Deck 13: Current Liabilities, Provisions, and Contingencies

Question 1

A company can exclude a short-term obligation from current liabilities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.

Answer 1

False

Question 2

Dividends in arrears on cumulative preference shares should be recorded as a current liability.

Answer 2

False

Question 3

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

Answer 3

False

Question 4

Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued.

Question 5

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

Question 6

A provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement.

Question 7

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

Question 8

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

Question 9

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

Question 10

Constructive obligations, in which the company has created a valid expectation on the part of other parties that it will discharge certain responsibilities, are disclosed in the notes to the financial statements.

Question 11

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

Question 12

Magazine subscriptions and airline ticket sales both result in unearned revenues.

Question 13

Preference dividends in arrears are not a liability until declared by the Board of Directors, but should be disclosed in the notes to the financial statements.

Question 14

A company must accrue a liability for sick pay that accumulates but does not vest.

Question 15

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Question 16

All long-term debt maturing within the next year must be classified as a current liability on the statement of financial position.

Question 17

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

Question 18

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

Question 19

Provisions are only recorded if it is likely that the company will have to settle an obligation at some point in the future.

Question 20

For purposes of recognizing a provision, "probable" is defined as more likely than not.

Question 21

IFRS uses the term "contingent" for assets and liabilities not recognized in the financial statements.

Question 22

Of the following items, the only one which should not be classified as a current liability is

A)current maturities of long-term debt.
B)sales taxes payable.
C)short-term obligations expected to be refinanced.
D)unearned revenues.

Question 23

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

Question 24

An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.

Question 25

Liabilities are

A)any accounts having credit balances after closing entries are made.
B)deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
C)obligations to transfer ownership shares to other entities in the future.
D)present obligations arising from past events and results in an outflow of resources.

Question 26

Among the short-term obligations of Lance Company as of December 31, the statement of financial position date, are notes payable totaling $250,000 with the Madison National Bank.These are 90-day notes, renewable for another 90-day period.These notes should be classified on the statement of financial position of Lance Company as

A)current liabilities.
B)deferred charges.
C)non-current liabilities.
D)intermediate debt.

Question 27

Contingent assets are not reported in the statement of financial position.

Question 28

Contingent assets are disclosed when an inflow of economic benefits is considered more likely than not to occur.

Question 29

Share dividends distributable should be classified on the

A)income statement as an expense.
B)statement of financial position as an asset.
C)statement of financial position as a liability.
D)statement of financial position as an item of equity.

Question 30

Paying a current liability with cash will always reduce the current ratio.

Question 31

Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible.

Question 32

IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company's chance of losing a lawsuit.

Question 33

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

Question 34

Which of the following is a characteristic of a current liability but not a non-current liability?

A)Unavoidable obligation.
B)Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
C)Settlement is expected within the normal operating cycle, or within 12 months after the reporting date.
D)Transaction or other event creating the liability has already occurred.

Question 35

Which of the following may be a current liability?

A)Withheld Income Taxes
B)Deposits Received from Customers
C)Unearned Revenue
D)All of these

Question 36

Which of the following is a current liability?

A)A long-term debt maturing currently, which is to be paid with cash in a sinking fund
B)A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
C)A long-term debt maturing currently, which is to be converted into ordinary shares
D)None of these

Question 37

Which of the following items is a current liability?

A)Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B)Bonds due in three years.
C)Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
D)Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

Question 38

Expected future operating losses can generally be accrued as part of a restructuring provision.

Question 39

Which of the following is a current liability?

A)Preference dividends in arrears
B)A dividend payable in the form of additional shares
C)A cash dividend payable to preference shareholders
D)All of these

Question 40

Which of the following should not be included in the current liabilities section of the statement of financial position?

A)Trade notes payable
B)Short-term zero-interest-bearing notes payable
C)Unearned revenues
D)All of these are included

Question 41

Which of the following best describes the accrual method of accounting for warranty costs?

A)Expensed when paid.
B)Expensed when warranty claims are certain.
C)Expensed based on estimate in year of sale.
D)Expensed when incurred.

Question 42

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

A)Warranty liability.
B)Warranty expense.
C)Unearned warranty revenue.
D)Warranty revenue.

Question 43

A company has not declared a dividend on its cumulative preference shares for the past three years.What is the required accounting treatment or disclosure in this situation?

A)Record a liability for cumulative amount of preference shares dividends not declared.
B)Disclose the amount of the dividends in arrears.
C)Record a liability for the current year's dividends only.
D)No disclosure or recognition is required.

Question 44

What are compensated absences?

A)Unpaid time off.
B)A form of healthcare.
C)Payroll deductions.
D)Paid time off.

Question 45

What is the relationship between current liabilities and a company's operating cycle?

