Deck 14: Operating Liabilities and Contingencies

Question 1

Which of the following is also referred to as deferred credits?

A)late fees
B)gift cards
C)unearned revenues
D)accrued revenues

Answer 1

C

Question 2

Which of the following is not an operating liability?

A)bonds payable
B)unearned revenue
C)customer deposits
D)compensated absences

Answer 2

A

Question 3

The amount of revenue recognized from the sale of gift cards during the period is equal to gift card redemptions during the period minus estimated breakage.

Answer 3

False

Question 4

Gift card breakage is never redeemed.

Question 5

All liabilities are probable future economic sacrifices arising from present obligations.

Question 6

Operating liabilities are short-term obligations.

Question 7

Accounts payable are formal,written promises to pay a certain sum of money on a specified date and typically specify a stated rate of interest.

Question 8

One of the three characteristics of liabilities is that they must arise from the firm's primary business obligations.

Question 9

Which of the following terms refers to gift card sales that are never redeemed?

A)spoilage
B)breakage
C)roughage
D)liftage

Question 10

The obligation for compensated absences should be valued at known future wage rates.

Question 11

What are compensated absences?

A)paid time off
B)unpaid time off
C)payroll deductions
D)healthcare benefits

Question 12

Under what conditions is an employer required to accrue a liability for sick pay?

A)Sick pay benefits are reasonably estimable.
B)Sick pay benefits are non-vested and reasonably estimable.
C)Sick pay benefits accumulate.
D)Sick pay benefits are vested.

Question 13

The obligation for compensated absences includes amounts payable for future holidays.

Question 14

The income tax payable that a company reports on its balance sheet represents the amount that is owed to the governmental units.

Question 15

The deposit liability account is debited when it is determined that deposits will not be returned.

Question 16

Which of the following represents amounts owed for goods,supplies,or services purchased?

A)bonds payable
B)accounts payables
C)customer -related payables
D)compensated absences

Question 17

Which of the following situations typically results in unearned revenues?

A)charging customers a deposit for returnable containers
B)short-term zero-interest notes payable
C)providing manufacturer warranties
D)selling magazine subscriptions

Question 18

The obligation for compensated absences represents services to be performed by the employee in the future.

Question 19

Which of the following is not a characteristic of a liability?

A)obligation always arises from past events
B)probably requires future sacrifice of resources
C)requires sacrifice of cash or other current asset
D)present obligation

Question 20

The sales tax liability account is debited when the seller collects sales taxes from customers.

Question 21

Asset retirement obligations must be legal obligations under both U.S.GAAP and IFRS.

Question 22

Pegasus Corp.signed a three-month,zero-interest-bearing $253,315 note on November 1,2016 for the purchase of $250,000 of inventory.If Pegasus makes adjusting entries only at the end of the year,the adjusting entry made at December 31,2016 will include a ________.

A)debit to Note Payable for $2,210
B)debit to Interest Expense for $2,210
C)credit to Note Payable for $2,210
D)credit to Interest Expense for $2,210

Question 23

Bull's Eye Department Stores,Inc.records $150,000 in gift card sales and receives cash in year 1.Customers redeemed 30% of the gift cards to purchase merchandise in year 2.Which of the following would be included in the summary journal entry to reflect the year 2 redemption transactions?

A)debit Unearned Revenue $45,000
B)credit Unearned Revenue $45,000
C)debit Sales Revenue $105,000
D)credit Sales Revenue $105,000

Question 24

Accounting for an ARO requires estimating the fair value that the company would have to pay to retire the asset in today's market.

Question 25

Under IFRS,asset retirement obligations are considered loss contingencies.

Question 26

Kool's Stores made cash sales during the month of May of $79,500.The sales are subject to a 6% sales tax that was also collected.Which of the following would be included in the summary journal entry to reflect the May sales transactions?

A)debit Cash for $79,500
B)credit Sales Tax Payable for $4,500
C)credit Sales for $75,000
D)credit Sales Tax Payable for $4,770

Question 27

A company gives each of its 100 employees (assume they were all employed continuously through 2016 and 2017)12 days of vacation a year if they are employed at the end of the year.The vacation accumulates and may be taken starting January 1 of the next year.The employees work 8 hours per day.In 2016,they made $17.50 per hour and in 2017 they made $20 per hour.During 2017,they took an average of 9 days of vacation each.The company's policy is to record the liability existing at the end of each year at the wage rate for that year.What amount of vacation liability would be reflected on the 2016 and 2017 balance sheets,respectively?

