Question 1

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

Accepted Answer

The answer of A contingent loss should be reported in...

Question 2

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

Accepted Answer

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt is callable by the creditor. This means that the creditor has the right to demand payment of the debt within the next year, making it necessary for the company to use current assets to fulfill this obligation.

Question 3

Which of the following may create employer liabilities in connection with their payrolls?

Accepted Answer

All of these choices may create employer liabilities in connection with their payrolls.

Employee withholding taxes: Employers are responsible for withholding federal and state income taxes, as well as Social Security and Medicare taxes, from their employees' paychecks. Failure to remit these taxes to the appropriate government agencies on time can result in penalties and interest.

Employee voluntary deductions: Employers may be liable for ensuring that any voluntary deductions, such as contributions to retirement plans and health insurance premiums, are accurately and timely deducted from their employees' paychecks and remitted to the appropriate entities.

Employee fringe benefits: Employers may be liable for providing and properly administering employee fringe benefits such as vacation pay, sick leave, and other benefits. Failure to do so may result in legal liabilities, fines, and penalties.

Question 4

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

Accepted Answer

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Question 5

Large, highly rated firms sometimes sell commercial paper:

Accepted Answer

Large, highly rated firms can sell commercial paper to borrow funds at a lower rate than borrowing from a bank. Commercial paper is an unsecured short-term debt instrument that companies use to obtain funds for their short-term financing needs. These firms can benefit from lower interest rates on commercial paper because investors are willing to accept lower yields in exchange for the safety of investing in highly rated companies.

Question 6

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

Accepted Answer

According to accounting principles, a company should only accrue a loss contingency when it is probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. While it may be difficult to determine the exact amount of the loss, it should be possible to make a reasonable estimate based on available information. This ensures that the company’s financial statements accurately reflect its potential liabilities and the associated costs.

Question 7

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:

Accepted Answer

Reporting liabilities as noncurrent increases the amount of working capital (current assets minus current liabilities) and the current ratio (current assets divided by current liabilities). This is because the noncurrent liabilities are not due within one year, so the company has more time to pay them off. A higher working capital and current ratio are generally seen as favorable financial ratios, indicating the company has enough short-term assets to cover its short-term liabilities.

Question 8

On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. 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, 2010. In February 2010, 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 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet?

Accepted Answer

L should include the remaining $1,000,000 of the note payable as a long-term liability, but should classify the $500,000 prepayment as a current liability since it is due within the current period. Therefore, the current liabilities section of the December 31, 2009, balance sheet should include the $500,000 prepayment but not the $1,000,000 remaining balance of the note payable.

Question 9

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2009. 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?

Accepted Answer

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Question 10

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

Accepted Answer

The answer of Of the following, which typically would not...

Question 11

Which of the following is not a current liability?

Accepted Answer

A note payable due in 2 years is a long-term liability, not a current liability. Accounts payable, accrued interest payable, and sales tax payable are all current liabilities because they are expected to be paid within a year or less.

Question 12

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

Accepted Answer

Short-term obligations can be reported as long-term liabilities if the firm intends to and has the ability to refinance them as long-term. This means that the firm has a plan and the financial capability to extend the maturity of the obligations beyond one year. In contrast, options A, B, and D do not necessarily imply that the short-term obligations can be reported as long-term liabilities. A long-term line of credit may provide long-term funding, but it does not necessarily mean that short-term obligations can be converted into long-term liabilities. Tentative plans to issue long-term bonds do not guarantee that the issuance will be successful or that it will happen in the immediate future. Similarly, the ability to refinance on a long-term basis does not necessarily mean that the firm plans to do so. Therefore, only choice C meets the criteria for reporting short-term obligations as long-term liabilities.

Question 13

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

Accepted Answer

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Question 14

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

Accepted Answer

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Question 15

Paul Company issues a product recall due to an apparently pre-existing 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:

Accepted Answer

The best choice is to accrue the liability and explain it in a footnote. This is because the defect is material and the contingency is reasonably estimable. As a result, Paul Company needs to account for the liability in the financial statements and disclose it in a footnote to ensure that the financial statements are not misstated. Accruing the liability and providing an explanation in a footnote will provide transparency to stakeholders and help them understand the potential impact on the company's financial position. Doing nothing relative to the contingency is not an appropriate course of action as it could result in misstated financial statements. Similarly, simply disclosing the contingency in a footnote without accruing the liability would not provide an accurate representation of the impact on the company's financial position. Accruing a long-term liability without providing an explanation would not provide sufficient transparency to stakeholders.

Question 16

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

Accepted Answer

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Question 17

Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:

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Question 18

In May of 2009, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2009, 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 2009 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of:

Accepted Answer

An accrued liability should be recorded when a loss is probable and the amount can be reasonably estimated. In this case, Raymond's attorney indicated that an unfavorable outcome was probable and the estimated loss was between $770,000 and $1,170,000. However, since Raymond accepted a settlement offer of $900,000 after year-end but before the financial statements were issued, this amount should be recorded as the accrued liability on the December 31, 2009, balance sheet. Therefore, the correct answer is B.

Question 19

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2009. 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?

Accepted Answer

The answer of Slotnick Chemical received customer deposits on returnable...

Question 20

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

Accepted Answer

A loss contingency should be accrued in a company's financial statements only if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. This is the most conservative approach and is in accordance with generally accepted accounting principles. Option A is incorrect because "at least remotely possible" is not a strong enough threshold for accruing a liability. Option B is incorrect because "reasonably possible" is still not as strong as "probable." Option C is incorrect because while the amount of the loss can be estimated, the threshold of "reasonably possible" is not strong enough.

Quiz 13: Current Liabilities and Contingencies