A)Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
B)Current liabilities are the result of operating transactions.
C)Current liabilities can't exceed the amount incurred in one operating cycle.
D)There is no relationship between the two.

Question 46

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

A)Intend to refinance the obligation on a long-term basis.
B)Obligation must be due within one year.
C)Unconditional right to defer settlement of the liability for at least 12 months.
D)Subsequently refinance the obligation on a long-term basis.

Question 47

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

A)be accrued during the period when the compensated time is expected to be used by employees.
B)be accrued during the period following vesting.
C)be accrued during the period when earned.
D)not be accrued unless a written contractual obligation exists.

Question 48

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2010.Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months.The management of Ortiz estimates that this recall would cost $800,000.What accounting recognition, if any, should be accorded this situation?

A)No recognition
B)Note disclosure only
C)Operating expense of $800,000 and liability of $800,000
D)Appropriation of retained earnings of $800,000

Question 49

A company is legally obligated for the costs associated with the retirement of a long-lived asset

A)only when it hires another party to perform the retirement activities.
B)only if it performs the activities with its own workforce and equipment.
C)whether it hires another party to perform the retirement activities or performs the activities itself.
D)when it is probable the asset will be retired.

Question 50

Which of the following statements is false?

A)A company may exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis and have an unconditional right to defer settlement of the liability for at least 12 months.
B)Cash dividends should be recorded as a liability when they are declared by the board of directors.
C)Under the cash basis method, warranty costs are charged to expense as they are paid.
D)Social security taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Question 51

Which of the following situations may give rise to unearned revenue?

A)Providing trade credit to customers.
B)Selling inventory.
C)Selling magazine subscriptions.
D)Providing manufacturer warranties.

Question 52

What is the relationship between present value and the concept of a liability?

A)Present values are used to measure certain liabilities.
B)Present values are not used to measure liabilities.
C)Present values are used to measure all liabilities.
D)Present values are only used to measure non-current liabilities.

Question 53

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs.Any liability for the warranty

A)should be reported as non-current.
B)should be reported as current.
C)should be reported as part current and part non-current.
D)need not be disclosed.

Question 54

Under what conditions is an employer required to accrue a liability for sick pay?

A)Sick pay benefits can be reasonably estimated.
B)Sick pay benefits vest.
C)Sick pay benefits equal 100% of the pay.
D)Sick pay benefits accumulate.

Question 55

Which of the following best describes the cash-basis method of accounting for warranty costs?

A)Expensed based on estimate in year of sale.
B)Expensed when liability is accrued.
C)Expensed when warranty claims are certain.
D)Expensed when incurred.

Question 56

Which of the following terms is associated with recognizing a provision?

A)Possible but not probable.
B)Likely.
C)Remote.
D)Probable.

Question 57

Which of the following statements is correct?

A)A company may exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis.
B)A company may exclude a short-term obligation from current liabilities if it has an unconditional right to defer settlement of the liability for at least 12 months.
C)A company may exclude a short-term obligation from current liabilities if it is paid off after the statement of financial position date and subsequently replaced by long-term debt before the statement of financial position is issued.
D)None of these.

Question 58

Which of the following is not considered a characteristic of a liability?

A)Present obligation.
B)Arises from past events.
C)Results in an outflow of resources.
D)Liquidation is reasonably expected to require use of existing resources classified as current assets.

Question 59

To record an environmental liability, the cost associated with the liability is

A)expensed.
B)included in the carrying amount of the related long-lived asset.
C)included in a separate account.
D)none of these.

Question 60

Where is debt callable by the creditor reported on the debtor's financial statements?

A)Non-current liability.
B)Current liability if the creditor intends to call the debt within the year, otherwise a non-current liability.
C)Current liability if it is probable that creditor will call the debt within the year, otherwise a non-current liability.
D)Current liability.

Question 61

Examples of contingent assets include all of the following except:

A)Unrealized gain on the sale of investments.
B)Pending lawsuit with a favorable outcome.
C)Tax refund disputed by the government but with a possible favorable outcome.
D)Promise of land to be donated by city as an enticement to move manufacturing facilities.

Question 62

Which of the following is the proper way to report a probable contingent asset?

A)As an accrued amount.
B)As deferred revenue.
C)As an account receivable with additional disclosure explaining the nature of the contingency.
D)As a disclosure only.

Question 63

Which of the following is the proper way to report a contingent asset considered probable?

A)As an asset.
B)As deferred revenue.
C)As a disclosure only.
D)No disclosure or accrual required.

Question 64

On June 20, Ying Company purchased goods from Chee-Chow Company for HK$30,000, terms 2\10, n\30.The invoice was paid on June 27.The company uses a perpetual inventory system and records purchases gross.The June 27 journal entry to record payment of the account would include:

A)a credit to Cash for HK$30,000.
B)a credit to Purchases Discounts for HK$600.
C)a debit to Accounts Payable for HK$29,400.
D)a credit to Inventory for HK$600.

