CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES PDF

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CHAPTER 13 CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES CHAPTER LEARNING OBJECTIVES 1.

Describe the nature, type, and valuation of current liabilities.

2.

Explain the classification issues of short-term debt expected to be refinanced.

3.

Identify types of employee-related liabilities.

4.

Explain the accounting for different types of provisions.

5.

Identify the criteria used to account for and disclose contingent liabilities and assets.

6.

Indicate how to present and analyze liability-related information.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

TRUE-FALSE—Conceptual 1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized. 2. Dividends in arrears on cumulative preference shares should be reported as a current liability. 3. Magazine subscriptions and airline ticket sales both result in unearned revenues. 4. All long-term debt maturing within the next year must be classified as a current liability on the statement of financial position. 5. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis. 6. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale. 7. Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued. 8. A company can exclude a short-term obligation from current liabilities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date. 9. Preference dividends in arrears are not a liability until declared by the Board of Directors, but should be disclosed in the notes to the financial statements. 10. A company must accrue a liability for sick pay that accumulates but does not vest. 11. Companies report the amount of social security taxes withheld from employees as well as the companies’ matching portion as current liabilities until they are remitted. 12. Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment. 13. Companies should recognize the expense and related liability for compensated absences in the year earned by employees. 14. The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold. 15. The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements. 16. Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty. 17. For purposes of recognizing a provision, “probable” is defined as more likely than not.

Current Liabilities, Provisions, and Contingencies

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18. A provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement. 19. Constructive obligations, in which the company has created a valid expectation on the part of other parties that it will discharge certain responsibilities, are disclosed in the notes to the financial statements but not recorded. 20. Provisions are only recorded if it is possible that the company will have to settle an obligation at some point in the future. 21. An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received. 22. Expected future operating losses can generally be accrued as part of a restructuring provision. 23. IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company’s chance of losing a lawsuit. 24. Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible. 25. Contingent assets are not reported in the statement of financial position. 26. IFRS uses the term “contingent” for assets and liabilities not recognized in the financial statements. 27. Contingent assets are disclosed when an inflow of economic benefits is considered more likely than not to occur. 28. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio. 29. Paying a current liability with cash will always reduce the current ratio. 30. Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. F F T F F

Item 6. 7. 8. 9. 10.

Ans. T F F T F

Item 11. 12. 13. 14. 15.

Ans. T F T F T

Item 16. 17. 18. 19. 20.

Ans. F T T F F

Item 21. 22. 23. 24. 25.

Ans. T F F T T

Item 26. 27. 28. 29. 30.

Ans. T T F F T

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

MULTIPLE CHOICE—Conceptual 31.

Liabilities are a. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles. c. obligations to transfer ownership shares to other entities in the future. d. present obligations arising from past events resulting in an outflow of resources.

32.

Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into ordinary shares d. None of these answer choices are correct.

33.

Among the short-term obligations of Lance Company as of December 31, the statement of financial position date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the statement of financial position of Lance Company as a. current liabilities. b. deferred charges. c. non-current liabilities. d. intermediate debt.

34.

Which of the following may be a current liability? a. Withheld Income Taxes b. Deposits Received from Customers c. Unearned Revenue d. All of these answers are correct.

35.

Which of the following items is a current liability? a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months. b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

36.

Which of the following should not be included in the current liabilities section of the statement of financial position? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. Unearned revenues d. All of these answer choices are included

Current Liabilities, Provisions, and Contingencies

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37.

Which of the following is a current liability? a. Preference dividends in arrears b. A dividend payable in the form of additional shares c. A cash dividend payable to preference shareholders d. All of these answer choices are correct.

38.

Share dividends distributable should be classified on the a. income statement as an expense. b. statement of financial position as an asset. c. statement of financial position as a liability. d. statement of financial position as an item of equity.

39.

Of the following items, the only one which should not be classified as a current liability is a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced. d. unearned revenues.

40.

Which of the following is a characteristic of a current liability but not a non-current liability? a. Unavoidable obligation. b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. c. Settlement is expected within the normal operating cycle, or within 12 months after the reporting date. d. Transaction or other event creating the liability has already occurred.

41.

Which of the following is not considered a characteristic of a liability? a. Present obligation. b. Arises from past events. c. Results in an outflow of resources. d. Liquidation is reasonably expected to require use of existing resources classified as current assets.

42.

What is the relationship between current liabilities and a company's operating cycle? a. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if more). b. Current liabilities are the result of operating transactions. c. Current liabilities can't exceed the amount incurred in one operating cycle. d. There is no relationship between the two.

43.

What is the relationship between present value and the concept of a liability? a. Present values are used to measure certain liabilities. b. Present values are not used to measure liabilities. c. Present values are used to measure all liabilities. d. Present values are only used to measure non-current liabilities.

44.

Where is debt callable by the creditor reported on the debtor's financial statements? a. Non-current liability. b. Current liability if the creditor intends to call the debt within the year, otherwise a noncurrent liability. c. Current liability if it is probable that creditor will call the debt within the year, otherwise a non-current liability. d. Current liability.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

45.

