Deck 1: Current Liabilities and Contingencies

Question 1

Which is an example of a liability?

A)The decision to borrow $150,000 from the ABC Bank on January 15, 2019.
B)Withdrawing $10,000 from the operating line of credit on January 15, 2019.
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.

Answer 1

B

Question 2

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

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

Answer 2

B

Question 3

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

Answer 3

IFRS requires that some financial liabilities be measured at their fair value rather than at amortized cost.

Question 4

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

Question 5

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 6

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 7

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 8

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

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

Fill in the following chart.
Initial measurement of the liability
Subsequent measurement of the liability
Non-financial liability
Financial liability held for trading

Question 11

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 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

What are the three broad categories of liabilities?

Question 14

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 15

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.

Question 16

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 17

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

Question 18

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 19

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 20

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.

Question 21

Fill in the following chart.
Initial measurement of the liability
Subsequent measurement of the liability
Non-financial liability
Financial liability not held for trading

Question 22

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 23

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 24

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 25

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 26

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 27

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 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 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 31

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 32

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 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 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 35

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 36

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 37

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 38

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 39

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 40

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 41

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 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

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 44

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

Question 45

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 46

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

Question 47

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

Question 48

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 49

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 50

Sales made in fiscal 2019 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 2019.

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

Question 51

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

Question 52

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 53

Why are taxes payable not classified as financial liabilities?

Question 54

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 55

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

Question 56

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 57

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 58

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 59

Contrast the gross method with the net method of recording purchase discounts by completing the following table:
For
Against
Net Method
Gross Method

Question 60

List three characteristics of a franchise arrangement.

Question 61

Explain the difference between "probable," "possible," and "remote" under IFRS.

Question 62

Which statement about contingencies is correct?

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,

Question 63

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 64

Which statement is correct about provisions, contingent assets and contingent liabilities?

A)Provisions are recorded in the financial statements whereas contingent assets are not recorded.
B)Provisions are recorded in the financial statements whereas contingent liabilities are not recorded.
C)Probable contingent liabilities are recorded at management's best estimates.
D)Probable contingent assets are recorded at management's best estimates.

Question 65

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 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 66

Explain the meaning of the following terms: "financial guarantee" contract and "onerous" contract

Question 67

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.

Question 68

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.

Question 69

Explain how commitments and guarantees are accounted for under accrual accounting.

Question 70

Consider the following independent situations. The underlined entity is the reporting entity.
1. The Supreme Court of Canada ordered a supplier to pay Towna Haring Inc. $500,000 for breach of contract.
2. Iwas Pharmaceuticals Inc. sued Game Day Agencies Ltd. for $8 million alleging patent infringement. While there may be some substance to Iwas's assertion, Game Day's legal counsel estimates that Iwas's likelihood of success is about 30%.
3. Environment Canada sued Foil Fan Isotopes Ltd. for $18 million seeking to recover the costs of cleaning up Foil Fan's accidental discharge of radioactive materials. Foil Fan acknowledges liability but is disputing the amount, claiming that the actual costs are in the range of$9 million to $12 million. Foil Fan's $18 million environmental insurance policy includes a $6 million deductible clause.
Required:
a. For each of the situations, indicate whether the appropriate accounting treatment is to:
A. Recognize an asset or liability.
B. Disclose the details of the contingency in the notes to the financial statements.
C. Neither provides for the item nor disclose the circumstances in the notes to the financial statements.
b. For each situation that requires the recognition of an asset or liability, record the journal entry.

Question 71

Indemnities and letters of credit are examples of?

A)Commitments.
B)Provisions.
C)Contingencies.
D)Guarantees.

