ch13 Current liabilities, Provisions, and Contingencies

Question 1

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

Answer 1

FALSE

Question 2

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

Answer 2

FALSE

Question 3

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

Answer 3

TRUE

Question 4

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

Answer 4

FALSE

Question 5

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

Answer 5

FALSE

Question 6

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

Answer 6

TRUE

Question 7

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

Answer 7

FALSE

Question 8

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 8

FALSE

Question 9

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

Answer 9

TRUE

Question 10

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

Answer 10

FALSE

Question 11

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

Answer 11

TRUE

Question 12

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

Answer 12

FALSE

Question 13

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

Answer 13

TRUE

Question 14

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

Answer 14

FALSE

Question 15

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

Answer 15

TRUE

Question 16

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

Answer 16

FALSE

Question 17

For purposes of recognizing a provision, “probable” is defined as more likely than not

Answer 17

TRUE

Question 18

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

Answer 18

TRUE

Question 19

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

Answer 19

FALSE

Question 20

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

Answer 20

FALSE

Question 21

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

Answer 21

TRUE

Question 22

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

Answer 22

FALSE

Question 23

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

Answer 23

FALSE

Question 24

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.

Answer 24

TRUE

Question 25

Contingent assets are not reported in the statement of financial position

Answer 25

TRUE

Question 26

IFRS uses the term “contingent” for assets and liabilities not recognized in the financial statements

Answer 26

TRUE

Question 27

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

Answer 27

TRUE

Question 28

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

Answer 28

FALSE

Question 29

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

Answer 29

FALSE

Question 30

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

Answer 30

TRUE

Question 31

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.

Answer 31

Present obligations arising from past events resulting in an outflow of resources.

Question 32

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.

Answer 32

None of these answer choices are correct.

Question 33

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.

Answer 33

CURRENT LIABILITIES

Question 34

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.

Answer 34

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Unearned Revenue

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.

Answer 35

Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

Question 36

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

Answer 36

All of these should be included:
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. Unearned revenues

Question 37

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.

Answer 37

CASH DIVIDEND PAYABLE TO PREFERENCE SHAREHOLDERS

Question 38

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.

Answer 38

Statement of financial position as an item of equity.

Question 39

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.

Answer 39

Short-term obligations expected to be refinanced.

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.

Answer 40

Settlement is expected within the normal operating cycle, or within 12 months after the reporting date.

Question 41

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.

Answer 41

Liquidation is reasonably expected to require use of existing resources classified as current assets.

Question 42

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.

Answer 42

Liquidation of current liabilities is reasonably expected within the company’s operating cycle (or one year if more).

Question 43

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.

Answer 43

Present values are used to measure certain liabilities.

Question 44

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.

Answer 44

Current liability.

Question 45

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.

Answer 45

Subsequently refinance the obligation on a long-term basis.

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.

Answer 46

Disclose the amount of the dividends in arrears. (Footnote)

Question 47

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

Answer 47

Selling magazine subscriptions.

Question 48

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.

Answer 48

None of these answer choices are correct.

Question 49

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

Answer 49

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 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.

Answer 50

Sales taxes are an expense of the seller.

Question 51

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 accumulated 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.

Answer 51

Vested rights are not contingent upon an employee’s future service.

Question 52

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.

Answer 52

Be accrued during the period when earned.

Question 53

The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the expected rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods.

a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.

Answer 53

Either 1 or 2 is acceptable.

1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the expected rates of pay expected to be paid when employees use compensated time.

Question 54

What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.

Answer 54

Paid time off.

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.

Answer 55

Sick pay benefits vest.

Question 56

Which of the following terms is associated with recognizing a provision?
a. Possible but not probable.
b. Likely.
c. Remote.
d. Probable.

Answer 56

PROBABLE

Question 57

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.

Answer 57

Included in the carrying amount of the related long-lived asset.

Question 58

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.

Answer 58

Whether it hires another party to perform the retirement activities or performs the
activities itself.

Question 59

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.

Answer 59

Should be reported as part current and part non-current.

Question 60

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

Answer 60

Operating expense of $800,000 and liability of $800,000

Question 61

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.

Answer 61

Accrued.

Question 62

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

Answer 62

The mid point of the range.

Question 63

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.

Answer 63

Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Question 64

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.

Answer 64

Expensed based on estimate in year of sale.

Question 65

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.

Answer 65

Recognized equally over the warranty period.

Question 66

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.

Answer 66

Warranty liability.

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.

Answer 67

The difference between the cost of the video game and the cash received is recognized as premium expense.

Question 68

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

Answer 68

Company has an existing legal obligation and can reasonably estimate the amount of the liability.

Question 69

Which of the following is not to be 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.

Answer 69

The type of litigation involved.

Question 70

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.

Answer 70

As a disclosure only.

Question 71

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

Answer 71

Possible but not probable

Question 72

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.

Answer 72

Is not reported as a liability if not probable.

Question 73

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.

Answer 73

As a disclosure only.

Question 74

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.

Answer 74

As an asset.

Question 75

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

Answer 75

Greater than 50%.

Question 76

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.

Answer 76

Unrealized gain on the sale of investments.

Question 77

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.

Answer 77

The non-current liabilities section follows the current liabilities section.

Question 78

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.

Answer 78

The sum of cash, short-term investments and net receivables divided by current liabilities.

Question 79

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.

Answer 79

The company’s liquidity.

Question 80

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

Answer 80

Offsetting current liabilities against assets that are to be applied to their liquidation

Question 81

The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.

Answer 81

Current ratio.

Question 82

The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and short-term investments.
c. cash and net receivables.
d. cash, short-term investments, and net receivables.

Answer 82

Cash, short-term investments, and net receivables.

Question 83

Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

Answer 83

INVENTORY