Deck 13: Current Liabilities and Contingencies

Question 1

Under IFRS,the term "probable" indicates a threshold of probability that is substantially more than a 50 percent chance of occurrence.

Answer 1

False

Question 2

Some liabilities are not contractual obligations and may not be payable in cash.

Answer 2

True

Question 3

A customer advance produces a liability that is satisfied when the product or service is provided.

Answer 3

True

Question 4

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

Question 5

State and Federal Unemployment Taxes (SUTA and FUTA)must be withheld from employees' wages.

Question 6

The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers.

Question 7

Under IFRS,if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid,the midpoint of the range should be accrued as a loss.

Question 8

A line of credit is an agreement to provide long-term financing,typically made with a bank or a group of banks.

Question 9

The concept of substance over form influences the classification of obligations expected to be refinanced.

Question 10

A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated.

Question 11

Amounts withheld from employees in connection with payroll often represent liabilities to be remitted to third parties.

Question 12

The most common type of liability is:

A)One that comes into existence due to a loss contingency.
B)One that must be estimated.
C)One that comes into existence due to a gain contingency.
D)One to be paid in cash and for which the amount and timing are known.

Question 13

A liability for an unasserted claim must be accrued if it is reasonably possible that the claim will be asserted.

Question 14

An asset for a gain contingency should not be accrued unless it is probable that the gain contingency will be realized.

Question 15

Expense for a quality-assurance warranty is recorded along with the related liability in the reporting period in which the product under warranty is sold.

Question 16

Revenue is recognized upon sale of gift cards,rather than being deferred.

Question 17

A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.

Question 18

Under IFRS,a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability.

Question 19

For a loss contingency to be accrued,the claim must have been made before the accounting period ended.

Question 20

Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.

Question 21

Jane's Donut Co.borrowed $200,000 on January 1,2016,and signed a two-year note bearing interest at 12%.Interest is payable in full at maturity on January 1,2018.In connection with this note,Jane's should report interest expense at December 31,2016,in the amount of:

A)$0.
B)$24,000.
C)$48,000.
D)$50,880.

Question 22

On October 31,2016,Simeon Builders borrowed $16 million cash and issued a 7-month,noninterest-bearing note.The loan was made by Star Finance Co.The stated discount rate is 8%.Sky's effective interest rate on this loan is:

A)More than the stated discount rate of 8%.
B)Less than the stated discount rate of 8%.
C)Equal to the stated discount rate of 8%.
D)Unrelated to the stated discount rate of 8%.

Question 23

The rate of interest that actually is incurred on a note payable is called the:

A)Face rate.
B)Contract rate.
C)Effective rate.
D)Stated rate.

Question 24

Universal Travel Inc.borrowed $500,000 on November 1,2016,and signed a 12-month note bearing interest at 6%.Interest is payable in full at maturity on October 31,2017.In connection with this note,Universal Travel Inc.should report interest payable at December 31,2016,in the amount of:

A)$ 8,000.
B)$30,000.
C)$ 5,000.
D)$25,000.

Question 25

On April 31,2016,Elkhorn Associates borrowed $10 million cash from Colonial Bank and issued a 5-month,noninterest-bearing note,priced to yield an effective interest rate of 10%.The stated discount rate on this loan is:

A)More than the effective interest rate.
B)Less than the effective interest rate.
C)Equal to the effective interest rate.
D)Unrelated to the effective interest rate.

Question 26

On June 1,2016,Dirty Harry Co.borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%.Assuming straight-line amortization of the discount,what is the carrying value of the note as of September 30,2016?

A)$525,000.
B)$300,000.
C)$495,000.
D)$475,000.

Question 27

Which of the following is not a liability?

A)An unused line of credit.
B)Estimated income taxes.
C)Sales tax collected from customers.
D)Advances from customers.

Question 28

Which of the following is the best definition of a current liability?

A)An obligation payable within one year.
B)An obligation payable within one year of the balance sheet date.
C)An obligation payable within one year or within the normal operating cycle,whichever is longer.
D)An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

Question 29

On September 1,2016,Hiker Shoes issued a $100,000,8-month,noninterest-bearing note.The loan was made by Second Commercial Bank where the stated discount rate is 9%.Hiker's effective interest rate on this loan (rounded)is:

A)9.0%.
B)9.5%.
C)9.6%.
D)9.7%.

Question 30

Oklahoma Oil Corp.paid interest of $785,000 during 2016,and the interest payable account decreased by $125,000.What was interest expense for the year?

A)$910,000.
B)$660,000.
C)$555,000.
D)$785,000.

