Question 1

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.

Accepted Answer

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if the incurrence of a loss is reasonably possible. This means that the future events are likely to occur but are not certain. If a loss is probable and the amount can be reasonably estimated, it should be accrued. If the loss is remote, it does not need to be disclosed or accrued.

Question 2

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2019. At December 31, 2018, 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, 2018, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2018, 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.

Accepted Answer

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Question 3

Which of the following is true about the initial journal entry used to record extended warranties? 
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The answer of Which of the following is true about...

Question 4

On December 31, 2018, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2019. 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, 2019. In February 2019, 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 2019. On March 13, 2019, L issued its 2018 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2018, balance sheet?
A) $0.
B) $500,000.
C) $1,000,000.
D) $1,500,000.

Accepted Answer

GAAP states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced. Therefore, L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2018, balance sheet. The refinancing was completed before the issuance of the financial statements and meets both criteria (intent and financial ability) for the classification of the $1,000,000 as a long-term liability.

Question 5

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.

Accepted Answer

Contingencies that should be accrued are those where a loss is probable and the amount can be reasonably estimated. Offering a two-year warranty with reasonably estimable expenses fits this criterion, as the company can anticipate future expenses related to warranty claims and should record a liability and expense for these future costs.

Question 6

Which of the following is true about the initial journal entry used to record quality-assurance warranties? 
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The initial journal entry used to record quality-assurance warranties would credit Sales Revenue and debit Warranty Liability. This is because the company has sold a product and recognized revenue for it but also has an obligation to provide warranty services for that product. By debiting Warranty Liability, the company is acknowledging that it has a future obligation to provide these services and is setting aside funds to cover those costs. Option A and Option B are incorrect because they do not account for the warranty liability. Option D is incorrect because it does not follow the matching principle of recognizing expenses in the same period as the related revenues.

Question 7

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.

Accepted Answer

The correct action required by Paul Company is to accrue the liability and explain it in a note to the financial statements. This is because the contingency is reasonably estimable and material, and the financial statements have not yet been issued. As such, it is important for Paul Company to disclose the issue to its stakeholders, both through accrual and disclosure in the financial statements. Doing nothing or merely disclosing it in a note to the financial statements without accruing the liability would be inadequate. Accruing a long-term liability without explanation would also be insufficient in communicating the issue to stakeholders.

Question 8

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.

Accepted Answer

When a quality-assurance warranty is provided, the seller must accrue an expense for the anticipated warranty costs at the time the product is sold. This is because they are obligated to provide repairs or replacements if necessary during the warranty period. Therefore, they must recognize the expected costs as an expense at the time of sale.

Question 9

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 or IFRS.
D) Neither U.S. GAAP nor IFRS.

Accepted Answer

The answer of Liabilities payable within the coming year are...

Question 10

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.

Accepted Answer

The answer of An extended warranty typically results in the...

Question 11

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.

Accepted Answer

Accounting for costs of incentive programs involves estimating the probability of customers taking advantage of the incentives (probability estimation), matching the costs of the incentives with the revenues they help generate (matching principle), and dealing with uncertainties regarding the extent of customer participation, which can be considered a loss contingency situation.

Question 12

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.

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 repayment of the debt within one year. If the debt is callable, it creates a current obligation for the company to repay the debt within the next year, regardless of the original maturity date of the debt. Therefore, the long-term liability should be reclassified as a current liability on the balance sheet.

Question 13

Kline Company refinanced current debt as long-term debt on January 5, 2019. Kline's fiscal year ended on December 31, 2018, and its financial statements will be issued sometime in early March 2019. Under IFRS, how would Kline classify the debt on its December 31, 2018, 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.

Accepted Answer

Under IFRS, liabilities are classified as current if they are expected to be settled within one year from the balance sheet date. Since Kline Company refinanced current debt as long-term debt on January 5, 2019, it would have still been classified as a current liability on December 31, 2018, as the refinancing did not occur until after that date. Therefore, the correct classification would be as a current liability on the December 31, 2018 balance sheet.

Question 14

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.

Accepted Answer

Reporting liabilities as noncurrent increases the company's working capital and current ratio, as the liabilities are not due for payment in the short term. This gives the impression that the company has better liquidity and financial stability, which is preferred by most managers. Option A is incorrect as reporting liabilities as noncurrent does not affect inventory turnover. Option B is incorrect as it suggests a lower current ratio, which is unfavourable. Option D is incorrect as reporting liabilities as noncurrent would not affect the debt to equity ratio.

Question 15

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.

Accepted Answer

The answer of Gray Co. estimates it is probable that...

Question 16

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.

Accepted Answer

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is probable (meaning more likely than not) and the amount of the loss can be reasonably estimated. This is because accrued loss contingencies are recorded as an expense in the financial statements, and it would be inappropriate to record an expense for a potential liability that is only reasonably possible or unknown.

Question 17

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.

Accepted Answer

Financial statement note disclosure for material potential losses is required even if the amount of the loss is not reasonably estimable. This ensures transparency and provides users of the financial statements with information about potential risks that could affect the financial position of the entity.

Question 18

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.

Accepted Answer

According to generally accepted accounting principles (GAAP), a loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is probable and the amount of the loss can be reasonably estimated. This means that the probability of the liability occurring is greater than 50% and the amount of the loss can be estimated with a reasonable degree of certainty. Accruing a loss contingency in any other circumstance could result in misleading financial statements.

Question 19

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.

Accepted Answer

Gain contingencies are recognized in the income statement when they are realized, not merely when they are probable or can be estimated. This is because recognizing gains before they are realized could potentially mislead users of financial statements by overstating a company's financial position.

Question 20

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.

Accepted Answer

The answer of Providing a monetary rebate program for purchasing...

Quiz 13: Current Liabilities and Contingencies

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

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

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

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

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 quality-assurance warranty typically results in the seller:

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:

An extended warranty typically results in the seller:

Accounting for costs of incentive programs for customer purchases:

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

Kline Company refinanced current debt as long-term debt on January 5, 2019. Kline's fiscal year ended on December 31, 2018, and its financial statements will be issued sometime in early March 2019. Under IFRS, how would Kline classify the debt on its December 31, 2018, balance sheet?

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:

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

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

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

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

Providing a monetary rebate program for purchasing a product: