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

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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 but not recorded.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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

Question 25

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 answer choices are correct.

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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 answer choices are correct.

Question 31

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 32

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 answer choices are included

Question 33

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

Question 34

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

Question 35

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 36

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

Question 37

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 38

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 resulting in an outflow of resources.

Question 39

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 answers are correct.

Question 40

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 41

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 42

What are compensated absences?

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

Question 43

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

A)portion of FICA taxes.
B)and employer's portion of FICA taxes.
C)portion of FICA taxes, and any mandatory deductions.
D)portion of FICA taxes and any voluntary deductions.

Question 44

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 45

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 46

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 47

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 answer choices are correct.

Question 48

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 49

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 50

Which of the following is not a correct statement about sales taxes?

A)Sales taxes are an expense of the seller.
B)Many companies record sales taxes in the sales account.
C)If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
D)All of these answer choices are true.

Question 51

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2015.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 52

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 answer choices are correct.

Question 53

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 54

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

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

Question 55

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 56

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 57

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)only when the obligation arises at the outset of the asset's use.

Question 58

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 59

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 more).
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 60

In accounting for compensated absences, the difference between vested rights and accumulated rights is

A)vested rights are normally for a longer period of employment than are accumu?lated rights.
B)vested rights are not contingent upon an employee's future service.
C)vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
D)vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

Question 61

In a service-type warranty, warranty revenue is

A)recognized in the year of sale.
B)not recognized.
C)recognized only in the last year of the warranty period.
D)recognized equally over the warranty period.

Question 62

What does the current ratio inform you about a company?

A)The extent of slow-moving inventories.
B)The efficient use of assets.
C)The company's liquidity.
D)The company's profitability.

Question 63

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

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

Question 64

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 65

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 66

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 67

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 68

Which of the following is not acceptable treatment for the presentation of current liabilities?

A)Listing current liabilities in order of maturity
B)Listing current liabilities according to amount
C)Offsetting current liabilities against assets that are to be applied to their liquidation
D)Showing current liabilities in order of liquidation preference.

Question 69

Which of the following best describes the accounting for assurance-type 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 70

A contingent liability

A)always exists as a liability but its amount and due date are indeterminable.
B)is accrued even though not probable.
C)is always the result of a loss contingency.
D)is not reported as a liability if not probable.

Question 71

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 72

Which of the following is not to be considered 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 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

Accounting for product warranty costs under an assurance-type warranty

A)is required for income tax purposes.
B)is frequently justified on the basis of expediency when warranty costs are immaterial.
C)charges an expense account when the seller performs in compliance with the warranty.
D)represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Question 75

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a company has a present obligation related to product warranties.The amount of the expense involved can be reasonably estimated.Based on the above facts, the estimated warranty expense should be

A)accrued.
B)disclosed but not accrued.
C)neither accrued nor disclosed.
D)classified as an appropriation of retained earnings.

Question 76

Which of the following is a characteristic of an assurance-type warranty, but not a service-type warranty?

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

Question 77

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 78

Espinosa Co.has a provision to accrue.The amount 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 amount of the accrual should be

A)zero.
B)the mid point of the range.
C)the minimum of the range.
D)the maximum of the range.

Question 79

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 80

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.