Question 31

When cash is received from customers in the form of a refundable deposit,the cash account is increased with a corresponding increase in:

A)A current liability.
B)Revenue.
C)Shareholders' equity.
D)Paid-in capital.

Question 32

The rate of interest printed on the face of a note payable is called the:

A)Yield rate.
B)Effective rate.
C)Market rate.
D)Stated rate.

Question 33

Large,highly rated firms sometimes sell commercial paper:

A)To borrow funds at a lower rate than through a bank.
B)To earn a profit on the paper.
C)To avoid paperwork.
D)Because the interest rate is locked in by the Federal Reserve Board.

Question 34

A discount on a noninterest-bearing note payable is classified in the balance sheet as:

A)An asset.
B)A component of shareholders' equity.
C)A contingent liability.
D)A contra liability.

Question 35

What is the effective interest rate (rounded)on a 3-month,noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?

A)12.4%.
B)13.6 %.
C)11.5%.
D)3.1%.

Question 36

Current liabilities are normally recorded at the amount expected to be paid rather than at their present value.This practice can be supported by GAAP according to the concept of:

A)Matching.
B)Consistency.
C)Materiality.
D)Conservatism.

Question 37

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

A)It represents a probable,future sacrifice of economic benefits.
B)It must be payable in cash.
C)It arises from present obligations to other entities.
D)It results from past transactions or events.

Question 38

Classifying liabilities as either current or long-term helps creditors assess:

A)Profitability.
B)The relative risk of a firm's liabilities.
C)The degree of a firm's liabilities.
D)The amount of a firm's liabilities.

Question 39

Current liabilities normally are recorded at their:

A)Present value.
B)Cost.
C)Maturity amount.
D)Expected value.

Question 40

At times,businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided.These customer advances represent:

A)Liabilities until the product or service is provided.
B)A component of shareholders' equity.
C)Long-term assets until the product or service is provided.
D)Revenue upon receipt of the advance payment.

Question 41

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:

A)Is callable by the creditor.
B)Is secured by adequate collateral.
C)Will be refinanced with stock.
D)Will be refinanced with debt.

Question 42

Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15,2016,and sold $1,500 in gift cards on another special promotion on November 15,2016.Of the cards sold in October,$100 were redeemed in October,$250 in November,and $300 in December.Of the cards sold in November,$150 were redeemed in November and $350 were redeemed in December.Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months.At 12/31/2016,Peterson would show an deferred revenue account for the gift cards with a balance of:

A)$0.
B)$1,000.
C)$1,350.
D)$1,500.

Question 43

Revenue for gift card breakage should be recognized:

A)When the gift card is sold.
B)No later than the last day of the operating period in which the gift card is delivered to the customer.
C)When the probability of gift card redemption is viewed as remote.
D)Under no circumstances,as gift cards are not themselves a delivered product,but rather a selling technique.

Question 44

When a product or service is delivered for which a customer advance has been previously received,the appropriate journal entry includes:

A)A debit to a revenue and a credit to a liability account.
B)A debit to a revenue and a credit to an asset account.
C)A debit to an asset and a credit to a revenue account.
D)A debit to a liability and a credit to a revenue account.

Question 45

Of the following,which typically would not be classified as a current liability?

A)Estimated liability from cash rebate program.
B)A long-term note payable maturing within the coming year.
C)Rent revenue received in advance.
D)A six-month bank loan to be paid with the proceeds from the sale of common stock.

Question 46

On January 1,2016,G Corporation agreed to grant all its employees two weeks paid vacation each year,with the stipulation that vacations earned each year can be taken the following year.For the year ended December 31,2016,G's employees each earned an average of $800 per week.A total of 500 vacation weeks earned in 2016 were not taken during 2016.Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2017.What is the amount of G's 2017 wages expense related to 2016 vacation time?

A)$ 0.
B)$ 20,000.
C)$400,000.
D)$420,000.

Question 47

Short-term obligations can be reported as long-term liabilities if:

A)The firm has a long-term line of credit.
B)The firm has tentative plans to issue long-term bonds.
C)The firm intends to and has the ability to refinance as long-term.
D)The firm has the ability to refinance on a long-term basis.

Question 48

In May of 2016,Raymond Financial Services became involved in a penalty dispute with the EPA.At December 31,2016,the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable.The additional penalties were estimated to be $770,000 but could be as high as $1,170,000.After the year-end,but before the 2016 financial statements were issued,Raymond accepted an EPA settlement offer of $900,000.Raymond should have reported an accrued liability on its December 31,2016,balance sheet of:

A)$ 770,000.
B)$ 900,000.
C)$ 970,000.
D)$1,170,000.

