Deck 1: Current Liabilities and Contingencies

Question 1

Which is not an example of a financial liability?

A) Payment to supplier for raw material received.
B) Obligation to repay a US dollar bank loan.
C) Obligation under a finance lease.
D) Obligation under a customer loyalty program.

Answer 1

D

Question 2

Which statement is correct about financial and non-financial liabilities?

A) A non-financial liability is a contractual obligation to deliver cash to another party.
B) A non-financial liability does not meet all of the criteria for a "liability."
C) The two liabilities may be valued differently for financial reporting purposes.
D) A non-financial liability is measured at fair value rather than amortized cost.

Answer 2

C

Question 3

What are the three broad categories of liabilities?

Answer 3

The three broad categories of liabilities are:
1.Financial liabilities held for trading
2.Other financial liabilities
3.Non-financial liabilities

Question 4

Which of the following characteristic is required for a "liability" under IFRS Framework?

A) Expected to result in the inflow of economic benefits.
B) Expected to result in the inflow of economic benefits that are measurable.
C) Expected to result in the outflow of resources embodying economic benefits.
D) Expected to result in the outflow of economic benefits that are virtually certain.

Question 5

Which of the following characteristic is required for a liability under IFRS Framework?

A) A past obligation.
B) A present obligation.
C) An unknown obligation.
D) A future obligation.

Question 6

Which of the following is correct about a "liability" under IFRS Framework?

A) A future obligation arising from past events, the settlement of which is expected to result in an inflow of resources.
B) A present obligation arising from past events, the settlement of which is expected to result in an inflow of resources.
C) A past obligation arising from past events, the settlement of which is expected to result in an outflow of resources.
D) A present obligation arising from past events, the settlement of which is expected to result in an outflow of resources.

Question 7

Explain the meaning of "provision" and give an example.

Question 8

Which statement is correct under the IFRS definition for a "liability"?

A) The obligating event must be probable before the liability can be recognized.
B) The obligating event must be virtually certain before the liability can be recognized.
C) A reliable measure of the obligation must exist before the liability can be recognized.
D) A precise measure of the obligation must exist before the liability can be recognized.

Question 9

Which is not a current liability?

A) Accounts payable due in 120 days.
B) Bank loan due in three years that is in default.
C) Bonds payable maturing in five years.
D) Certain held for trading liabilities.

Question 10

Which of the following is a financial liability?

A) A magazine publisher's obligation to provide the magazine monthly for an agreed upon period.
B) Warranties.
C) Accounts payable.
D) Income taxes payable.

Question 11

What are "liabilities"? Differentiate between financial liabilities and non-financial liabilities.

Question 12

Which statement regarding liabilities is not correct under the IFRS Framework?

A) A reliable estimate for an asset is presumed to exist.
B) A provision exists if the timing of payment is uncertain.
C) A provision exists if the amount of payment is uncertain.
D) A reliable estimate for a liability is presumed to exist.

Question 13

Explain some of the challenges that exist in determining the amount of a "liability" by identifying factors that influence the value of the indebtedness.

Question 14

Which of the following groups includes only financial liabilities?

A) Accounts payable, Notes payable, Warranties payable.
B) Bank loan, Bonds payable, Finance lease obligation.
C) Accounts payable, HST payable, Bonds payable.
D) Bank overdraft, USD bank loan, Obligation under customer loyalty plan.

Question 15

Which of the following characteristic is required for a liability under IFRS Framework?

A) Arises from a past event.
B) Arises from a non-financial transaction.
C) Arises from a future transaction.
D) Arises from a forecasted transaction.

Question 16

Fill in the following chart.

Question 17

Which is an example of a liability?

A) The decision to borrow $150,000 from the ABC Bank on January 15, 2013.
B) Withdrawing $10,000 from the operating line of credit on January 15, 2013.
C) Selecting the supplier to provide the raw materials for the manufacturing process.
D) Choosing the site for a future plant expansion from a list of several possible choices.

Question 18

Which is not an example of a non-financial liability?

