306 Chapter 13

In accounting for compensated absences, the difference between vested rights and accumulated rights is that:

vested rights are not contingent upon an employee's future service

Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent if the refinancing is completed:

by the financial reporting date

The numerator of the acid-test ratio consists of

cash, marketable securities, and net receivables

The currently maturing portion of long-term debt should be classified as a current liability if

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

Examples of contingent assets include all of the following except:

unrealized gain on the sale of investments.

Why is the liability section of the balance sheet of primary importance to bankers?

To assist in understanding the entity's liquidity

Under IFRS, which of the following is used to measure a liability, if a range of estimates is predicted and no amount in the range is more likely than any other amount in the range?

mid-point of the range

Liabilities are

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

Which of the following is an example of a contingent liability?

obligations related to product warranties

What are compensated absences?

paid time off

In a service-type warranty, warranty revenue is

recognized equally over the warranty period.

Accounting for product warranty costs under an assurance-type warranty

represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Which of these is not included in an employer's payroll tax expense?

Federal income taxes

What does the current ratio inform you about a company?

The company's liquidity.

For which of the following areas a provision may be recognized in the financial statement?

Warranties

Which of the following is an account used in accounting for an assurance-type warranty that is not a service-type warranty?

Warranty liability

When is a contingent liability recorded?

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

A contingent liability

is the result of a loss contingency

The ratio of current assets to current liabilities is called the

Current ratio

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

accrued

Stock dividends distributable should be classified on the

balance sheet as an item of stockholders' equity.

Which of the following is true about accounts payable? 1. Accounts payable are also called trade accounts payable. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.

1. Accounts payable are also called trade accounts payable

The effective interest on a 12-month, zero-interest-bearing note payable of $530000, discounted at the bank at 5% is

5.26%

Which of the following is a current liability?

A cash dividend payable to preferred stockholders

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

All (obligation relates to the rights that vest or accumulate, is attributable to employee services already performed, payment of the compensation is probable)

Which of the following gives rise to the requirement to accrue a liability for the cost of compensated absences?

All (payment is probable, employee rights vest or accumulate, amount can be reasonably estimated)

Which of the following contingencies need not be disclosed in the financial statements or the related notes?

All (probable losses, environmental liabilities, risk of damage)

Which of the following should not be included in the current liabilities section of the balance sheet?

All (trade notes payable, short-term zero-interest-bearing notes payable, and the discount on short-term notes payable)

Which of the following may be a current liability?

All (withheld income taxes, deposits received from customers, and deferred revenue)

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 occurrence of the 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.

Which of the following items is a current liability?

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?

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

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 future 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.

Either 1 or 2 is acceptable

Which of the following best describes the accounting for assurance-type warranty costs?

Expensed based on estimate in year of sale.

Which of the following statements is false?

FICA 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.

Which of the following is a characteristic of a current liability but not a long-term liability?

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?

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?

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?

Management indicated that they are going to refinance the obligation

An account which would be classified as a current liability is

None (dividends payable in the form of a company's stock, accounts payable-debit balances, losses expected to be incurred within the next twelve months)

Which of the following is a current liability?

None (long term- to be paid with cash in sinking fund, retired with proceeds from new debt issue, and converted to common stock)

Which of the following statements is correct?

None (short-term obligations excluded if...)

Which of the following is not a condition allowing a company to exclude a short-term obligation from current liabilities?

Obligation must be due within one year.

Which of the following is not an acceptable treatment for the presentation of current liabilities?

Offsetting current liabilities against assets that are to be applied to their liquidation.

Which of the following is generally associated with payables classified as accounts payable?

Periodic Payment of Interest - no, Secured by collateral - no

Contingent assets need not be disclosed in the financial statements or in the notes if they are:

Possible but not probable to occur

What is the relationship between present value and the concept of a liability?

Present values are used to measure certain liabilities

Which of the following is not a correct statement about sales taxes?

Sales taxes are an expense of the seller

Which of the following situations may give rise to unearned revenue?

Selling magazine subscriptions

Under what conditions is an employer required to accrue a liability for sick pay?

Sick pay benefits vest

Which of the following taxes does not represent a common employee payroll deduction?

State unemployment taxes

Which of the following is not true about the discount on short-term notes payable?

The discount on Notes Payable account should be reported as an asset on the balance sheet

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing

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

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

How do you determine the acid-test ratio?

The sum of cash, short-term investments and net receivables divided by current liabilities.

Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation?

The type of litigation involved.

Which of the following is the proper way to report some gain contingencies?

a disclosure only

Excluding a short-term obligation from current liabilities can be done when

all (contractually due, refinance, contractual right)

Accrued liabilities are disclosed in financial statements by

appropriately classifying them as regular liabilities in the balance sheet.

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

be accrued during the period when earned

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

Where is debt callable by the creditor reported on the debtor's financial statements?

current liability

To record an asset retirement obligation (ARO), the cost associated with the ARO is

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

Each of the following are included in both the current ratio and the acid-test ratio except

inventory

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

portion of FICA taxes and any union dues

Which of the following terms is associated with recording a contingent liability?

probable

Of the following items, the only one which should not be classified as a current liability is

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

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

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.

A company is legally obligated for the costs associated with the retirement of a long-lived asset

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