Chapter 12 MC

Question 1

32. A brewing company operating in an Ontario city experiencing water shortages received its water bill for December 2013, on December 31, 2013. The bill ($8,000) represents the cost of water used in December to make its product. The company will not publish the 2013 financial statements until February 2014. Therefore, the adjusting entry as of December 31, 2013 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 Jan 2014

Answer 1

a

Question 2

33. A short-term note payable may include all of the following except:
    A. Trade notes payable.
    b. non trade notes payable
    c. a current potion of a long-term liability
    d. unearned revenue

Answer 2

d

Question 3

34. Which of the following statements is 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, content gains should be recognized if they are reasonably certain to occur.
    D. A contingency is more likely to require an accrual than a provision.

Answer 3

b

Question 4

35. A firm sold $100,000 worth of goods during 2014. The firm extends warranty coverage on these goods. Historically, warranty costs have averaged 2% of total sales. During 2014, the firm incurred $1,000 to service goods sold in 2013 and $200 to service goods sold in 2014. What is warranty expense for 2014? 
A. $200
B. $1,200
C. $2,000
D. $3,200

Answer 4

c

Question 5

36. 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 5

b

Question 6

37. On November 7, 2014 local residents sued Brimley Corporation for excess chemical emissions that caused some of them to seek medical attention. The total lawsuit is $8,000,000. Brimley Corporation’s lawyers believe that the lawsuit will be successful and that the amount to be paid to the residents will be $4,000,000. On its December 31, 2014 financial statements Brimley should:
    A. Accrue a provision loss of $8,000,000 with no financial statement disclosure necessary.
    B. Accrue a provision loss of $4,000,000 and note disclose.
    C. Do nothing as the lawsuit has not yet ended.
    D. Simply disclose the details regarding the lawsuit in a note.

Answer 6

b

Question 7

38. ABC Inc. has 50 pending lawsuits for which it may be found liable. The expected value (sum of the probabilities of the outcomes multiplied by their respective payouts) amounts to $100,000. However, the company’s controller believes that the most likely outcome will be a payout of $120,000. Which of the following statements pertaining to the accrual of the provision is correct?
    A. There is a large population of lawsuits, so a provision of $100,000 must be accrued.
    B. There is a large population of lawsuits, so a provision of $120,000 must be accrued.
    C. There is a small population of lawsuits, so a provision of $100,000 must be accrued.
    D. There is a small population of lawsuits, so a provision of $120,000 must be accrued.

Answer 7

b

Question 8

39. Which one of the following items is not a liability?
    A. Accrued estimated warranty costs
    B. Dividends payable in shares
    C. Advances from customers on contracts
    D. The portion of long-term debt due within one year

Answer 8

b

Question 9

40. A company has commenced work on a non-cancellable fixed price construction contract in the amount of $6 million. Costs of $4 million have been incurred to date, and it is expected that $3.2 million in additional costs will have to be incurred to complete the contract. The company adheres to IFRS. Which of the following statements with respect to the contract are correct?
    A. There is a constructive obligation to finish the contract.
    B. The company will have recognized $3 million in profit on the contract to date.
    C. The company has a constructive obligation to accrue a loss of $1.2 million plus any previously recognized profit.
    D. This is an onerous contract, so the company must accrue a loss of $1.2 million plus any previously recognized profit.

Answer 9

d

Question 10

41. Constructive obligations may arise from:
    A. Accrued Liabilities resulting from operations.
    B. Warranty obligations.
    C. Notes Payable.
    D. Unearned Revenues

Answer 10

b

Question 11

42. Long-term obligations (i.e., debts) that is callable for early payment:
    A. Must continue to be classified as a long-term liability by the debtor, if a provision of the debt covenant has been violated.
    B. Must continue to be classified as a long-term liability in all situations.
    C. Must be reported as current liabilities by the debtor if callable on demand.
    D. Can be reported as current liabilities by the debtor only if callable because a provision of the debt covenant has been violated

Answer 11

c

Question 12

43. A company had sales of $1 million. Coupons in the amount of $1 per $10 in sales were given to paying customers. History has shown that 50% of all coupons are redeemed. Which of the following statements is correct?
    A. A provision for $50,000 must be recognized.
    B. A provision for $100,000 must be recognized.
    C. A provision for $1 million must be recognized.
    D. No provision is necessary.

Answer 12

a

Question 13

44. By law, a fleet of aircraft must be subject to a major overhaul every 5 years as part of its scheduled maintenance program. Which of the following statements is correct?
    A. An accrual should be made in each of the 5 years preceding the overhaul.
    B. The costs of the overhaul should be expensed as incurred.
    C. The cost of the overhaul should be deferred and amortized.
    D. The estimated cost of the overhaul should be disclosed as part of a continuity schedule in the notes to the financial statements.

Answer 13

c

Question 14

45. Which of the following statements is correct?
    A. For companies that are self-insured, a provision must be established for events taking place prior to the reporting period if known.
    B. There is no guidance for self-insurance under IFRS.
    C. Contingent assets are only recorded when it is virtually certain that the benefits relating to the contingent assets will be received.
    D. Contingent assets are only recorded when it is reasonably certain that the benefits relating to the contingent assets will be received.

