# ACCT-202 Study Guide - Midterm Guide: Contingent Liability, Current Liability, Harris Corporation

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Published on 3 Mar 2020

Department

Accounting

Course

ACCT-202

Professor

Accounting 202

Spring 2018

Exam 1 Name: SOLUTION

Professor Anderson Section Time: ____________________

Instructions:

-- READ CAREFULLY! Failure to follow instruction can result in substantial loss of

points.

-- Exam consists of Part I (current and contingent liabilities) worth 29 points; Part II (long-

term liabilities) worth 36 points; Part III (leases) 27 worth points; and Part IV (annual

report) worth 8 points. You should allocate your time accordingly.

-- There are 14 pages in this exam. Make sure you have all of the pages before you begin.

-- All work is to be done on the attached pages.

-- For problems requiring computations, work must be shown in order to get credit. Zero

points will be given to any correct answer showing no supporting calculations. Showing

your work is also necessary for partial credit. Therefore, label all your work and make it

as neat as possible.

-- If journal entries are required, use descriptive account titles (no abbreviations or

acronyms) that indicate you know what you are doing. Be sure the journal entry is in the

proper form, including the date. You should make no abbreviations anywhere in your

answers.

-- Failure to turn in your exam at the end of the exam period results in a grade of zero.

-- GOOD LUCK!

2

Part I – Current and Contingent Liabilities (29 Total Points)

1. (10 Total Points; 2 Points Each) Mountaineer Mufflers, Inc. engaged in the following

transactions during 2017. Prior to these transactions, Mountaineer Mufflers had a current

ratio (current assets / current liabilities) of 1.5. For each transaction, state the effect on

Mountaineer Mufflers’ current ratio. Specifically, state (1) the amount of the increase or

decrease on the numerator; (2) the amount of the increase or decrease on the

denominator; and (3) whether the ratio increases, decreases, or does not change. You only

need to state the effect on the current ratio for the date of the transaction listed, i.e., do

not worry about any future adjusting entries.

a. On March 7, 2017, Mountaineer Mufflers borrows $10,000 on an 8%, 10-month note.

Numerator: Increases $10,000

Denominator: Increases $10,000 Ratio: Decreases

b. On May 31, 2017, Mountaineer Mufflers estimates its May warranty expense to be

$1,000 based on its May sales. In addition, Mountaineer Muffler spent $150 on

actual warranty repairs during May.

Numerator: Decreases by $150

Denominator: Increases by $850 Ratio: Decreases

c. On September 15, 2017, Mountaineer Mufflers receives a deposit of $2,000 from a

customer for a repair job that Mountaineer Mufflers will perform in October of

2017.

Numerator: Increases by $2,000

Denominator: Increases by $2,000 Ratio: Decreases

d. On October 17, 2017, Mountaineer Mufflers paid $3,000 for accrued rent, taxes and

insurance.

Numerator: Decreases by $3,000

Denominator: Decreases by $3,000 Ratio: Increases

e. On November 3, 2017, Mountaineer Mufflers purchased $5,000 of supplies on credit.

The invoice is due on December 3, 2017 to Mountaineer’s supplier.

Numerator: Increases by $5,000

Denominator: Increases by $5,000 Ratio: Decreases

3

2. (6 Total Points) In 2017 Kelly’s Kazoo Company began selling a new kazoo that carried a

two-year warranty against defects. Based on the manufacturer’s recommendations, Kelly

projects estimated warranty costs as a percentage of sales as follows:

First Year of Warranty 3%

Second Year of Warranty 9%

Sales and actual warranty repairs for 2017 are as follows:

2017

Sales $500,000

Actual Warranty Repair Costs 10,600

a. (2 Points) What amount of warranty expense will Kelly recognize on its 2017 income

statement?

2017 Warranty Expense: $60,000

Warranty Expense = $500,000 x (9% + 3%) = $60,000

b. (2 Points) What is the balance in the estimated warranty liability account on its

December 31, 2017 balance sheet?

December 31, 2017 Estimated Warranty Liability: $49,400

Estimated Warranty Liability = $60,000 - $10,600 = $49,400

c. (2 Points) Now, assume in addition to the standard two-year warranty above, Kelly’s

Kazoo Company offers and additional warranty on each kazoo for $2. This

warranty covers defects for two years that are not covered under the standard

warranty. Assume Kelly sold 100 of these warranties on January 1, 2017. What

journal entry would Kelly make on December 31, 2017 related to these additional

warranties?

Date

Account Title

Debit

Credit

12/31/17

Unearned Revenue*

100

Revenue

100

*(100 x $2) x 1/2