To record the vacation pay as a deferred asset as of November 30, Year 1, with a debit to deferred wages expense for $48,000 and a credit to vacation wages payable for $48,000.
d. Not to record the vacation pay until it is taken by employees in the coming fiscal year because the amount of the expense is probable and estimated.

4. The EMB Company requires advance payments for custom orders made to customer's specifications. Information concerning for Year 2's entries include:

Customer advances, balance, beg. of Year 2	$295,000
Advances received with orders in Year 2	460,000
Advances applied to orders shipped in Year 2	410,000
Nonrefundable advances received on orders canceled in Year 2	125,000

At the end of the fiscal year, what amount should EMB report as current liability for customer advances?

a. $0
b. $220,000
c. $345,000
d. $370,000

5. On February 1, Year 1, a firm issues $100,000 semi-annual 12% bonds at par plus accrued interest. The interest is payable on July 1 and January 1 of each year. What entry is necessary to record the issuance of the bonds on February 1?

a.

Cash	100,000
Bonds Payable		100,000

b.

Cash	101,000
Bonds Payable		101,000

c.

Cash	100,000
Interest Payable	1,000
Bonds Payable		101,000

d.

Cash	101,000
Bonds Payable Interest Payable		100,000 1,000

6. Bonds are issued at greater than par value when

a. the bonds are risk free
b. the market interest rate is less than the stated interest rate on the bond
c. the market rate of interest is declining
d. the market interest rate is greater than the stated interest rate on the bond

7. (CMA adapted, Dec 86 #20) On January 1, Year 1, Straf Company sold its 5-year, $100,000 face value, 8% bonds at $108,530, to yield an effective annual interest rate of 6%. The bonds are dated January 1, Year 1, and interest is payable annually on January 1. Using the effective interest method of premium amortization, the amount of interest expense (rounded to the nearest dollar) reported by Straf Company in Year 1 is

a. $1,488
b. $6,512
c. $8,000
d. $8,682

8. (CMA adapted, Dec 90 #12) Marquette, Inc. issued $6,000,000 of 12% bonds on December 1, Year 1, due on December 1, Year 6, with interest payable each December 1 and June 1. The bonds sold for $5,194,770 to yield 16%. If the discount is amortized by the effective interest method, Marquette, Inc.'s interest expense for the fiscal year ended November 30, Year 2 related to its $6,000,000 bond issue will be

a. $623,372
b. $720,000
c. $835,610
d. $881,046

9. A callable bond

a. must be retired from a sinking fund maintained by the bond issuer
b. may be retired at a specified price at the option of the bond purchaser
c. may be reacquired by the issuing company at a specified price
d. are registered with an agent to insure correct payment of bond interest amounts

10. A bond sinking fund is recorded on the balance sheet as

a. a current liability
b. a long-term liability
c. a noncurrent asset
d. part of shareholders' equity

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