Chap 13

Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued. True False

False

State and federal unemployment taxes are imposed on both employers and employees. True False

False

Which of these is not included in an employer's payroll tax expense? Federal income taxes F.I.C.A. (social security) taxes State unemployment taxes Federal unemployment taxes

Federal income taxes

Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant.The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant.The contingency should be reported: In the income statement. In the notes to the financial statements. As a fixed asset valuation allowance account. As a valuation allowance as a part of stockholders' equity.

In the notes to the financial statements.

Wyatt Co. has a probable loss that 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 loss accrual should be The mean of the range. Zero. The minimum of the range. The maximum of the range.

The minimum of the range.

Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation? Time period in which the underlying cause of action occurred. The probability of an unfavorable outcome. The type of litigation involved. The ability to make a reasonable estimate of the amount of the loss.

The type of litigation involved.

Why is the liability section of the balance sheet of primary importance to bankers? To better understand sources of repayment. To assist in understanding the entity's liquidity. To evaluate operating efficiency. To evaluate the entity's credit quality.

To assist in understanding the entity's liquidity.

A company discloses gain contingencies in the notes only when a high probability exists for realizing them. True False

True

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis and demonstrates the ability to consummate the refinancing. True False

True

For purposes of recognizing a provision "probable" is defined as more likely than not. True False

True

Gain contingencies are not recorded. True False

True

If a company intends to refinance a short-term liability on a long-term basis, the liability must be reported as current unless the company has consummated the refinancing agreement by the balance sheet date. True False

True

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements. True False

True

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability. True False

True

For which of the following areas a provision may be recognized in the financial statement? Business recession Warranties Strike Possibility of war

Warranties

When is a contingent liability recorded? When the future events are probable to occur. When the amount can be reasonably estimated. When the future events are probable to occur and the amount can be reasonably estimated. When the future events will possibly occur and the amount can be reasonably estimated.

When the future events are probable to occur and the amount can be reasonably estimated.

A contingent liability definitely exists as a liability but its amount and due date are indeterminable. is not disclosed in the financial statements. is accrued even though not reasonably estimated. is the result of a loss contingency.

is the result of a loss contingency.

A company is legally obligated for the costs associated with the retirement of a long-lived asset only if it performs the activities with its own workforce and equipment. when it is probable the asset will be retired. whether it hires another party to perform the retirement activities or performs the activities itself. only when it hires another party to perform the retirement activities.

whether it hires another party to perform the retirement activities or performs the activities itself.

Which of the following factors need not be considered in determining whether a liability should be recorded with respect to pending or threatened litigation? The time period in which the cause of action occurred. The probability of an unfavorable outcome. The ability to make a reasonable estimate of the loss. All of the options must be considered.

All of the options must be considered.

Which of the following should not be included in the current liabilities section of the balance sheet? Trade notes payable. Short-term zero-interest-bearing notes payable. The discount on short-term notes payable. All of these answer are current liabilities.

All of these answer are current liabilities.

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

All of these answers are correct.

Which of the following contingencies need not be disclosed in the financial statements or the related notes? Probable losses not reasonably estimable. Environmental liabilities that cannot be reasonably estimated. Risk of damage of enterprise property by explosion. All of these must be disclosed.

All of these must be disclosed.

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? Amount of loss is reasonably estimable and event occurs infrequently. Amount of loss is reasonably estimable and occurrence of event is probable. Event is unusual in nature and event occurs infrequently. Event is unusual in nature and occurrence of event is probable.

Amount of loss is reasonably estimable and occurrence of event is probable.

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? Amount of loss is reasonably estimable and event occurs infrequently. Event is unusual in nature and event occurs infrequently. Amount of loss is reasonably estimable and occurrence of event is probable. Event is unusual in nature and occurrence of event is probable.

Amount of loss is reasonably estimable and occurrence of event is probable.

What is a contingency? An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.

An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

Employees' bonus expense is considered an "other expense" on the income statement. True False

False

Which of the following is the proper way to report some gain contingencies? As a disclosure only. As deferred revenue. As an accrued amount. As an account receivable with additional disclosure explaining the nature of the contingency.

As a disclosure only.

