Chapter 12

Question 1

1. Conceptually, liabilities constitute a present obligation as a result of a past event.
   true or false

Answer 1

true

Question 2

Under IFRS, only legal obligations are recognized

true or false

Answer 2

false

Question 3

A reasonable expectation on the part of a company’s stakeholders arising from a company’s past
practices or behaviour may constitute a constructive obligation in certain instances.
true or false

Answer 3

true

Question 4

A contingency may become a provision if the likelihood of the contingent event greatly
increases
true or false

Answer 4

true

Question 5

for a small population, the best estimate for the amount of a provision that must be recognized is the expected value of the possible outcomes
true or false

Answer 5

false

Question 6

For a large population, the best estimate for the amount of a provision that must be
recognized is the most likely outcome with respect to the expected value and cumulative
probabilities
true or false

Answer 6

false

Question 7

Discounting is not required when the time value of money is immaterial or if the amount
and timing of cash flows is highly uncertain.
true or false

Answer 7

true

Question 8

For a small population, the best estimate for the amount of a provision that must be
recognized is the expected value of the possible outcomes
true or false

Answer 8

false

Question 9

Contingencies must be both accrued and disclosed.

true or false

Answer 9

false

Question 10

under proposed changes to current standards, amounts currently classified as contingencies may need to be accrued rather than simply disclosed
true or false

Answer 10

true

Question 11

Contingencies must be both accrued and disclosed.

true or false

Answer 11

false

Question 12

A lawsuit in progress wherein the defendant will probably be found guilty would likely
be accounted for as a provision.
true or false

Answer 12

true

Question 13

Warranties provisions may arise from legal or constructive obligations.true or false

Answer 13

true

Question 14

once a company has formally decided to restrucuture its operations, a provision must be made for the restructuring
true or false

Answer 14

false

Question 15

loyalty points are provided (accrued) for and reversed once the points are redeemed
true or false

Answer 15

true

Question 16

Self-insurance costs for expected losses must never be provided for
true or false

Answer 16

false

Question 17

current liabilities are usually discounted

true or false

Answer 17

false

Question 18

The carrying value of a bond from the issuing corporation’s standpoint will always move closer
to its face value, regardless of whether the bond is issued at a premium or a discount.
true or false

Answer 18

true

Question 19

under the effective interest method, interest expense is calculated by multiplying the market interest rate by the carrying value of the bond
true or false

Answer 19

true

Question 20

Assume that a company issues bonds at a discount. Under the effective interest method,
the company will record progressively less interest with the passage of time.
true of false

Answer 20

false

Question 21

transaction costs are usually included in the carrying value of any financial liabilities
true or false

Answer 21

true

Question 22

Long-term financial liabilities will usually be carried at amortized cost.
true or false

Answer 22

true

Question 23

Adjustments to fair value relating to FVTPL liabilities will always flow through earnings

Answer 23

true

Question 24

Loan guarantees must be provided for; the amount of the provision is the probability of
payout multiplied by the fair value o the loan guarantee
true or false

Answer 24

true

Question 25

when the market rate exceeds the stated or nominal rate, a bond’s carrying value will be less than its fair value
true or false

Answer 25

true

Question 26

the stated rate of interst is the interest rate used to determine the amount of cash interest that will be paid on the principal

Answer 26

true

Question 27

a short-term payable may be the current portion of a long-term liabilitiy, which arises when the next payment on such a debt will be made out of current assets
true or false

Answer 27

true

Question 28

Interest may be recognized on a note even though the note does not explicitly state an interest
rate.
true or false

Answer 28

true

Question 29

the principal amount of a debt is the cash or cash equivalent amount borrowed
true or false

Answer 29

true

Question 30

a company may reclassify a current financial liability to a long-term one only if there is a contractual agreement in place by the reporting date to replace the financing
true or false

Answer 30

true

Question 31

debt issue costs may be expensed or included in the cost of debt
true or false

Answer 31

true

Question 32

an administrative fee pertaining to a successful loan applicaton is to be immediately expensed
true or false

Answer 32

false

Question 33

an administrative fee pertaining to an unsuccessful loan application is to be immediately expensed
true or false

Answer 33

true

Question 34

capitalization of borrowing costs on qualifying assets will continue even if work on the asset has temporarily ceased
true or false

Answer 34

false

Question 35

accounts payable should include only obligations directly related to the primary and continuing operations of an equity
true or false