Question 49

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2016.Fifteen percent of the containers were not returned.The deposits are based on the container cost marked up 20%.How much profit did Slotnick realize on the forfeited deposits?

A)$0.
B)$7,500.
C)$9,000.
D)$45,000.

Question 50

All of the following but one represent collections for third parties.Which one of the following is not a collection for a third party?

A)Sales tax payable.
B)Customer deposits.
C)Employee insurance deductions.
D)Social security taxes deductions.

Question 51

Which of the following generally is associated with accounts payable?

Question 52

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2016.Twelve percent of the containers were not returned.The deposits are based on the container cost marked up 20%.What is cost of goods sold relative to this forfeiture?

A)$0.
B)$2,000.
C)$10,000.
D)$14,400.

Question 53

All else equal,a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period?

A)Large increase,because deferred revenue becomes revenue when the seller has satisfied its performance obligations.
B)Large decrease,because deferred revenue implies that less revenue has been earned,which reduces future revenue.
C)No effect,because deferred revenue is a liability,so payment will use assets rather than providing revenue.
D)Large decrease,because deferred revenue indicates collection problems that will reduce net revenues in future periods.

Question 54

When a deposit on returnable containers is forfeited,the firm holding the deposit will experience:

A)A decrease in cost of goods sold.
B)An increase in current liabilities.
C)An increase in accounts receivable.
D)An increase in revenue.

Question 55

M Corp.has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days.Vacation days can be carried over indefinitely.Employees can elect to receive payment in lieu of vacation days.At December 31,2016,M's unadjusted balance of liability for compensated absences was $30,000.M estimated that there were 200 total vacation days available at December 31,2016.M's employees earn an average of $150 per day.In its December 31,2016,balance sheet,what amount of liability for compensated absences is M required to report?

A)$ 0.
B)$ 30,000.
C)$225,000.
D)$450,000.

Question 56

Which of the following is not true about deferred revenue?

A)Deferred revenue with respect to gift cards is recognized as revenue when the gift cards expire.
B)Deferred revenue is a liability.
C)Deferred revenue is recognized on credit sales when collectibility can be estimated.
D)Customer prepayments typically require recognition of deferred revenue.

Question 57

Lake Co.receives nonrefundable advance payments with special orders for containers constructed to customer specifications.Related information for 2016 is as follows ($ in millions):
What amount should Lake report as a current liability for advances from customers in its Dec.31,2016,balance sheet?

A)$0.
B)$80.
C)$125.
D)$170.

Question 58

B Corp.has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days.Both vacation and sick days can be carried over indefinitely.Employees can elect to receive payment in lieu of vacation days;however,no payment is given for sick days not taken.At December 31,2016,B's unadjusted balance of liability for compensated absences was $42,000.B estimated that there were 300 total vacation days and 150 sick days available at December 31,2016.B's employees earn an average of $200 per day.In its December 31,2016,balance sheet,what amount of liability for compensated absences is B required to report?

A)$ 60,000.
B)$ 84,000.
C)$ 90,000.
D)$144,000.

Question 59

Which of the following is not a current liability?

A)Accounts payable.
B)A note payable due in two years.
C)Accrued interest payable.
D)Sales tax payable.

Question 60

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

A)The long-term debt is callable by the creditor.
B)The creditor has the right to demand payment due to a contractual violation.
C)The long-term debt matures within the upcoming year.
D)The company intended to refinance the debt and did so prior to issuance of the financial statements.

Question 61

Branch Company,a building materials supplier,has $18,000,000 of notes payable due April 12,2017.At December 31,2016,Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis.The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided.At the date of issue of the December 31,2016,financial statements,the value of Branch's collateral was $20,000,000.On its December 31,2016,balance sheet,Branch should classify the notes as follows:

A)$15,000,000 long-term and $3,000,000 current liabilities.
B)$4,500,000 short-term and $13,500,000 current liabilities.
C)$18,000,000 of current liabilities.
D)$18,000,000 of long-term liabilities.

Question 62

On December 31,2016,L Inc.had a $1,500,000 note payable outstanding,due July 31,2017.L borrowed the money to finance construction of a new plant.L planned to refinance the note by issuing long-term bonds.Because L temporarily had excess cash,it prepaid $500,000 of the note on January 23,2017.In February 2017,L completed a $3,000,000 bond offering.L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2017.On March 13,2017,L issued its 2016 financial statements.What amount of the note payable should L include in the current liabilities section of its December 31,2016,balance sheet?

A)$ 0.
B)$ 500,000.
C)$1,000,000.
D)$1,500,000.