A) Warranty liability.
B) Bank loan.
C) Income taxes payable.
D) Deferred revenue.

Question 19

Describe what a non-financial liability is,and provide three examples of non-financial liabilities.

Question 20

Why is it important to distinguish financial from non-financial liabilities?

Question 21

Which statement is correct?

A) Contingencies arise from future events.
B) The amount to be paid for contingencies is known or reasonably estimable.
C) Current liabilities arise from future events.
D) The amount to be paid for current liabilities is known or reasonably estimable.

Question 22

For a $100,000 trade payable with terms of 2/10,net 45,how much would be reported as "purchase discount lost" under the gross method if a payment was made after 60 days?

A) $0
B) $2,000
C) $4,500
D) $10,000

Question 23

Which is a reason to use the net method to record purchase discounts?

A) Cost-benefit factor is greater for the net method.
B) Reporting "purchase discounts lost" signifies inefficient business practices.
C) Given the materiality of the amounts involved, the net method is used.
D) The net method is technically superior to the gross method.

Question 24

Which statement is correct?

A) Trade payables are supported by a written promise to pay.
B) Trade payables with no discount terms are expected to be paid in full.
C) Notes payable are legally enforceable and can only be interest bearing.
D) Notes payables are recognized at the face value or transaction price.

Question 25

Fill in the following chart.

Question 26

What is true regarding royalty fees?

A) Unpaid royalty fees are recorded as a contra asset.
B) Unpaid royalty fees are a debit to royalty fee expense and a credit to unearned revenue.
C) Royalty fees are a minor expense for publishing companies.
D) A franchise gives the franchisor the right to sell specified goods and/or services within a designated area.

Question 27

Which statement is correct?

A) Supplier discounts can only be accounted for by using the gross method.
B) The amount owing for trade payables is generally not known with a high degree of certainty.
C) An accrued liability is needed when a company has received goods, but not the invoice.
D) Completeness means that obligations are reported in the proper accounting period.

Question 28

For a $200,000 trade payable with terms of 2/15,net 50,how much would be reported as "purchase discount lost" under the net method if a payment was made after 60 days?

A) $0
B) $4,000
C) $5,000
D) $30,000

Question 29

Which is a non-current liability?

A) HST payable.
B) 45-day accounts payable.
C) Five-year loan that matures four months after year-end reporting date.
D) The creditor has granted a 15-month grace period on a loan in default.

Question 30

Which of the following liabilities will be reported only as a current liability?

A) Bank overdraft.
B) Unearned revenue.
C) Bond payable that matures in two years.
D) Obligation under customer loyalty plan.

Question 31

Which statement about sales taxes is correct?

A) The consumer is responsible for remitting the tax to the government.
B) Taxes are uniformly applied to all sale transactions.
C) Businesses can deduct the GST paid on their purchases from GST collected.
D) The same products that are exempt from GST are exempt from PST.

Question 32

Which of the following is true?

A) The declaration of a stock dividend gives rise to a liability.
B) Stock dividends are revocable by the board of directors at any time before they are issued.
C) Undeclared dividends in arrears on cumulative preferred shares are recorded as a liability.
D) No note disclosure is required for the declaration of a stock split.

Question 33

Which statement about sales taxes is correct?

A) Businesses can recover the PST paid on all of their purchases.
B) Goods purchased for resale are exempt from PST.
C) Businesses remit only the GST collected on sales transactions.
D) The same products that are exempt from HST are exempt from PST.

Question 34

Which of the following is true about non-interest bearing notes?

A) The most common method of determining the fair value of non-interest bearing notes is the discounted cash flow analysis.
B) Non-interest bearing short-term payables may never be measured at the original invoice amount.
C) A rule of thumb is to use the face value for non-interest bearing notes payable with a duration of greater than 90 days.
D) A rule of thumb is to use the market value for non-interest bearing notes payable with a duration of 90 days or less.

Question 35

Which is true about lines of credit?

