Question 1

Contingent liabilities will or will not become actual liabilities depending on:

Accepted Answer

Contingent liabilities become actual liabilities based on the outcome of a future event, such as a lawsuit or a regulatory fine, which is uncertain at the time the liability is recognized.

Question 2

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:

Accepted Answer

According to accounting principles, when a loss is probable and the amount can be reasonably estimated, the company should accrue the loss and disclose it in the financial statements. Brimley Corporation's lawyers believe the lawsuit will be successful and estimate a loss of $4,000,000, which meets the criteria for accruing a provision loss and disclosing it in the notes.

Question 3

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:

Accepted Answer

The correct approach is to compute the present value of both the principal amount ($30,000) and the interest payments ($2,400 annually for three years) using the market or "going" interest rate, which is 12%. This method reflects the current value of the note payable, taking into account the time value of money at the prevailing market interest rate.

Question 4

Long-term obligations (i.e., debts)that is callable for early payment:

Accepted Answer

If a long-term obligation is callable on demand, it must be reported as a current liability by the debtor, as it could be required to be settled within the next year.

Question 5

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:

Accepted Answer

When the debt was incurred, $45,000 US would convert to $45,000 * 1.46 = $65,700 Cdn. Upon repayment, if the exchange rate is $1.00 US = $1.38 Cdn, then $45,000 US would convert to $45,000 * 1.38 = $62,100 Cdn. The difference between $65,700 and $62,100 is $3,600, which represents a foreign exchange gain because less Canadian dollars are needed to repay the US dollar debt.

Question 6

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:

Accepted Answer

According to accounting principles, if it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated, the estimated loss contingency should be accrued in the accounts and reported in the financial statements. In this case, the history of warranty costs provides a basis for estimation.

Question 7

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?

Accepted Answer

The answer of A firm sells products covered by a...

Question 8

Under IFRS, which of the following will only require only a note disclosure as a contingency?

Accepted Answer

Under IFRS, a contingency that has a remote chance of resulting in a loss, such as a lawsuit in process with a remote chance of loss, would only require note disclosure and not be recognized in the financial statements. Choices B, C, and D involve situations where a financial impact is certain or probable, thus requiring accounting treatment beyond mere note disclosure.

Question 9

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?

Accepted Answer

Given the sales of $1 million and a coupon rate of $1 per $10 in sales, the total potential coupon value is $100,000. With a 50% redemption rate, the expected redemption value is $50,000, necessitating a provision for this amount.

Question 10

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):

Accepted Answer

The correct answer is B) Loss on the lawsuit (operating expense). This is because when a company is involved in a lawsuit and it is probable that the company will incur a loss, and the amount can be reasonably estimated, the loss should be recognized in the financial statements of the period the event occurred or was confirmed. In this case, since it appeared probable by December 31, 2016, that the Government would settle for approximately $150,000, this amount should be recognized as a loss on the lawsuit, which is typically categorized as an operating expense.

Question 11

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?

Accepted Answer

The contract is onerous because the total expected costs ($4 million incurred + $3.2 million to complete = $7.2 million) exceed the contract price ($6 million), resulting in a loss of $1.2 million. Under IFRS, the company must recognize this loss.

Question 12

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:

Accepted Answer

The net effective interest rate takes into account the tax savings from the interest expense. The interest for the year is 12% of $400,000, which is $48,000. The tax savings on this interest expense is 40% of $48,000, which is $19,200. Therefore, the net interest expense is $48,000 - $19,200 = $28,800. The net effective interest rate is the net interest expense divided by the loan amount: $28,800 / $400,000 = 7.2%.

Question 13

Which of the following contingencies should be accrued in the accounts and reported in the financial statements?

Accepted Answer

The estimated expenses of a one-year product warranty should be accrued because it is probable and can be reasonably estimated, which aligns with the accounting principles for recognizing liabilities.

Question 14

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):

Accepted Answer

The balance in the liability account on January 1, 2014, can be calculated by considering the payments made and the interest accrued. After the first payment on December 31, 2012, two payments remain. The present value of these payments, calculated using the 11% interest rate, gives the liability balance on January 1, 2014. The correct calculation involves discounting the two $30,000 payments due at the end of 2013 and 2014 back to January 1, 2014, which results in a balance of approximately $27,026.

Question 15

Which of the following statements is correct?

Accepted Answer

Under IFRS, a provision (which includes litigation where the company is likely to be found guilty) should be recognized when: (1) the company has a present obligation as a result of a past event; (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (3) a reliable estimate can be made of the amount of the obligation. This is why litigation that is likely to result in a loss for the company is accrued as a provision.

Question 16

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:

Accepted Answer

The answer of XYZ borrowed $60,000 for one year and...

Question 17

Jake Co.includes three coupons in each bag of dog food it sells.In return for fifteen coupons, customers receive a dog leash.The leashes cost Jones $2.00 each.Jake estimate that 50% of the coupons will be redeemed.Data for 2014 and 2015 are as follows:  The estimated liability for premiums for Jake Co.as at December 31, 2015 is:

Accepted Answer

The answer of Jake Co.includes three coupons in each bag...

Question 18

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?

Accepted Answer

The warranty expense for 2014 is calculated as 2% of the total sales for that year, which is $100,000. Therefore, the warranty expense is $2,000. The costs incurred for servicing goods sold in previous years do not affect the warranty expense calculation for 2014.

Question 19

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?

Accepted Answer

The correct answer is C) cr. utilities payable $8,000 because the company has incurred the expense in December 2013, but will not pay the bill until a later date, thus creating a liability (utilities payable) that needs to be recorded in the December 2013 financial statements.

Question 20

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):

Accepted Answer

The total amount of interest paid under the terms of the agreement is $14,511. This is calculated as follows:Present value of the annuity = $45,489Interest rate = 10%Number of periods = 5Annual payment = $11,372Total interest paid = $14,511

Quiz 12: Financial Liabilities and Provisions