Question 63

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:

A)The likelihood of a loss is remote.
B)The incurrence of a loss is reasonably possible.
C)The incurrence of a loss is more likely than not.
D)The likelihood of a loss is probable.

Question 64

Which of the following is a contingency that should be accrued?

A)The company is being sued and a loss is reasonably possible and reasonably estimable.
B)The company deducts life insurance premiums from employees' paychecks.
C)The company offers a two-year warranty and the expenses can be reasonably estimated.
D)It is probable that the company will receive $100,000 in settlement of a lawsuit.

Question 65

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

A)More likely than not and the amount of the loss is known.
B)At least reasonably possible and the amount of the loss is known.
C)At least reasonably possible and the amount of the loss can be reasonably estimated.
D)Probable and the amount of the loss can be reasonably estimated.

Question 66

Blue Co.can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country.If the likelihood of expropriation is remote,a loss contingency should be:

A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Question 67

Kline Company refinanced current debt as long-term debt on January 5,2017.Kline's fiscal year ended on December 31,2016,and its financial statements will be issued sometime in early March 2017.Under IFRS,how would Kline classify the debt on its December 31,2016,balance sheet?

A)In the "mezzanine" between current and noncurrent liabilities.
B)Kline would not classify the debt as current or noncurrent,but rather would write a disclosure note explaining the circumstances.
C)As a noncurrent liability.
D)As a current liability.

Question 68

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

A)At least remotely possible and the amount of the loss is known.
B)Reasonably possible and the amount of the loss is known.
C)Reasonably possible and the amount of the loss can be reasonably estimated.
D)Probable and the amount of the loss can be reasonably estimated.

Question 69

Accounting for costs of incentive programs for customer purchases:

A)Requires probability estimation.
B)Follows the matching principle.
C)Is a loss contingency situation.
D)All of these answer choices are correct.

Question 70

An extended warranty typically results in the seller:

A)Accruing an expense for anticipated warranty costs at the time the warranty is sold.
B)Estimating the contingent liability associated with the warranty at the time the warranty is sold.
C)Recognizing revenue over the life of the extended warranty.
D)Refunding warranty payments upon expiration of the warranty.

Question 71

Gain contingencies usually are recognized in a company's income statement when:

A)Realized.
B)The amount can be reasonably estimated.
C)The gain is reasonably possible and the amount can be reasonable estimated.
D)The gain is probable and the amount can be reasonably estimated.

Question 72

Providing a monetary rebate program for purchasing a product:

A)Is accounted for similarly to product warranties.
B)Creates an expense for the seller in the period of sale.
C)Creates a contingent liability for the seller at the time of sale.
D)All these answer choices are correct.

Question 73

Which of the following is true about the initial journal entry used to record extended warranties?

Question 74

Other things being equal,most managers would prefer to report liabilities as noncurrent rather than current.The logic behind this preference is that the long-term classification permits the company to report:

A)Higher working capital and a higher inventory turnover.
B)Lower working capital and a higher current ratio.
C)Higher working capital and a higher current ratio.
D)Higher working capital and a lower debt to equity ratio.

Question 75

Gray Co.estimates it is probable that it will receive a $10,000 gain contingency and pay a $4,000 loss contingency.After recording the appropriate journal entries to recognize contingent amounts,Gray Co.'s net assets will:

A)Increase by $10,000.
B)Increase by $6,000.
C)Decrease by $4,000.
D)Not change.

Question 76

A quality-assurance warranty typically results in the seller:

A)Accruing an expense for anticipated warranty costs at the time the warrantied product is sold.
B)Recognizing an asset for accrued warranty costs which is amortized over the life of the warranty.
C)Recognizing revenue over the life of the extended warranty.
D)Refunding warranty payments upon expiration of the warranty.

Question 77

Financial statement note disclosure is required for material potential losses when the loss is at least reasonably possible:

A)Only if the amount is known.
B)Only if the amount is known or reasonably estimable.
C)Unless the amount is not reasonably estimable.
D)Even if the amount is not reasonably estimable.

Question 78

Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under:

A)U.S.GAAP.
B)IFRS.
C)Either U.S.GAAP and IFRS.
D)Neither U.S.GAAP and IFRS.

Question 79

Which of the following is true about the initial journal entry used to record quality-assurance warranties?

Question 80

Paul Company issues a product recall due to an apparently preexisting and material defect discovered after the end of its fiscal year.Financial statements have not yet been issued.The action required of Paul Company for this reasonably estimable contingency for the year just ended is:

A)To disclose it in a note to the financial statements.
B)To accrue a long-term liability.
C)To accrue the liability and explain it in a note to the financial statements.
D)To do nothing relative to the contingency.