A) The company generally must repay the credit line in full monthly.
B) The borrower can borrow up to an agreed upon limit.
C) Interest is charged on the full amount of the agreed upon limit.
D) Lines of credit are particularly useful for steady income businesses that have very little volatility in revenue.

Question 36

Which statement about warranties is correct?

A) Warranties sold separately are accounted for under IFRS7.
B) Warranties sold separately are accounted for under IFRS15.
C) Warranties are financial liabilities and accounted for at fair value.
D) Expected value uses a weighted average of possible outcomes.

Question 37

How are "purchase discounts lost" reported in the financial statements?

A) As a reduction of sales.
B) As an increase in liability.
C) As an increase in inventory.
D) As an expense item.

Question 38

Which statement is correct?

A) HST payable is a financial liability.
B) Bank overdraft is a non-financial liability.
C) Unearned revenue is a non-financial liability.
D) Unearned subscriptions are a financial liability.

Question 39

Which of the following liabilities can potentially be reported as either or both a current and a non-current liability?

A) Bank overdraft.
B) Unearned revenue.
C) 180-day bank loan.
D) Income taxes payable.

Question 40

Which statement about warranties is correct?

A) Warranties are provisions.
B) Warranties included with the product sold are accounted for under IFSR15.
C) Warranties are financial liabilities.
D) Warranties included with the product sold are accounted for under IAS39.

Question 41

Explain the meaning of the following terms: current assets,trade payables,expected value,deferred revenue and warranty.

Question 42

Which statement about deferred revenue is correct?

A) Deferred revenue is a financial liability.
B) Deferred revenue is a non-financial liability.
C) Deferred revenue is a held for trading financial liability.
D) Deferred revenue arises when the contract is signed.

Question 43

A company,using a perpetual inventory system,sells goods on credit for $10,000.The applicable HST rate is 10%.The cost of goods sold was $6,000.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Question 44

For the following transaction,provide all of the required journal entries from inception to liquidation.Assume a December 31 year-end and that the company does not prepare interim statements.Round all amounts to nearest dollar.

Question 45

A company,using a perpetual inventory system,sells goods on credit for $10,000.The applicable PST rate is 5% and the cost of goods sold was $6,000.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Question 46

Explain the nature of current liabilities and how these are accounted for in the financial statements.

Question 47

A company purchases inventory on credit for $80,000.Inventory costing $30,000 is sold on credit for $40,000.The applicable HST rate is 10%.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Question 48

List three reasons why the recording of sales taxes is not straightforward.

Question 49

Which statement about deferred revenue is correct?

A) Deferred revenue is always a non-current liability.
B) Deferred revenue could arise from loyalty programs.
C) Deferred revenue is measured using expected values.
D) Deferred revenue arises when the goods are shipped.

Question 50

List three characteristics of a franchise arrangement.

Question 51

Why are taxes payable not classified as financial liabilities?

Question 52

Sales made in fiscal 2016 for $50,000,000 include a 5 year warranty coverage.The estimated cost for warranty is expected to be 2% for the first 4 years and 5% for the last year.Determine how much warranty expense will be recorded in fiscal 2016.

A) 1,000,000
B) 4,000,000
C) 5,000,000
D) 6,500,000

Question 53

A company,using a perpetual inventory system,sells goods on credit for $10,000.The applicable PST rate is 5% and the GST rate is 10%.The cost of goods sold was $6,000.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Question 54

AV Airlines sold a ticket on May 1,2016 for travel on Jun 15,2016 for $1,500.The customer paid at time of booking the flight.Provide the necessary journal entries.

Question 55

For the following transaction,provide all of the required journal entries from inception to liquidation.Assume a December 31 year-end and that the company does not prepare interim statements.Round all amounts to nearest dollar.

Question 56

Contrast the gross method with the net method of recording purchase discounts by completing the following table:

Question 57

For the following transaction,provide all of the required journal entries from inception to liquidation.Assume a December 31 year-end and that the company does not prepare interim statements.Round all amounts to nearest dollar.