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

Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

What condition(s) is/are necessary to recognize an asset retirement obligation? Obligation event has occurred. Company has an existing legal obligation and can reasonably estimate the amount of the liability. Company can reasonably estimate the amount of the liability. Company has an existing legal obligation.

Company has an existing legal obligation and can reasonably estimate the amount of the liability.

Where is debt callable by the creditor reported on the debtor's financial statements? Current liability. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability. Long-term liability.

Current liability.

Management can estimate the amount of the loss that will occur if a foreign government expropriates some company assets.If expropriation is reasonably possible, a loss contingency should be: Disclosed but not accrued as a liability. Neither accrued as a liability nor disclosed. Disclosed and accrued as a liability. Accrued as a liability but not disclosed.

Disclosed but not accrued as a liability.

A loss contingency should be recorded only if it is more likely than not that a liability has been incurred. True False

False

Which of the following is a characteristic of a current liability but not a long-term liability? Unavoidable obligation. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities. Transaction or other event creating the liability has already occurred.

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following is a part of the definition of a liability? Unavoidable obligation. Liquidation is reasonably expected to require use of existing resources classified as current assets or the creation of other current liabilities. Transaction or other event creating the liability has already occurred. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.

Liquidation is reasonably expected to require use of existing resources classified as current assets or the creation of other current liabilities.

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

Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

Which of the following does not allow a company to exclude a short term obligation from current liabilities? The liability is contractually due more than one year after the balance sheet date. Actually refinance the obligation. Have a contractual right to defer settlement of the liability for at least one year after the balance sheet date. Management indicated that they are going to refinance the obligation.

Management indicated that they are going to refinance the obligation.

Which of the following is a current liability? A long-term debt maturing currently, which is to be paid with cash in a sinking fund. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue. A long-term debt maturing currently, which is to be converted into common stock. None of these answers are correct.

None of these answers are correct.

Which of the following statements is correct? A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. None of these answers are correct.

None of these answers are correct.

Which of the following is not a condition allowing a company to exclude a short-term obligation from current liabilities? Subsequently refinance the obligation on a long-term basis. Obligation must be due within one year. A contractual right to defer settlement of the liability at least a year after the balance sheet date. Liability is contractually due to be settled more than a year after the balance sheet date.

Obligation must be due within one year.

Which of the following is an example of a contingent liability? Pending court case with a probable favorable outcome. Possible receipt from a litigation settlement. Obligations related to product warranties. Tax loss carryforwards.

Obligations related to product warranties.

What is the relationship between present value and the concept of a liability? Present values are only used to measure long-term liabilities. Present values are used to measure certain liabilities. Present values are not used to measure liabilities. Present values are used to measure all liabilities.

Present values are used to measure certain liabilities.

Which of the following terms is associated with recording a contingent liability? Probable. Likely. Possible. Remote.

Probable.

Gain contingencies are usually recognized in the income statement when The amount can be reasonably estimated. Occurrence is reasonably possible and the amount can be reasonably estimated. Occurrence is probable and the amount can be reasonably estimated. Realized.

Realized

A large anticipated insurance recovery is reported as a disclosure only. an account receivable with additional disclosure explaining the nature of the contingency. deferred revenue. an accrued amount.

a disclosure only.

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be disclosed but not accrued. classified as an appropriation of retained earnings. accrued. neither accrued nor disclosed.

accrued

Gain contingencies include all of the following except possible receipts of donations and gifts. pending court cases where the probable outcome is favorable. tax loss carryforwards. all of the options are gain contingencies.

all of the options are gain contingencies.

Excluding a short-term obligation from current liabilities can be done when the liability is contractually due to be settled more than one year after the balance sheet date. the company enters into a financing agreement that permits the company to refinance the debt on a long-term basis. the company has a contractual right to defer settlement of the liability for at least one year after the balance sheet date. all of these answers are correct.

all of these answers are correct.

Accrued liabilities are disclosed in the financial statements by an appropriation of retained earnings. showing the amount among the liabilities but not extending it to the liability total. a footnote to the statements. appropriately classifying them as regular liabilities in the balance sheet.

appropriately classifying them as regular liabilities in the balance sheet.

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as current liabilities. deferred charges. intermediate debt. long-term liabilities.

current liabilities.

