ACCT 311 Final Exam
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1. XYZ Company sells appliance service contracts agreeing to repair appliances for a two-year period. XYZ’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Receipts from service contract sales for the two years ended December 31, year 2, are as follows:
Year 1 $500,000
Year 2 $600,000
Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales are made evenly during the year. What amount should XYZ report as unearned service contract revenue at December 31, year 2?
2. A Corp. had the following liabilities at December 31, year 2:
Accounts payable $55,000
Unsecured notes, 8%, due 7/1/Y3 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred income tax liability 25,000
Senior bonds, 7%, due 3/31/Y3 1,000,000
The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against A. A’s legal counsel expects the suit to be settled in year 4, and has estimated that A will be liable for damages in the range of $450,000 to $750,000.
The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in year 4.
What amount should A report…