Question 58

Explain what rebates are and how they are accounted for in the financial statements.

Question 59

Why is it important to distinguish current liabilities from long-term liabilities?

Question 60

A company purchases inventory on credit for $40,000.Inventory costing $30,000 is sold on credit for $50,000.The applicable HST rate is 10%.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Question 61

GOT Jetski Corp.has sold motorized watercraft for a number of years.GOT includes a three-year warranty on each watercraft they sell.Management estimates that the cost of providing the warranty coverage is 2% of sales in the first year and 3% of sales in each of years two and three.Other facts follow:
• GGT reported a $270,000 provision for warranty payable on its December 31,2017 balance sheet.
• GGT's sales for 2018 totalled $6,000,000 spread evenly through the year.
• The cost to GGT of meeting their warranty claims in 2018 was $480,000; $300,000 for parts and $180,000 for labour.
• GGT's sales for 2019 totalled $6,200,000 spread evenly through the year.
• The cost to GGT of meeting their warranty claims in 2019 was $468,000; $280,800 for parts and $187,200 for labour.Based on recent claims history,GGT revises their 2019 warranty provision to 9% of sales.
Required:
a.Prepare summary journal entries to record warranty expense and warranty claims in 2018 and 2019.
b.Determine the provision for warranty payable that GGT will report as a liability on December 31,2019.

Question 62

Which statement about contingencies is correct?

A) It involves only potential economic outflows of resources.
B) It is a possible condition that depends upon the outcome of a future event.
C) It involves uncertainty about either the timing or amount of payment.
D) It is an existing condition that depends upon the outcome of a future event.

Question 63

A clothing store maintains a loyalty program for its customers.For every purchase,members receive points that do not expire.In fiscal 2016,the store made sales of $1 million and awarded 50,000 points that have a fair value of $50,000.The company estimates that approximately 75% of these points will be redeemed by members.Members redeemed 10,000 points in fiscal 2017.
Provide the necessary journal entries for fiscal 2016 and 2017.

Question 64

A company purchased inventory from Europe valued at $100,000 euros.The spot rate at the transaction date was C$1.00 = 0.85 Euro.The spot rate on year-end date was C$1.00 = 0.80 Euro.When the company paid the supplier 3 months after year-end the spot rate was C$1.00 = 0.90 Euro.
Provide all necessary journal entries.Round all amounts to nearest dollar.

Question 65

In 2017,Johnson's Cycles Inc.sold 5,000 mountain bikes.For the first time,Johnson offered an in-store,no-charge,two-year warranty on each bike sold.Company management estimates that the average cost of providing the warranty is $8 per unit in the first year of coverage and $11 per unit in the second year.
Johnson's warranty-related expenditures totaled $36,500 for labor costs during 2017.
Required:
a.Prepare the summary journal entry to recognize Johnson's warranty expense in 2017.
b.Prepare the summary journal entry to recognize the warranty service provided in 2017.
c.Determine the total provision for warranty obligations that will be reported on the company's balance sheet at year-end.Assuming that all sales transactions and warranty service took place on the last day of the year,how much of the warranty obligation will be classified as a current liability? As a non-current liability?

Question 66

Which statement about contingent liabilities is correct?

A) It is a present obligation that will probably result in the economic outflow of resources.
B) It involves uncertainty about either the timing of payment or the amount of payment.
C) It is an obligation that arises from past transactions and events and can be reliably measured.
D) It is a present obligation that arises from past events but it cannot be reliably measured.

Question 67

RJ Magazines sells two-year magazine subscriptions for $108 cash each.The cost of producing and delivering each monthly magazine is $2.75 paid in cash at the time of delivery.RJ's sales activity for the year follows:
Sales activity
• On January 1,2017,RJ sells 22,000 subscriptions.
• On April 1,2017,RJ sells 5,000 subscriptions.
• On November 1,2017,RJ sells 12,000 subscriptions
RJ delivers the magazines at the end of the month and the year-end is December 31.
Required:
a.Prepare journal entries to record the subscription sales during the year.
b.Prepare summary journal entries to record the revenue earned during the year and the related expense.