Question 65

Contingent assets need not be disclosed in the financial statements or the notes thereto if they are considered?

A)Probable virtually certain.
B)Probable.
C)Likely.
D)Possible but not probable.

Question 66

Collier borrowed $175,000 on October 1 and is required to pay $180,000 on March 1.What amount is the note payable recorded at on October 1 and how much interest is recognized from October 1 to December 31?

A)$175,000 and $0.
B)$175,000 and $3,000.
C)$180,000 and $0.
D)$175,000 and $5,000.

Question 67

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount.The coupons expire in one year.The store normally recognized a gross profit margin of 40% of the selling price on video games.How would the store account for a purchase using the discount coupon?

A)The reduction in sales price attributed to the coupon is recognized as premium expense.
B)The difference between the cost of the video game and the cash received is recognized as premium expense.
C)Premium expense is not recognized.
D)The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

Question 68

Glaus Corp.signed a three-month, zero-interest-bearing $152,205 note on November 1, 2010 for the purchase of $150,000 of inventory.The adjusting entry made at December 31, 2010 will include a

A)debit to Note Payable for $735.
B)debit to Interest Expense for $1,470.
C)credit to Note Payable for $735.
D)credit to Interest Expense for $1,470.

Question 69

Sodium Inc.borrowed $175,000 on April 1.The note requires interest at 12% and principal to be paid in one year.How much interest is recognized for the period from April 1 to December 31?

A)$0.
B)$21,000.
C)$5,250.
D)$15,750.

Question 70

Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?

A)Time period in which the underlying cause of action occurred.
B)The type of litigation involved.
C)The probability of an unfavorable outcome.
D)The ability to make a reasonable estimate of the amount of the loss.

Question 71

All of the following are true regarding the presentation of current liabilities in the statement of financial position except

A)The non-current liabilities section follows the current liabilities section.
B)Current liabilities may be listed in order of maturity, in descending order of magnitude or in order of liquidity preference.
C)Current liabilities are generally recorded at their full maturity values.
D)Current liabilities should not be offset against the assets that will be used to liquidate them.

Question 72

On December 31, 2011, Frye Co.has £4,000,000 of short-term notes payable due on February 28, 2012.On December 23, 2011, Frye arranged a line of credit with County Bank which allows Frye to borrow up to £3,500,000 at one percent above the prime rate for three years.On February 2, 2007, Frye borrowed £2,500,000 from County Bank and used £500,000 additional cash to liquidate £3,000,000 of the short-term notes payable.The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2011 statement of financial position which is issued on March 15, 2012 is

A)$0.
B)$500,000.
C)$1,000,000.
D)$4,000,000.

Question 73

How do you determine the acid-test ratio?

A)The sum of cash and short-term investments divided by short-term debt.
B)Current assets divided by current liabilities.
C)Current assets divided by short-term debt.
D)The sum of cash, short-term investments and net receivables divided by current liabilities.

Question 74

The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 10% is

A)10.87%.
B)10%.
C)9.09%.
D)11.11%.

Question 75

On September 30, Yang Company signed a HK$150,000, one-year zero-interest-bearing note at First Solvent Bank.Yang's borrowing rate on such obligations is 12% (.89286 present value factor).The September 30 journal entry to record issuance of the note would include:

A)a debit to Cash for HK$150,000.
B)a debit to Notes Receivable for HK$150,000.
C)a credit to Notes Payable for HK$133,929.
D)a debit to Interest Expense for HK$16,071.

Question 76

Which of the following is the proper way to report a contingent asset, receipt of which is virtually certain?

A)As an asset.
B)As unearned revenue.
C)As a disclosure only.
D)No disclosure or accrual required.

Question 77

Provisions are contingent liabilities which are accrued because the likelihood of an unfavorable outcome is

A)virtually certain.
B)greater than 50%.
C)at least 75%.
D)possible.

Question 78

On September 1, Hydra purchased $9,500 of inventory items on credit with the terms 1\15, net 30, FOB destination.Freight charges were $200.Payment for the purchase was made on September 18.Assuming Hydra uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as accounts payable from this purchase?

A)$9,405.
B)$9,605.
C)$9,700.
D)$9,500.

Question 79

What condition is necessary to recognize an environmental liability?

A)Company has an existing legal obligation and can reasonably estimate the amount of the liability.
B)Company can reasonably estimate the amount of the liability.
C)Company has an existing legal obligation.
D)Obligation event has occurred.

Question 80

A contingent liability

A)definitely exists as a liability but its amount and due date are indeterminable.
B)is accrued even though not reasonably estimated.
C)is the result of a loss contingency.
D)is not recognized in the financial statements.