A)$168,000; $234,000
B)$192,000; $234,000
C)$168,000; $240,000
D)$192,000; $240,000

Question 28

Distinguish between an interest-bearing note and a non-interest-bearing note.How are the proceeds computed for a non-interest-bearing note?

Question 29

What are compensated absences? How does a company account for them?

Question 30

When an Asset Retirement Obligation is first recognized,the liability account is credited and Accretion Expense is debited.

Question 31

Dismantling an ocean oil-rig platform is an example of an asset retirement obligation.

Question 32

Gabbit Publishers sold 6,000 annual subscriptions at $150 each on September 1.How much unearned revenue will be recognized for the year ending December 31?

A)$0
B)$300,000
C)$600,000
D)$900,000

Question 33

What is breakage and how does it relate to the accounting for sales of gift cards? Describe two methods for estimating the amount of breakage.

Question 34

Reducto Co.pays a weekly payroll of $95,000 that includes federal taxes withheld of $12,700,FICA taxes withheld of $7,270,and retirement withholdings of $6,000.What is the effect of assets and liabilities from this transaction?

A)Assets decrease $85,000 and liabilities decrease $25,970.
B)Assets decrease $85,000 and liabilities increase $25,970.
C)Assets decrease $69,030 and liabilities decrease $25,970.
D)Assets decrease $69,030 and liabilities increase $25,970.

Question 35

On September 1,Dondra purchased $9,500 of inventory items on credit with the terms 1/15,net 30,FOB destination.Freight charges were $200.Payment for the purchase was made on September 18.Assuming Dondra uses the perpetual inventory system and the net method of accounting for purchase discounts,what amount is recorded on September 1 as accounts payable from this purchase?

A)$9,700
B)$9,605
C)$9,500
D)$9,405

Question 36

Under IFRS,estimated costs of asset retirement obligations are discounted using an after-tax interest rate.

Question 37

Accounting requirements for AROs under IFRS are the same as U.S.GAAP requirements.

Question 38

Accretion expense functions in the same way as interest expense.

Question 39

Asset retirement obligations (AROs)are short-term legal obligations to dismantle and scrap assets.

Question 40

Accretion expense required by U.S.GAAP is referred to as interest expense by IFRS.

Question 41

More contingencies are reported on the balance sheet under U.S.GAAP than under IFRS because of different definitions of "probable."

Question 42

A contingency is deemed to be probable if it is considered to be likely to occur.

Question 43

What is the expense resulting from the increase in the carrying amount of an asset retirement obligation?

A)contingent expense
B)accretion expense
C)vested expense
D)depletion expense

Question 44

What is the account that is debited when the liability is initially capitalized for an asset retirement obligation to dismantle an ocean oil rig?

A)a retirement expense account
B)an accretion expense account
C)the oil rig asset account
D)a separate quasi-asset account

Question 45

A liability for a contingent loss will be accrued and reported on the balance sheet if the occurrence of the obligation is at least reasonably possible.

Question 46

Lifeline Biofuels built an oil rig at a cost of $4.5 million.The company estimates the oil rig will have a useful life of 20 years (with no salvage value),after which Federal regulations require that the oil rig must be dismantled and the land area restored.The present value of these asset retirement costs is $1.4 million based on the 6% after-tax discount rate.
a.Prepare the journal entry prepared at the completion of construction to value the oil rig.
b.Prepare the journal entry to record the annual increase in the carrying value of the liability.

Question 47

When a company can estimate a range for the loss,but cannot identify a single most-likely outcome within that range,IFRS requires that it accrue the midpoint of the range while U.S.GAAP requires that it accrue the minimum value of the range.

Question 48

Lifeline Biofuels built an oil rig at a cost of $4.5 million.The company estimates the oil rig will have a useful life of 20 years (with no salvage value),after which Federal regulations require that the oil rig must be dismantled and the land area restored.The fair value of the costs of this asset retirement project is $800,000.The present value of these asset retirement costs is $250,000 based on the 6% after-tax discount rate.What is the initial capitalized carrying value of the oil rig at the completion of construction?

A)$4,500,000
B)$4,735,850
C)$4,750,000
D)$5,300,000

Question 49

Contingent gains are generally not recognized in the financial statements due to conservatism.

Question 50

If management can only estimate a range for the loss,but cannot identify a single most likely outcome within that range,under U.S.GAAP it should accrue the midpoint of the range.

Question 51

Asset retirement obligations are ________.

A)present value of future resource usage
B)obligations to replace old buildings and equipment with new assets
C)sinking funds for bonds or other long-term liabilities
D)long-term legal requirements to restore property

Question 52

Contingent gains need not be disclosed in the financial statements or the notes thereto if they are considered ________.