Question 68

Simplicity Inc.had the following shareholders' equity account balances on December 31,2017:
On October 31,2018 Simplicity declared the stipulated dividends on the preferred shares payable on December 1.
On November 30,2018 Simplicity declared cash dividends of $2 per common share payable on January 2,2019.
Required:
Prepare the journal entries for 2018 and 2019.

Question 69

It is early in February 2017 and you are conducting the audit of Blast Off Airline's 2016 financial statements.Through discussion with Blast Off's Chief Financial Officer you learn of matters that have not yet been incorporated into the 2016 financial statements:
During 2016,Blast Off began a customer loyalty program.For each aeronautical mile that a passenger travels on a paid flight,the passenger accrues one flight mile.Passengers can redeem accrued flight miles for free air travel.Earned miles do not expire.Blast Off's analysis of its competitors' programs suggests an average redemption rate of 55%.In 2016,Blast Off awarded 50,000,000 flight miles,1,375,000 of which were redeemed.Management estimates the fair value of the flight miles is $540,000.
Required:
Prepare the journal entries to record the required adjustments for the above event.

Question 70

Deck Contractors Inc.(DC)enters into a contract to construct six decks adjacent to a commercial building.The purchaser has agreed to pay $8,500 for each deck (total $51,000).The terms of the contract call for a 40% deposit ($3,400 per deck)at time of contract signing and payment of the balance ($5,100 per deck)as each deck is completed.
The contract is signed on October 1,2017.Two decks are completed in 2017 and the balance in 2018.DC has a December 31 year-end.The cost to DC of constructing each deck is $3,400,which it pays in cash.
Required:
a.Prepare summary journal entries for 2017 and 2018.
b.What is the balance in the deferred revenue account as at December 31,2017?

Question 71

Select transactions and other information pertaining to the Best Place in the World Inc.(BPW)are detailed below.
Facts:
a.BPW is domiciled in Vancouver,British Columbia and all purchases and sales are made in BC.
b.The HST rate in British Columbia is 12%.
c.The balances in BPWs HST recoverable account and HST payable account as at March 31,2017,were $7,000 and $18,000,respectively.
d.BPW uses a perpetual inventory system.
e.Inventory is sold at a 100% mark-up on cost.(Cost of goods sold is 50% of the sales price.)
Select transactions in April 2017:
1.BPW purchased inventory on account at a cost of $17,000 plus HST.
2.BPW purchased equipment on account at a cost of $18,000 plus HST.It paid an additional $600 plus HST for shipping.
3.Cash sales-BPW sold inventory for $45,000 plus HST.
4.Sales on account-BPW sold inventory for $35,000 plus HST.
5.BPW paid the supplier in full for the equipment previously purchased on account.
6.At the end of the month,BPW remitted the net amount of HST owing to the Canada Revenue Agency.
Required:
Prepare summary journal entries to record the transactions detailed above.

Question 72

Which statement about contingent assets is correct?

A) It involves only potential economic outflows of resources.
B) It is a possible asset that depends upon the outcome of a future event.
C) It involves uncertainty about either the timing or amount of payment.
D) It is a condition that depends upon the outcome of a forecasted event.