Federal income taxes withheld by the employer on behalf of the employee are recorded as current liabilities. receivables. expenses. unearned revenues.

current liabilities.

To record an asset retirement obligation (ARO), the cost associated with the ARO is expensed. included in the carrying amount of the related long-lived asset. included in a separate account. capitalized over the asset's useful life.

included in the carrying amount of the related long-lived asset.

Long-term debts maturing within 12 months of the balance sheet date should be reported as current liabilities if they are or will be: refinanced with the proceeds of a new debt issue. converted into capital stock. due on demand. retired by use of noncurrent assets.

due on demand.

Short-term obligations expected to be refinanced are classified as current liabilities because they will be paid by the balance sheet date. the obligations will be satisfied before the financial statements are issued. their satisfaction will not require the use of assets classified as current as of the balance sheet date. none of these answers are correct.

none of these answers are correct.

Gain contingencies are recorded when: it is probable that a benefit will be received. the amount of the gain can be reasonably estimated. it is probable that a benefit will be received, and the amount of the gain can be reasonably estimated. none of these answers is correct.

none of these answers is correct.

A loss related to general or unspecified business risks is usually accrued. always accrued. sometimes accrued. not accrued.

not accrued.

Liabilities are deferred credits that are recognized and measured in conformity with generally accepted accounting principles. accounts having credit balances as a result of closing entries. obligations to transfer ownership shares to other entities in the future. obligations arising from past transactions and payable in assets or services in the future.

obligations arising from past transactions and payable in assets or services in the future.

Liabilities are obligations arising from past transactions and payable in assets or services in the future. any accounts having credit balances after closing entries are made. obligations to transfer ownership shares to other entities in the future. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.

obligations arising from past transactions and payable in assets or services in the future.

Contingent assets need not be disclosed in the financial statements or in the notes if they are: possible but not probable to occur. likely to occur. probable to occur. virtually certain to occur.

possible but not probable to occur.

Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2020, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Brown had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroad's offer. The Railroad's 2020 financial statements should include the following related to the incident: disclosure in note form only. recognition of a loss and creation of a liability for the value of the land. creation of a liability only. recognition of a loss only.

recognition of a loss and creation of a liability for the value of the land.

Current liabilities are defined as obligations whose liquidation is reasonably expected to be paid within a year. require the distribution of cash. require use of current assets. require use of current assets or creation of other current liabilities

require use of current assets or creation of other current liabilities

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

short-term obligations expected to be refinanced on a long-term basis.

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 need not be disclosed. should be reported as long-term. should be reported as current. should be reported as part current and part long-term.

should be reported as part current and part long-term.

Employer payroll taxes include all of the following except state income taxes. federal unemployment taxes. state unemployment taxes. FICA taxes.

state income taxes.

A loss contingency can be accrued when the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred. an asset may have been impaired. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated. it is certain that funds are available to settle the disputed amount.

the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred.

Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and the Darren Company admits guilt. the damages appear to be material. the cause for action occurred during the accounting period covered by the financial statements. the court will decide the case within one year.

the cause for action occurred during the accounting period covered by the financial statements.

A company can classify short-term debt expected to be refinanced as non-current if one of the following criteria is met as of the balance sheet date: the entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date. demonstrates an ability to consummate the refinancing. pays off the obligation after the balance sheet date and subsequently replaces it with long-term debt before the balance sheet is issued. intends to refinance the obligation on a long-term basis.

the entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

Martinez Co. has a loss contingency to accrue. The loss 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 loss accrual should be zero. the mean of the range. the minimum of the range. the maximum of the range.

the minimum of the range.

Neer Co. has a probable loss that 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 loss accrual should be the minimum of the range. the maximum of the range. the mean of the range. zero.

the minimum of the range.

The currently maturing portion of long-term debt should be classified as a current liability if the debt is to be refinanced on a long-term basis. the portion so classified will be liquidated within one year using current assets. the debt is to be converted into common stock. funds used to liquidate it are currently classified as a long-term asset.

the portion so classified will be liquidated within one year using current assets.

Examples of contingent assets include all of the following except: pending lawsuit with a probable favorable outcome. possible refunds from the government in tax disputes. unrealized gain on the sale of investments. promise of land to be donated by city as an enticement to move manufacturing facilities.

unrealized gain on the sale of investments.