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities? a. Intend to refinance the obligation on a long-term basis. b. Obligation must be due within one year. c. Unconditional right to defer settlement of the liability for at least 12 months. d. Subsequently refinance the obligation on a long-term basis.

46.

A company has not declared a dividend on its cumulative preference shares for the past three years. What is the required accounting treatment or disclosure in this situation? a. Record a liability for cumulative amount of preference shares dividends not declared. b. Disclose the amount of the dividends in arrears. c. Record a liability for the current year's dividends only. d. No disclosure or recognition is required.

47.

Which of the following situations may give rise to unearned revenue? a. Providing trade credit to customers. b. Selling inventory. c. Selling magazine subscriptions. d. Providing manufacturer warranties.

48.

Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if it has an unconditional right to defer settlement of the liability for at least 12 months. c. A company may exclude a short-term obligation from current liabilities if it is paid off after the statement of financial position date and subsequently replaced by long-term debt before the statement of financial position is issued. d. None of these answer choices are correct.

49.

Which of the following statements is false? a. A company may exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis and have an unconditional right to defer settlement of the liability for at least 12 months. b. Cash dividends should be recorded as a liability when they are declared by the board of directors. c. Under the cash basis method, warranty costs are charged to expense as they are paid. d. Social security taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

50.

Which of the following is not a correct statement about sales taxes? a. Sales taxes are an expense of the seller. b. Many companies record sales taxes in the sales account. c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate. d. All of these answer choices are true.

Current Liabilities, Provisions, and Contingencies

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51.

In accounting for compensated absences, the difference between vested rights and accumulated rights is a. vested rights are normally for a longer period of employment than are accumulated rights. b. vested rights are not contingent upon an employee's future service. c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

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52.

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's a. portion of FICA taxes. b. and employer's portion of FICA taxes. c. portion of FICA taxes, and any mandatory deductions. d. portion of FICA taxes and any voluntary deductions.

53.

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a. be accrued during the period when the compensated time is expected to be used by employees. b. be accrued during the period following vesting. c. be accrued during the period when earned. d. not be accrued unless a written contractual obligation exists.

54.

The amount of the liability for compensated absences should be based on 1. the current rates of pay in effect when employees earn the right to compensated absences. 2. the expected rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future periods. a. b. c. d.

1. 2. 3. Either 1 or 2 is acceptable.

55.

What are compensated absences? a. Unpaid time off. b. A form of healthcare. c. Payroll deductions. d. Paid time off.

56.

Under what conditions is an employer required to accrue a liability for sick pay? a. Sick pay benefits can be reasonably estimated. b. Sick pay benefits vest. c. Sick pay benefits equal 100% of the pay. d. Sick pay benefits accumulate.

57.

Which of the following terms is associated with recognizing a provision? a. Possible but not probable. b. Likely. c. Remote. d. Probable.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

58.

To record an environmental liability, the cost associated with the liability is a. expensed. b. included in the carrying amount of the related long-lived asset. c. included in a separate account. d. None of these answer choices are correct.

59.

A company is legally obligated for the costs associated with the retirement of a long-lived asset a. only when it hires another party to perform the retirement activities. b. only if it performs the activities with its own workforce and equipment. c. whether it hires another party to perform the retirement activities or performs the activities itself. d. only when the obligation arises at the outset of the asset’s use.

60.

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty a. should be reported as non-current. b. should be reported as current. c. should be reported as part current and part non-current. d. need not be disclosed.

61.

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2015. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition b. Note disclosure only c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000

62.

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a company has a present obligation related to product warranties. The amount of the expense involved can be reasonably estimated. Based on the above facts, the estimated warranty expense should be a. accrued. b. disclosed but not accrued. c. neither accrued nor disclosed. d. classified as an appropriation of retained earnings.

63.

Espinosa Co. has a provision to accrue. The amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of the accrual should be a. zero. b. the mid point of the range. c. the minimum of the range. d. the maximum of the range.

Current Liabilities, Provisions, and Contingencies S

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64.

Accounting for product warranty costs under an assurance-type warranty a. is required for income tax purposes. b. is frequently justified on the basis of expediency when warranty costs are immaterial. c. charges an expense account when the seller performs in compliance with the warranty. d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

65.

Which of the following best describes the accounting for assurance-type warranty costs? a. Expensed when paid. b. Expensed when warranty claims are certain. c. Expensed based on estimate in year of sale. d. Expensed when incurred.

66.

In a service-type warranty, warranty revenue is a. recognized in the year of sale. b. not recognized. c. recognized only in the last year of the warranty period. d. recognized equally over the warranty period.

67.

Which of the following is a characteristic of an assurance-type warranty, but not a servicetype warranty? a. Warranty liability. b. Warranty expense. c. Unearned warranty revenue. d. Warranty revenue.

68.

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon? a. The reduction in sales price attributed to the coupon is recognized as premium expense. b. The difference between the cost of the video game and the cash received is recognized as premium expense. c. Premium expense is not recognize...