Question 73

St.John Laurulry (SJL)recently hired Huck as its payable clerk,a position that has been vacant for two months.While the other accounting staff have taken care of the "must do's," there are a number of transactions that have not yet been recorded.
• Nov.15,2017-SJL purchases $8,000 supplies inventory on account.The terms offered are 2/10,net 30.
• Nov.22,2017-SJL purchases 10 washing machines.SJL issues a $3,000 non-interest bearing note payable due on 01/15/18.
• Nov.28,2017-SJL borrows $131,400 from the bank.SJL signs a demand note for this amount and authorizes the bank to take the interest payments from its bank account.Interest is payable monthly at 10% per annum.
• Dec.18,2017-SJL purchases $1,000 supplies inventory on account.The terms offered are 2/10,net 30.
• Dec.21,2017-SJL purchases 15 dryers.SJL issues a $25,000 non-interest bearing note payable due on Dec.21,2018.
• Dec.22,2017-Huck pays the Nov.15,2017 and Dec.18,2017 invoices.
• Dec.31,2017-Huck processes the payroll for the month.The gross payroll is $80,000; $2,700 is withheld for the employees' Canada Pension Plan and Employment Insurance premiums.
Other Info
• SJL uses the net method to record accounts payable.
• SJL's year-end is Dec.31 and interim statements are normally prepared on a monthly basis.
• Due to the vacancy in the accounting department,SJL's latest interim statements are for the period ended Oct.31,2017.The necessary accruals were made at that time.
• The market rate of interest for SJL's short-term borrowing is 10%.
Required:
a.Prepare journal entries to record the documented events and the necessary accruals for the months of November and December.Compute interest accruals based on the number of days,rather than months.
b.Contrast the gross and net methods of accounting for trade payables.

Question 74

On May 1,2016,British Columbia Brew Supplies Inc.borrowed US$180,000 from its bank.British Columbia's year-end is December 31,2016.Exchange rates were as follows:
Required:
Prepare the required journal entries to record receipt of the loan proceeds and for any adjustments required at year-end.

Question 75

Which statement about contingencies is correct?

A) If the future outcome is possible and reliably measurable, a provision is recorded.
B) If the future outcome is probable and reliably measurable, a provision is recorded.
C) If the future outcome is probable, a provision is recorded even if it is not reliably measurable.
D) If the future outcome is possible, a provision is recorded even if it is not reliably measurable.

Question 76

In December 2017,a shoe store offered its customers a discount voucher that entitles them to a 30% discount on their purchases the following January.The store's sales for December 2017,were of $2 million and 15,000 vouchers were awarded to customers.The store estimates that approximately 20% of the vouchers will be redeemed by customers and that sale proceeds in January 2018 will be of $1.5 million.
Provide the necessary journal entries for fiscal 2017 and 2018.

Question 77

On January 1,2017 BCL Transmission Services Co.issued a $40,000,non-interest bearing note,due on January 1,2018,in exchange for a custom-built computer system.The fair value of the computer system is not easily determinable.The market rate of interest for similar transactions is 4%.BCL's year-end is December 31.
Required:
a.Prepare the journal entry to record the issuance of the note payable.
b.Prepare the journal entry to record the accrual of interest at December 31,2017,assuming that BCL prepares adjusting entries only at year-end.
c.Prepare the journal entry to record the retirement of the note payable on January 1,2018.

Question 78

LMZ Computer Systems Inc.maintains office equipment under contract.The contracts are for labour only; customers must reimburse LMZ for parts.LMZ's rate schedule follows:
LMZ's 2018 sales of maintenance agreements is set out below:
Required:
Assuming that sales occurred evenly through the year:
a.What amount of revenue will LMZ recognize for the year ended December 31,2018?
b.What amount of deferred revenue will LMZ report as a current liability on December 31,2018?
c.What amount of deferred revenue will LMZ report as a non-current liability on December 31,2018?

Question 79

Which statement about contingent liabilities is correct?

A) It is a possible obligation that arises from past transactions and events.
B) It is an obligation that arises from past transactions and events.
C) It involves uncertainty about either the timing or amount of payment.
D) It is a condition that depends upon the outcome of an anticipated event.

Question 80

On March 1,2017 Daisy Miller signed a five-year franchise agreement for the exclusive rights to sell Delightful Shakes products in Montreal,Quebec.The agreement stipulates that Daisy will pay the franchisor $30,000 upon signing the agreement and an ongoing royalty of 6% of monthly sales payable on the 20th of each following month.Daisy started operating the new franchise immediately after signing the agreement.Her sales for the first two months were $20,000,and $30,000.Daisy amortizes the franchise agreement monthly on a straight-line basis.
Required:
Prepare journal entries related to franchise fees during the first two months of operation.