Question 1

The terms referring to contingencies differ between U.S.GAAP and IFRS.

Accepted Answer

There are differences in how contingencies are defined and accounted for under U.S. GAAP and IFRS. For example, under U.S. GAAP, contingencies are classified as either probable, reasonably possible, or remote, while IFRS does not utilize this classification system. Additionally, U.S. GAAP tends to be more prescriptive in terms of disclosures related to contingencies, while IFRS provides more flexibility.

Question 2

The liability for a premium offer estimated to be redeemed is not a current liability.

Accepted Answer

The liability for a premium offer estimated to be redeemed is considered a current liability because it represents an obligation that is expected to be settled within one year or within the normal operating cycle of the business, whichever is longer.

Question 3

If you plan to invest $10,000 and want to determine how much will be accumulated in six years if you earn interest at 7% per year, you would calculate this using the future value of an annuity.

Accepted Answer

The calculation described is for the future value of a single sum, not an annuity. An annuity involves periodic payments, whereas this scenario involves a one-time investment earning interest over time.

Question 4

In a compound interest problem, if you know the future value, the present value, and the number of periods, then you can solve for the interest rate.

Accepted Answer

This is true. The formula for compound interest is:

FV = PV * (1 + r)^n

where FV = future value, PV = present value, r = interest rate, and n = number of periods. By rearranging the formula, we can solve for r:

r = ( (FV/PV)^(1/n) ) - 1

Question 5

Advance ticket sales for a concert next month are a current liability.

Accepted Answer

Advance ticket sales represent revenue that has not yet been earned and therefore are recorded as a current liability until the concert takes place and the revenue is earned.

Question 6

When borrowing money to be repaid in regular future payments, the payment is based on the present value of the loan, the interest rate and the length of the loan.

Accepted Answer

This is a basic concept of financial mathematics and is true for loans with regular amortization payments. The present value of the loan is determined by calculating the sum of the future payments discounted by the interest rate. The length of the loan, along with the interest rate and present value, is then used to determine the regular payment amount.

Question 7

Contingent assets may be disclosed in the notes if probable and reasonably estimable.

Accepted Answer

The answer of Contingent assets may be disclosed in the...

Question 8

A contingent liability is recorded if it is probable and can be reasonably estimated.

Accepted Answer

A contingent liability is only recorded if it is probable (meaning it is likely to occur) and can be reasonably estimated (meaning the amount of the liability can be reasonably calculated). If either of these conditions is not met, the liability is not recorded.

Question 9

If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.

Accepted Answer

When the annual interest rate is 12% and compounding is done quarterly, the interest rate per period is not simply divided by the number of periods; instead, it is 12%/4 = 3% per quarter.

Question 10

$2,000 invested today at 12% with compound interest will yield $2,480 in 2 years.

Accepted Answer

Using the formula for compound interest, A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($2,000), r is the annual interest rate (12% or 0.12), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years (2 years). Assuming the interest is compounded once a year (n=1), the calculation would be A = 2000(1 + 0.12/1)^(1*2) = 2000(1.12)^2 = 2000*1.2544 = $2,508.80, not $2,480.

Question 11

For a given contingent liability, the company has the choice of either recording it on the balance sheet or disclosing it in the notes.

Accepted Answer

A contingent liability is recorded on the balance sheet only if it is probable and the amount can be reasonably estimated; otherwise, it is disclosed in the notes.

Question 12

Simple interest on a loan can be calculated by multiplying the principal by the annual interest rate expressed as a percentage of the time in years or a fraction of the time in years.

Accepted Answer

This is the correct formula for calculating simple interest on a loan.

Question 13

Compound interest is a repeated calculation of the interest on the principal over certain periods of time.

Accepted Answer

The answer of Compound interest is a repeated calculation of...

Question 14

An annuity is a series of equal payments made at equal intervals in the future.

Accepted Answer

An annuity is defined as a series of equal payments made at regular intervals, such as monthly or yearly.

Question 15

When a company uses coupon or premium offers in conjunction with the sale of its products, there is no need to record any contingent liability.

Accepted Answer

Coupon or premium offers represent a contingent liability for the company until they are redeemed by the customers. Therefore, the company needs to estimate the amount of liability associated with outstanding coupons or premiums and record it in their financial statements.

Question 16

Accountants need not worry about calculations based upon the concept of the time value of money.

Accepted Answer

Accountants must consider calculations based on the time value of money, including present value, future value, and annuity calculations. These concepts are fundamental in financial reporting, budgeting, and investment decision-making.

Question 17

Curtain Corp.stands to receive a sufficient cash settlement from a law suit.Curtain needs to record this on its accounting records.

Accepted Answer

The answer of Curtain Corp.stands to receive a sufficient cash...

Question 18

International accounting standards use the term provision for those contingent items that must be recorded on the balance sheet.

Accepted Answer

Provision is used for contingent items that must be recorded on the balance sheet according to international accounting standards.

Question 19

Redfearn Company has current assets of $150,000 and current liabilities of $60,000.How much inventory could it purchase on account and achieve its minimum desired current ratio of 2 to 1?
A) $10,000
B) $20,000
C) $30,000
D) $40,000

Accepted Answer

To achieve a minimum desired current ratio of 2 to 1, Redfearn Company needs to have current assets that are at least twice its current liabilities. Currently, its current assets are 150,000 and its current liabilities are 60,000, so its current ratio is 2.5 (150,000/60,000).

If the company were to purchase inventory on account, its current assets would increase and its current ratio would decrease. The question is asking how much inventory the company could purchase on account and still maintain a minimum current ratio of 2 to 1.

To find out, we can set up the following equation:

Current ratio = Current assets / Current liabilities

2 = (150,000 + Inventory) / 60,000

Multiplying both sides by 60,000, we get:

120,000 = 150,000 + Inventory

Subtracting 150,000 from both sides, we get:

Inventory = 30,000

Therefore, the company could purchase $30,000 of inventory on account and still maintain a minimum current ratio of 2 to 1.

So the best choice is C.

Question 20

The present value is the value today of a single amount to be paid or received at a specific date in the future.

Accepted Answer

This statement is true. Present value is the value of a future cash flow discounted to reflect the time value of money.

Quiz 9: Current Liabilities, Contingencies, and the True Value of Money