Question 1

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

Accepted Answer

For a loss contingency to be accrued, it must be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The existence of the loss contingency should also be able to be determined before the financial statements are issued or available to be issued. However, the fact that a claim was made before the accounting period ended is not a requirement for accruing a loss contingency.

Question 2

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

Accepted Answer

A customer advance is a payment made in advance for a product or service that has not yet been provided. This payment creates a liability for the company until the product or service is provided and the liability can be satisfied with the delivery of the product or service.

Question 3

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

Accepted Answer

Payroll withholdings can include taxes, employee benefits contributions, and other mandatory deductions that must be paid to third parties on behalf of the employees. Until these amounts are remitted to the appropriate parties, they are considered liabilities of the employer.

Question 4

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

Accepted Answer

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

Question 5

Current liabilities normally are recorded at their:

Accepted Answer

Current liabilities are recorded at their maturity amount, which means the total amount due at the time of payment. This is because current liabilities are short-term obligations that are expected to be settled within one year or the operating cycle, whichever is longer. Additionally, there is usually no significant time value of money effect on these liabilities, so they do not need to be recorded at their present value.

Question 6

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.

Accepted Answer

The answer of Under IFRS, if it is probable that...

Question 7

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

Accepted Answer

The answer of State and Federal Unemployment Taxes (SUTA and...

Question 8

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold.

Accepted Answer

This statement is true. Warranty expense is recognized and recorded in the same period in which the product under warranty is sold, and a corresponding liability is also recorded for potential warranty claims. This is done in accordance with the matching principle, which requires that expenses be matched with the revenues they help to generate.

Question 9

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.

Accepted Answer

The answer of Long-term debt that is callable by the...

Question 10

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

Accepted Answer

The answer of Which of the following is the best...

Question 11

The most common type of liability is:

Accepted Answer

The answer of The most common type of liability is:
...

Question 12

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

Accepted Answer

The answer of Under IFRS, the term "probable" indicates a...

Question 13

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

Accepted Answer

The answer of The cost of promotional offers should be...

Question 14

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.

Accepted Answer

The answer of A company should accrue a liability for...

Question 15

Which of the following is not a liability?

Accepted Answer

An unused line of credit is not a liability, as it represents the maximum amount of credit an entity can obtain, but it is not a debt that has to be repaid unless it is used. B, C, and D are all liabilities as they represent amounts that the entity owes to others. Estimated income taxes represent the amount the entity will owe on its earnings, sales tax collected from customers represents amounts collected on behalf of the government that the entity will eventually need to remit, and advances from customers represent amounts received from customers that are not yet earned and represent an obligation to provide goods or services in the future.

Question 16

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

Accepted Answer

Liabilities can include things like warranties or legal claims, which are not necessarily expressed in a contract or payable in cash.

Question 17

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

Accepted Answer

The concept of substance over form emphasizes the economic reality of a transaction over its legal form. In the case of obligations expected to be refinanced, the substance of the obligation (i.e. the likelihood of it being refinanced) is more important than its legal form (i.e. whether it is classified as short-term or long-term). This can have an impact on financial statement presentation and disclosure.

Question 18

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

Accepted Answer

This statement is true. While the Social Security tax has a maximum wage base up to which it is applied, the Medicare portion of the FICA tax is applied to all wages and salaries.

Question 19

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

Accepted Answer

Liabilities do not have to be payable in cash. They can be settled through other means such as the transfer of goods or services or by assuming obligations of the creditor.

Question 20

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.

Accepted Answer

The answer of Under IFRS, a liability that is refinanced...

Quiz 13: Current Liabilities and Contingencies