Answer 35

true

Question 36

captialization of borrowing costs on qualfiyng assets is mandatory under both IFRS and ASPE
true or false

Answer 36

false

Question 37

use of the effective interest method for amortizingbond premiums and discounts is mandatory under IFRS but not under ASPE
true or false

Answer 37

true

Question 38

borrowing costs can only be capitalized on non-financial assets
true or false

Answer 38

true

Question 39

the cost of any equity financing is included when calculating the cost of generalized borrowings
true or false

Answer 39

false

Question 40

Bonds are said to be redeemable when they can be prematurely retired at the discretion of
the issuing company and retractable when they can be prematurely retired at the
investor’s discretion.
true or false

Answer 40

true

Question 41

Under IRS, a loss contingency must be credited to a liability account only if the occurrence of
the contingent event is probable and if the amount of loss can be reasonably estimated
true or false

Answer 41

false

Question 42

a gain contingency will usually not be recorded in the accoutns and reported in the financial statements even though its occurrence is probable
true or false

Answer 42

true

Question 43

under ASPE, disclosure in the footnotes to the financial statements is thhe only way to properly report contingent losses
true or false

Answer 43

false

Question 44

when the maturity date of a bond issue is within one year or the operating cycle (whichever is longer) of the current balance sheet date, the bond liability should be reclassified as a current liability (assuming the payment will be made out of current assets)
true or false

Answer 44

true

Question 45

callable bonds are callable at the option of the investor

true or false

Answer 45

false

Question 46

A $1,000, 6%, 10-year bond purchased as a long-term investment at an effective rate at 7%, will
pay the investor $70 cash interest each year
true or false

Answer 46

false

Question 47

When bonds are sold at a discount, interest-method amortization results in a schedule of interest
accruals, which increase in amount as maturity approaches
true of false

Answer 47

true

Question 48

in substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt. in such situations, the debt is always recorded as paid when the trust fund is set up
true or false

Answer 48

false

Question 49

hedging is one method of minimizing foreign exchange risk

true or false

Answer 49

true

Question 50

under IFRS, a continuity scheduled must be provided for both provisions and contingencies
true or false

Answer 50

false

Question 51

(Appendix) Blended payments are payments where the interest rate is fixed at the beginning of
the loan term and there are regular equal payments of principal and interest made.
true or false

Answer 51

true

Question 52

A brewing company operating in an Ontario city experiencing water shortages received its water
bill for December 1999, on December 31, 1999. The bill ($8,000) represents the cost of water
used in December to make its product. The company will not publish the 1999 financial
statements until February 2000. Therefore, the adjusting entry as of December 31, 1999 includes
which of the following?
A) cr. utilities payable $8,000
B) cr. cash $8,000
C) cr. utilities expense $8,000
D) no adjusting entry needed because the bill will not be paid until January 2000

Answer 52

a

Question 53

Bonds payable (due 5 years from the balance sheet date) should be classified as follows:
A) A contingent liability.
B) An element of the owners' equity.
C) A long-term liability.
D) A current liability.

Answer 53

c

Question 54

54. A short-term note payable may include all of the following except:
    A) Trade notes payable.
    B) Nontrade notes payable.
    C) A current portion of a long-term liability.
    D) Unearned revenue.

Answer 54

d

Question 55

55. Which of the following statements is/are correct?
    A) Under IFRS, contingencies may be accrued, but not under ASPE.
    B) Litigation for which the company will probably be found guilty would normally be accrued
    as a provision.
    C) Under IFRS, contingencies should be disclosed but not accrued.
    D) Both B & C are correct.

Answer 55

d

Question 56

A firm sold $100,000 worth of goods during 1999. The firm extends warranty coverage on these
goods. Historically, warranty costs have averaged 2% of total sales. During 1999, the firm
incurred $1,000 to service goods sold in 1998 and $200 to service goods sold in 1999. What is
warranty expense for 1999?
A) $200
B) $1,200
C) $2,000
D) $3,200

Answer 56

c

Question 57

You are an investor and have just purchased a bond on July 1 which pays interest every March 1
and September 1. When you receive your first interest cheque, you will receive and have earned
how many months interest?
Received Earned
1 6 6
2 6 2
3 2 2
4 4 4
5 6 4
A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4
E) Choice 5

Answer 57

b