Chapter 13

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should accrue a contingent liability and loss of Multiple choice question.

$250,000.

Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should accrue a contingent liability and loss of Multiple choice question.

$400,000.

Which of the following is the best definition of a current liability?

An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

Which of the following are essential characteristics of a liability?

The future sacrifice arises from a present obligation. The obligation results from a past event. A future sacrifice of an economic benefit is probable.

Norbert Company's recently signed a 20-year mortgage that requires monthly payments of principal and interest. Norbert should report the mortgage principal payments due during the following accounting period as

a current liability

A loss contingency is recognized only if the event that gave rise to it occurred

before the financial statement date.

Which of the following is not a category used to assess the likelihood of a loss contingency

certain

Events occurring between the end of the fiscal year and the date the financial statements are issued or available to be issued should be

considered to clarify financial statement elements at the reporting date.

Warranties that assure the customer that the products are delivered free from major defects typically result in the accrual of

contingent liabilities

When it is uncertain whether an obligation really exists, we may recognize what is referred to as a

contingent loss.

An otherwise successful company may fail to exist, if it experiences serious _____ problems.

liquiditiy

Recognition of costs related to manufacturers' quality assurance warranty during the same period that the related revenue is recognized is consistent with the

matching principle

Current liabilities are those obligations that are payable within ______ or the operating cycle whichever is ____.

one year; longer

Information relative to a loss contingency that becomes available after the fiscal year ends, but before the financial statement date (select all that apply)

should be considered in determining the probability of a loss contingency. should be considered in estimating the amount of the loss.

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:

A current liability.

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

A debit to a liability and a credit to a revenue account.

Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year?

A noncurrent liability of $504,000 A current liability of $36,000

Which of the following is correct regarding accrued interest payable? Accrued interest payable relates to interest that was neither paid nor incurred. Accrued interest payable relates to interest already incurred but not yet paid. Accrued interest payable relates to interest that was prepaid but not yet incurred.

Accrued interest payable relates to interest already incurred but not yet paid.

Expenses already incurred, but not yet paid are referred to as

Acurred liabilities

Sally Company owes its employees $5,250 for the last 4 days of the year ended December 31. The company will pay this amount on January 7 as part of its regular payroll disbursements of $11,800. What, if anything, should Sally recognize on December 31?

An accrued liability of $5,250.

Which of the following transactions require the recognition of a liability? (Select all that apply.) Collection of a refundable deposit from a customer. Receipt of payment for a service performed next month. Placing a purchase order for inventory.

Collection of a refundable deposit from a customer. Receipt of payment for a service performed next month.

Which of the following concepts or principles is the primary reason why gain contingencies are not accrued, even if they are probable?

Conservatism

Generally, a current liability is expected to be satisfied from__ . (Enter one word per blank.)

Current assets

Which of the following are classified as current liabilities?

Debt callable in the upcoming year, even when not expected to be called Long-term loans with violated debt covenants Current portion of long-term debt

Which of the following is not true about deferred revenue?

Deferred revenue is recognized on credit sales when collectibility can be estimated.

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

FALSE

Revenue is recognized upon sale of gift cards, rather than being deferred.

FALSE

Under IFRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability.

FALSE

Current liabilities already reported on balance sheet

Higher Risk

The dollar amount of a potential loss from a contingent liability can be classified as (Select all that apply.)

Known Reasonably estimable

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the demise of a company that otherwise may have been successful.

Noncurrent liabilities already reported on the balance sheet

Lower risk

The most common type of liability is:

One to be paid in cash and for which the amount and timing are known.

Revenue related to extended warranty contracts typically is recognized Multiple choice question.

Over time

The dollar amount of a potential loss from a contingent liability can be classified as

Reasonably estimable Known

Which of the following represents the formal credit instrument for an accounts payable?

Supplier's invoice

Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss.

TRUE

A contingent liability typically is accrued for product warranties because it meets which of the following criteria? (Select all that apply.)

The amount of the future loss can be reasonably estimated. A future loss is probable.

A contingent liability is accrued if which conditions are met?

The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.

Which of the following is necessary for a loss contingency to exist?

The potential loss must arise from an event that occurred prior to the financial statement date.

Which of the following transactions require recognition of a liability on December 31? (Select all that apply.) Multiple select question. The utility bill for December will be paid January 3. Employees are promised a 4% pay raise starting next month. Receipt of inventory purchases on account.

The utility bill for December will be paid January 3. Receipt of inventory purchases on account.

Which of the following is correct regarding gain contingencies? Multiple choice question.

They are not accrued.

Which of the following statements is correct regarding short-term obligations?

They may be classified as long-term liabilities if they meet certain criteria.

Which of the following is an important characteristic of loss contingencies that is not commonly shared by other liabilities?

Uncertainty exists regarding whether a future event giving rise to the obligation will occur.

Gunner Corp. has $2 million in bonds outstanding that mature during 2018. The company intends to refinance some of its obligation by issuing $1 million in 10-year bonds. On January 31, 2018, the new bond issue is sold. The funds will be utilized to pay part of the maturing bond obligation. The balance sheet at 12/31/2017 should show the following regarding the maturing bonds: (

a current bonds payable of $1 million. a long-term bonds payable of $1 million.

Debt that is callable by the creditor in the upcoming year, but is not expected to be called, is reported as

a current liability

Interest that has been incurred but not yet been paid is recognized as

accrued interest payable.

Accounts payable typically (Select all that apply.). are noninterest-bearing. require a formal promissory note. are offered on open account. bear interest.

are noninterest-bearing. are offered on open account.

If a liability is classified as current, rather than noncurrent, the company's working capital will ______. Multiple choice question.

decrease

During December, Martin Department Stores sells $240,000 in gift cards. When it sells the gift cards, Martin should recognize

deferred revenue.

The costs of satisfying product-related warranties should be recorded as an expense Multiple choice question.

during the year of sale.

An asset for a gain contingency should not be accrued unless it is probable that the gain contingency will be realized. Group starts

false

A liability is accrued for a contingent loss if (Select all that apply.)

it is probable the confirming event will occur the amount can be reasonably estimated

Cash collected from customers as refundable deposits or as advance payments for products or services are recognized as

liabilities.

Taxes collected for taxing authorities are recognized as

liabilities.

Which of the following are used to categorize the likelihood of the occurrence of a future loss? (Select all that apply.)

probable reasonably possible remote

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should recognize the following credits in its ledger (Select all that apply.)

sales revenue of $1,000. sales taxes payable of $100.

Revenue related to extended warranty contracts typically is recognized over time because

the warranty provides coverage over time.

The feature that distinguishes loss contingencies from other liabilities is the

uncertainty that a loss will occur.

Revenue associated with the sale of gift cards normally is recognized

when the gift cards are redeemed