Question 1

Which statement about contingencies is correct?

Accepted Answer

A)  If the future outcome is probable and reliably measurable, a provision is recorded.
B)  If the future outcome is probable, disclosure is required if it is reliably measurable.
C)  If the future outcome is probable, but not reliably measurable, no action is required.
D)  If the future outcome is probable, a provision is required, even if it is not reliably measurable, A

Question 2

Which statement about warranties is correct?

Accepted Answer

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. A

Question 3

For each independent situation:
1. A customer sued Vernon Tractor Corp. for $300,000 for breach of contract. Vernon's solicitors advise that they will almost certainly be found liable. Based on previous results, counsel estimates that there is a 70% probability that the courts will award the $300,000 being sought; a 20% probability that $230,000 will be conferred; and a 10% probability that the judgment will be $140,000.
2. Pickering Conveyor and Clutch Ltd. are in the midst of preparing their financial statements for the year ended December 31, 2021. Pickering has been in ongoing discussions with its bankers about renewing its $2,500,000 loan maturing on June 30, 2022. While nothing had been finalized by year-end, the bank did agree to extend the maturity by five years on January 15, 2022.
Required:
Describe how the event should be dealt with in the financial statements and explain why. Prepare all required journal entries.

Accepted Answer

1. The loss is probable and has to be provided for. A liability is established for a single event using the most likely outcome approach.  2. A journal entry is not required. Rather, the $2,500,000 must be disclosed as a current liability in the 2021 financial statements as renewal was not effected before year-end. The fact that the bank agreed to renew the loan after year-end, but before the statements were authorized for issue, is disclosed as a non-adjusting event in the notes to the financial statements.

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

The answer of Describe what a non-financial liability is, and...

Question 6

Which of the following groups includes only financial liabilities?

Accepted Answer

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 7

It is early in February 2020 and you are conducting the audit of Blast Off Airline's 2019 financial statements. Through discussion with Blast Off's Chief Financial Officer you learn of matters that have not yet been incorporated into the 2019 financial statements:
In July 2019, 127 passengers on board Blast Off Airlines Flight 007 were seriously injured when the plane missed the runway on final approach. In January 2020, the injured passengers launched a class action lawsuit against Blast Off seeking damages of $15 million. Blast Off's internal investigation of the incident determined that the pilot was intoxicated during the flight. The company's solicitors suggest that if the matter goes to court, Blast Off will be found liable and ordered to pay the $15 million.
In an attempt to reduce its loss, Blast Off's solicitors made a settlement offer of $10 million to the plaintiffs. The litigants' attorney has not provided a formal response but has indicated that the offer is being seriously considered. Blast Off's lawyers estimate that there is a 90% probability the plaintiffs will accept the offer.
Required:
Prepare the journal entries to record the required adjustments for the above event.

Accepted Answer

The answer of It is early in February 2020 and...

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

The answer of Explain the nature of current liabilities and...

Question 10

Fill in the following chart.

$\begin{array}{|l|l|l|}
\hline & \begin{array}{l}
\text { Initial measurement of the } \
\text { liability }
\end{array} & \begin{array}{l}
\text { Subsequent measurement of } \
\text { the liability }
\end{array} \
\hline \text { Non-financial liability } & & \
\hline \begin{array}{l}
\text { Financial liability not held } \
\text { for trading }
\end{array} & & \
\hline
\end{array}$

Accepted Answer

The answer of Fill in the following chart.

\(\begin{array}{|l|l|l|}
\hline & \begin{array}{l}
\text...

Question 11

Which is a non-current liability?

Accepted Answer

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 12

What is true regarding royalty fees?

Accepted Answer

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 13

Which statement about contingencies is correct?

Accepted Answer

A)  If the future outcome is possible and reliably measurable, a provision is recorded.
B)  If the future outcome is possible, but reliably measurable, no action is required.
C)  If the future outcome is possible, but not reliably measurable, no action is required.
D)  If the future outcome is possible, but reliably measurable, disclosure is required.

Question 14

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

Accepted Answer

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

Question 15

Which is not a current liability?

Accepted Answer

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 16

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

Accepted Answer

The answer of Explain what rebates are and how they...

Question 17

Which statement about sales taxes is correct?

Accepted Answer

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 18

Which of the following is true?

Accepted Answer

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 19

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

Accepted Answer

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.

Question 20

Which statement about contingencies is correct?

Accepted Answer

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.

Exam 1: Current Liabilities and Contingencies

Which statement about contingencies is correct?

Which statement about warranties is correct?

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

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

Which of the following groups includes only financial liabilities?

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

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

Which is a non-current liability?

What is true regarding royalty fees?

Which statement about contingencies is correct?

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

Which is not a current liability?

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

Which statement about sales taxes is correct?

Which of the following is true?

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

Which statement about contingencies is correct?