Answer 14

c

Question 15

46. Information obtained prior to the issuance of the current period’s financial statements of KG Company indicates that it is probable that, at the date of the financial statements, a liability will be incurred for obligations related to product warranties on products sold during the current period. During the past three years, product warranty costs have been approximately 1 1/2 percent of annual sales revenue. An estimated loss contingency should be:
    A. Neither accrued nor disclosed in the financial statements.
    B. Recognized as an appropriation of retained earnings.
    C. Accrued in the accounts and reported in the financial statements.
    D. Disclosed in the financial statements but not accrued

Answer 15

c

Question 16

47. Contingent liabilities will or will not become actual liabilities depending on:
    A. Whether they are probable and estimable
    B. The degree of uncertainty
    C. The present condition suggesting a liability
    D. The outcome of a future event

Answer 16

d

Question 17

48. Under IFRS, which of the following will only require only a note disclosure as a contingency?
    A. Cash discounts given for early payment by customers; almost always taken
    B. Remote chance of loss from a lawsuit in process
    C. Probable claim for an income tax refund
    D. Loss from an investment in equity securities that is certain

Answer 17

b

Question 18

49. Which of the following contingencies should be accrued in the accounts and reported in the financial statements?
    A. The estimated expenses of a one-year product warranty.
    B. The company is forcefully contesting a personal injury suit and a loss is possible and reasonably estimable.
    C. An accommodation endorsement involving a remote loss.
    D. It is probable that the company will receive $50,000 in settlement of a lawsuit.

Answer 18

a

Question 19

50. KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at its Glowworm plant site during 2013. At December 31, 2016, it appeared probable the Government would settle for approximately $150,000. This event should be recorded (i.e., recognized) in 2016 as a(n):
    A. Loss on the lawsuit (operating expense).
    B. Unusual gain.
    C. Prior period adjustment.
    D. Unusual loss.
    E. Disclosure of contingency loss only in a note.

Answer 19

a

Question 20

51. On January 1, 2014, DWW borrowed $400,000 cash and signed a one-year, 12 percent interest-bearing note payable. Assuming a 40 percent average income tax rate for DWW Corporation, the net effective interest rate on this note was: 
A. 4.8 percent.
B. 6.0 percent.
C. 7.2 percent.
D. 12.0 percent.

Answer 20

c

Question 21

52. XYZ borrowed $60,000 for one year and signed an 18 percent, interest-bearing note payable. Assuming XYZ has an income tax rate of 45 percent, the net effective rate was: 
A. 8.1 percent.
B. 9.9 percent.
C. 11.7 percent.
D. 18 percent.

Answer 21

b

Question 22

53. On September 1, 2012, Company B signed a $7,392, two-year non-interest-bearing note payable in full on August 31, 2014. Company B received $6,000 cash. What was the yield or effective rate of interest? 
A. 11 percent
B. 14 percent
C. 18 percent
D. 23 percent

Answer 22

a

Question 23

54. VCR Company owed a $73,311 debt due on January 1, 2012. An agreement was reached to pay it off in three equal annual payments of $30,000 each, starting on December 31, 2012. The interest rate was 11 percent. The balance in the liability account of VCR Company on January 1, 2014 is (round annual payment to nearest $1): 
A. $27,026
B. $51,875
C. $73,311
D. $90,000

Answer 23

a

Question 24

55. XY Company owed a $45,489 due on January 1, 2015. An agreement was reached to pay it off in five equal annual payments, starting on December 31, 2015. The interest rate was 10 percent. The total amount of interest paid under the terms of the agreement was (round annual payment to nearest $1): 
A. $25,000
B. $22,745
C. $14,511
D. $6,000

Answer 24

c

Question 25

56. A firm sells products covered by a three-year warranty. From the past experience of the other firms in the industry, the firm expects to incur warranty costs equal to 1% of sales. Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively. In 2014, the firm spent $200 to repair goods sold in 2013, and $300 to repair goods sold in 2014. The firm received no warranty servicing demands from customers in 2013, the firm's first year of operations. What is the balance in the warranty liability account on January 1, 2014? 
A. $400
B. $500
C. $300
D. $0

Answer 25

a

Question 26

57. On January 1, 2014, JG purchased a machine and gave a $30,000 three-year, 8% note. The market or “going” interest rate was 12%. The annual interest payments are to be paid on each December 31. On January 1, 2014, JG should record the net liability amount determined as follows:
    A. Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 8%.
    B. Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 12%.
    C. Use its face amount, $30,000 plus the $7,200 interest.
    D. Use its face amount, $30,000 minus $7,200 interest.

Answer 26

b

Question 27

58. Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn. $1.46. When the debt was repaid the exchange rate changes to US $1.00 = Cdn. $1.38. Ryan Company records the amount on the date of exchange as: 
A. A foreign exchange loss of $3,600.
B. A foreign exchange gain of $3,600.
C. A foreign exchange gain of $62,100.
D. A foreign exchange loss of $62,100

Answer 27

b