Question 72

Consider the following independent situations. The underlined entity is the reporting entity.
1. Call Cattle Inc. sued Nutrient Feed Ltd. for $10 million alleging breach of contract. Nutrient's legal counsel estimates that Call's likelihood of success is about 80%. Based on its experience with cases of this nature, the law firm estimates that, if successful, the litigants will be awarded $8,800,000 to $9,000,000, with all payouts in this range being equally likely.
2. Deana Finnamore broke her leg when she tripped on an uneven floor surface in Groton Co.'s office. On the advice of legal counsel, Groton has offered Finnamore $140,000 to settle her $275,000 lawsuit. It is unknown whether Finnamore will accept the settlement offer. Groton's legal counsel estimates that Finnamore has a 90% probability of success, and that if successful, she will be awarded $230,000.
3. The courts ordered a competitor to pay $1,000,000 to Ferbert and Finn Corp. for patent infringement. The competitor's legal counsel indicated that the company will probably appeal the amount of the award.
Required:
a. For each of the situations, indicate whether the appropriate accounting treatment is to:
A. Recognize an asset or liability.
B. Disclose the details of the contingency in the notes to the financial statements.
C. Neither provide for the item nor disclose the circumstances in the notes to the financial statements.
b. For each situation that requires the recognition of an asset or liability, record the journal entry.

Question 73

A supplier sued Pneumatic Systems Inc. for $200,000 for breach of contract. Pneumatic's legal counsel believes that they will almost certainly be found liable. Based on previous results, the lawyer estimates that there is a 60% probability that the supplier will be awarded the $200,000; a 30% probability that the judgment will be $150,000; and a 10% probability that $100,000 will be conferred. Assuming that Pneumatic reports its financial results in accordance with IFRS, indicate which of the following will be the appropriate accounting treatment:

A)Recognize a liability of $175,000.
B)Recognize a liability of $200,000.
C)Disclose the details of the contingency in the notes to the financial statements.
D)Recognize an asset of $175,000.

Question 74

For each independent situation:
1. A former employee of Melvin Minimarket Inc. sued the company for $900,000, alleging that the company owner sexually harassed her. Melvin's lawyers suggest that the lawsuit has a 30-40% probability of success and that, if successful, the plaintiff will be awarded between $400,000 and $500,000.
2. Leduc Pyrotechnics Ltd. received a $15,000 fee to guarantee the $800,000 bank indebtedness of Kenora Fireworks Inc. The fair value of the guarantee is initially estimated to be $15,000.
3. Montomery Syringes Co. sued a competitor for $800,000, alleging corporate espionage. Montomery's legal counsel believes that the company will be successful and will be awarded somewhere in the range of $650,000 to $800,000.
Required:
Describe how the event should be dealt with in the financial statements and explain why. Prepare all required journal entries.

Question 75

Which statement is correct about provisions, contingent assets and contingent liabilities?

A)The same probability threshold is used to record contingent liabilities and provisions.
B)The same probability threshold is used to record contingent assets and contingent liabilities.
C)Possible contingent liabilities are recorded.
D)Virtually certain contingent assets are recorded.

Question 76

Which statement about contingencies is correct?

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

Question 77

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 78

For each independent situation:
1. Moosehead Pool and Skeet Com.'s debt to equity ratio is 1.6: 1 based on its draft financial statements for the year ended December 31, 2020. This leverage ratio exceeds the 1.5:1 maximum stipulated in Moosehead's loan agreement pertaining to a $5,000,000 loan maturing on March 15, 2023. The loan agreement stipulates that the loan becomes payable on demand upon breach of any of the loan covenants. Moosehead's creditors agreed on December 15, 2020 to waive their right to demand payment until December 31, 2021 for reason only that the firm's leverage ratio exceeds the stipulated maximum.
2. Guelph Piano Storage Inc. issued a $30,000, 30-day, non-interest bearing note to Roland's Crating for storage bins. The market rate of interest for similar transactions is 2.5%.
3. On November 30, 2019, Port Meadow Fertilizer Ltd. entered into a non-cancellable agreement to buy 10 tonnes of phosphorus for $1,600 per tonne for delivery on February 28, 2020. Phosphorus is a key component of the custom fertilizer that Port Meadow produces. The market price of phosphorus is extremely volatile, as evident by the $1,175 per tonne that it could be acquired for on December 31, 2019. Notwithstanding the premium price paid for the phosphorus, the company expects that fertilizer sales will remain profitable. Port Meadow's year-end is December 31, 2019.
Required:
For each of the situations described above, prepare the required journal entry for the underlined entity. If a journal entry is not required, explain why.

Question 79

Explain what contingent assets and liabilities are and how these items are accounted for financial reporting purposes.

Question 80

Which statement is correct?

A)Contingencies arise from future events.
B)Financial guarantees arise from contracts previously entered into.
C)Current liabilities arise from future events.
D)The amount to be paid for financial guarantees is known or reasonably estimable.