Question 1

Which of the following is a contingency that would most likely require accrual?
A)Potential claims on extended warranties.
B)Customer premium offers.
C)Potential liability on a product where none have yet been sold.
D)Sales tax payable.

Accepted Answer

The answer of Which of the following is a contingency...

Question 2

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 the above are correct.

Accepted Answer

All of the above are correct.Accounting for costs of incentive programs for customer purchases requires probability estimation to determine the amount of the liability, follows the matching principle to expense the costs in the period in which the revenue is recognized, and is a loss contingency situation because the obligation is not certain.

Question 3

Z Co. filed suit against W Inc. in 2013 seeking damages for patent infringement. At December 31, 2013, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2014. Z should report this award in its 2013 financial statements, issued in March 2014 as:
A)A receivable and unearned revenue of $40 million.
B)A receivable and revenue of $40 million.
C)A disclosure of a gain contingency of $40 million.
D)A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Accepted Answer

At December 31, 2013, Z's legal counsel had estimated the amount of damages to be awarded to Z in the range of $30 million to $60 million, and as such, the amount of the gain contingency was undetermined, falling within the estimated range. Since the amount was indeterminate, it is not appropriate to record a receivable or revenue. The appropriate accounting treatment, in this case, is to disclose the gain contingency in the notes to the financial statements. Therefore, the correct answer is Option D.

Question 4

Accounting for costs of incentive programs for frequent customer purchases involves:
A)Recording an expense and a liability each period.
B)Recording a liability and a reduction of revenue each period.
C)Recording an expense and an asset reduction each period.
D)Recording an expense and revenue each period.

Accepted Answer

Incentive programs for frequent customer purchases typically involve recognizing an expense for the cost of the incentives and a liability for the future obligation to provide the incentives.

Question 5

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

The answer of Financial statement note disclosure is required for...

Question 6

The accounting concept that requires recognition of a liability for customer premium offers is:
A)Periodicity.
B)Conservatism.
C)Historical cost.
D)The matching principle.

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the related revenues. In this case, the customer premium offers represent an expense that is incurred when the customer makes a purchase. Therefore, a liability for the premium offer must be recognized in the same period as the revenue from the sale.

Question 7

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

The answer of Which of the following is a contingency...

Question 8

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:
A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Accepted Answer

If the expropriation is probable and the amount of loss can be estimated reliably, a loss contingency should be disclosed and accrued as a liability in the financial statements. This is because the likelihood and amount of loss meet the criteria for recognition as a liability under the accounting standards. The accrual of the liability also ensures that the financial statements reflect the true financial impact of the potential loss on the company's financial position and results of operations.

Question 9

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:
A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Accepted Answer

If a loss is reasonably possible but not probable, it should be disclosed in the financial statements but not accrued as a liability.

Question 10

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 best option is to accrue the liability for the recall and explain it in the notes to the financial statements. This is because the liability is reasonably estimable and would have a material impact on the financial statements. By disclosing it in the financial statements, investors and other stakeholders can be informed of the potential liability and can make informed decisions. Failing to disclose it could lead to legal and regulatory repercussions.

Question 11

Which of the following entail essentially the same accounting treatment?
A)Coupons for cash rebates and coupons for other premiums.
B)Cents-off coupons and coupons for other premiums.
C)Cents-off coupons and coupons for cash rebates.
D)All of the above are correct.

Accepted Answer

Coupons for cash rebates and coupons for other premiums both involve recognizing a liability for the expected redemption of the coupons, whereas cents-off coupons are typically recognized as a reduction in revenue at the time of sale.

Question 12

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 loss contingency should only be accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. This means that there is more than a 50% chance that the liability has been incurred and the amount of the loss can be estimated with a reasonable degree of accuracy. Option A is incorrect because it only requires that the likelihood of the liability is more likely than not, which is a lower threshold than probability. Option B is incorrect because it only requires that the likelihood of the liability is at least reasonably possible, which is an even lower threshold than more likely than not. Option C is also incorrect because it only requires that the amount of the loss can be reasonably estimated, but does not consider the likelihood of the liability itself.

Question 13

The cost of customer premium offers should be charged to expense:
A)When the related product is sold.
B)When the premium offer expires.
C)Over the life cycle of the product to which the premium relates.
D)When the premiums are claimed.

Accepted Answer

The cost of customer premium offers is considered to be a marketing expense, and therefore, it should be charged to expense when the related product is sold. This is because the cost of the premium offer is directly related to the sale of the product, and it is incurred as part of the effort to promote the sale of the product. Charging the cost of the premium offer to expense when the related product is sold ensures that the expense is accurately matched to the revenue generated from the sale of the product.

Question 14

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

Contingent losses that have a reasonably possible chance of occurrence are required to be disclosed in the financial statements in a disclosure note, rather than being accrued. Accrual is only required when the likelihood of a loss is probable or more likely than not. When the likelihood of a loss is remote, disclosure is not necessary.

Question 15

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 of the above are correct.

Accepted Answer

A rebate program creates an expense for the seller in the period of sale and a contingent liability at the time of sale. It is not accounted for similarly to product warranties.

Question 16

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

The answer of Gain contingencies usually are recognized in a...

Question 17

The main difference between accounting for rebate and cash discount coupons is:
A)The latter is not treated as an expense.
B)Only the former creates a contingent liability when issued.
C)The expense for the latter is usually deferred until redemption of the coupon.
D)There are no significant differences in accounting between the two.

Accepted Answer

The expense for cash discount coupons is deferred until the coupon is redeemed, whereas accounting for rebates is treated as an expense when the rebate is issued.

Question 18

When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:
A)Reported in the income statement and disclosed.
B)Offset against shareholders' equity.
C)Disclosed but not recognized in the income statement.
D)Neither recognized in the income statement nor disclosed.

Accepted Answer

The answer of When a material gain contingency is probable...

Question 19

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:
A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Accepted Answer

The answer of Blue Co. can estimate the amount of...

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:
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

A loss contingency should be accrued in a company's financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. This means that it is more likely than not that the company will be held responsible for the liability and the amount of the loss can be estimated with a reasonable degree of accuracy. It is important to note that remote possibilities should not be accrued, while reasonably possible contingencies should only be disclosed in the notes to the financial statements.

Quiz 13: Current Liabilities and Contingencies

Which of the following is a contingency that would most likely require accrual?

Accounting for costs of incentive programs for customer purchases:

Accounting for costs of incentive programs for frequent customer purchases involves:

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

The accounting concept that requires recognition of a liability for customer premium offers is:

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

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:

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:

Which of the following entail essentially the same accounting treatment?

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

The cost of customer premium offers should be charged to expense:

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

Providing a monetary rebate program for purchasing a product:

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

The main difference between accounting for rebate and cash discount coupons is:

When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:

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