1. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:

1. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:

12/31/06 12/31/07

Employee advances $12,000 $ 18,000

Accrued salaries payable 65,000 ?

Salaries expense during the year 650,000

Salaries paid during the year (gross) 625,000

At December 31, 2007, what amount should Barr report for accrued salaries payable?

a. $90,000.

b. $84,000.

c. $72,000.

d. $25,000.

2. Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:

During 2007 During 2008 During 2009

$100,000 $160,000 $70,000

What amount should be reported as unearned service contract revenues in Dexter’s December 31, 2006 balance sheet?

a. $360,000.

b. $330,000.

c. $240,000.

d. $220,000.

3. Lett Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

a. zero.

b. the maximum of the range.

c. the mean of the range.

d. the minimum of the range.

1. In March 2007, an explosion occurred at Howe Co.’s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe’s management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe’s December 31, 2006 financial statements, for which the auditor’s fieldwork was completed in April 2007, how should this casualty be reported?

a. As a note disclosing a possible liability of $4,000,000.

b. As an accrued liability of $400,000.

c. As a note disclosing a possible liability of $400,000.

d. No note disclosure of accrual is required for 2006 because the event occurred in 2007.

2. On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2008. The lease is appropriately accounted for by Mendez as a capital lease. Mendez’s incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.In its December 31, 2008 balance sheet, Mendez should report a lease liability of

a. $606,528.

b. $680,000.

c. $751,344.

d. $766,528.

3. In a lease that is recorded as a sales-type lease by the lessor, interest revenue

a. should be recognized in full as revenue at the lease’s inception.

b. should be recognized over the period of the lease using the straight-line method.

c. should be recognized over the period of the lease using the effective interest method.

d. does not arise.