A)reasonably probable
B)virtually certain
C)possible but not probable
D)more likely than not

Question 53

By recording a contingent gain,a company recognizes revenue when it is realized.

Question 54

How does IFRS accounting for asset retirement obligations different from U.S.GAAP accounting?

Question 55

A liability for a contingent loss of a known amount will be disclosed in a footnote if the occurrence of the obligation is deemed to be probable.

Question 56

Which of the following is not a way IFRS differs from U.S.GAAP for asset retirement obligations?

A)The transaction may be accounted for using either the proportional method or remote method,not just the proportional method.
B)The nature of the obligation may be either economic or legal,not just legal.
C)Valuation is based on estimated costs,not fair value.
D)Valuation is discounted using a pre-tax rate,not an after-tax rate.

Question 57

If management can only estimate a range for the loss,but cannot identify a single most likely outcome within that range,it should accrue the midpoint of the range.

Question 58

Some loss contingencies may be disclosed only in the footnotes even if the losses are deemed to be probable.

Question 59

Which of the following is the proper way to report a probable contingent asset?

A)as a disclosure only
B)as a deferred revenue
C)as an accrued revenue
D)as an increase to receivables

Question 60

Provisions for contingent losses are accrued because the likelihood of an unfavorable outcome is ________.

A)virtually certain
B)more likely than not
C)reasonably possible
D)more than remote

Question 61

How is accounting for loss contingencies different under IFRS as compared to U.S.GAAP?

Question 62

Because the sale of a service-type warranty increases sales revenue,the seller should recognize the expense of providing that warranty in the year of sale.

Question 63

Whenever the probability of occurrence of a gain contingency is more likely than not,companies typically disclose that contingency in the footnotes.

Question 64

Onopea Inc.considered two contingencies at the end of 2016: ** a probable loss in the range of $300,000 to $500,000
** a reasonably possible loss of $150,000
Under IFRS,what is the balance for contingent liabilities at the end of 2016?

A)$300,000
B)$400,000
C)$450,000
D)$550,000

Question 65

Warranties that cover longer time periods are more likely to be assurance-type warranties.

Question 66

What are the three characteristics of a liability as defined in the conceptual framework?

Question 67

Contingencies should not be accrued,but should be disclosed if they are either (1)probable,but not estimable,or (2)reasonably possible.

Question 68

If the warranty is required by law,it is more likely to be an assurance-type warranty.

Question 69

A provision for a contingent loss is considered to be probable if the probability of its occurrence is ________.

A)slight
B)more likely than not
C)virtually certain
D)reasonably possible

Question 70

Cost of promotional premiums offered to customers are accrued as part of Cost of Goods Sold in the period in which related sales revenue is recognized.

Question 71

An assurance-type warranty is also referred to as an extended warranty.

Question 72

When a company sells the service-type warranty contract,it records a liability for unearned revenue.

Question 73

Which of the following would not be considered when evaluating whether to record a contingent loss for pending litigation?

A)the type of litigation involved.
B)the ability to make a reasonable estimate of the amount of the loss
C)time period in which the underlying cause of action occurred
D)the probability of an unfavorable outcome

Question 74

In order to accrue a litigation-related liability,the company must be aware of the lawsuit before the company's year-end.

Question 75

If a litigation-related loss is not probable,it cannot be accrued as a liability.

Question 76

The defensive interval ratio gauges liquidity based on current resources available to meet current cash expenditures.

Question 77

A service-type warranty exists if the customer has the option to purchase the warranty separately.

Question 78

In February 2017,an explosion occurred at a Dinkol Company plant,causing damage to area properties.By April 15,2017,no claims had yet been asserted against Dinkol.However,Dinkol's management and legal counsel have concluded that it is possible but not probable that Dinkol might be held responsible for negligence.Furthermore,they have determined that a reasonable estimate for damages might be as much as $4,000,000.Dinkol's comprehensive public liability policy contains a $400,000 deductible clause.For Dinkol's December 31,2016 financial statements,for which the auditor's fieldwork was completed in April 2015,how should this possible casualty loss be reported,if at all?

A)as an accrued liability of $400,000
B)as a note disclosing a contingent loss of $400,000
C)as a note disclosing a contingent loss of $4,000,000
D)No disclosure or accrual is required.

Question 79

Onopea Inc.considered two contingencies at the end of 2016: ** a probable loss in the range of $300,000 to $500,000
** a reasonably possible loss of $150,000
Under U.S.GAAP,what is the balance for contingent liabilities at the end of 2016?

A)$300,000
B)$400,000
C)$450,000
D)$550,000

Question 80

The quick ratio is calculated as the sum of cash and short-term marketable securities divided by current liabilities.