Exam 12: Financial Liabilities and Provisions

On September 1, 2014, XYZ borrowed $100,000 on a 9%, two-year, note payable.Simple interest is payable on August 31, 2015 and 2016.XYZ's reporting year ends December 31 and the company does not use reversing entries for interest.The required entry on August 31, 2001, is:

Under ASPE, disclosure in the footnotes to the financial statements is the only way to properly report contingent losses.

Jake Co.includes three coupons in each bag of dog food it sells.In return for fifteen coupons, customers receive a dog leash.The leashes cost Jones $2.00 each.Jake estimate that 50% of the coupons will be redeemed.Data for 2014 and 2015 are as follows: The estimated liability for premiums for Jake Co.as at December 31, 2015 is:

A lawsuit in progress wherein the defendant will probably be found guilty would likely be accounted for as a provision.

Capitalization of borrowing costs on qualifying assets is mandatory under both IFRS and ASPE.

Under IFRS, provisions are always recorded at their expected value.

Accounts payable should include only obligations directly related to the primary and continuing operations of an entity.

A company has commenced work on a non-cancellable fixed price construction contract in the amount of $6 million.Costs of $4 million have been incurred to date, and it is expected that $3.2 million in additional costs will have to be incurred to complete the contract.The company adheres to IFRS.Which of the following statements with respect to the contract are correct?

Normal business risks that are insured must be provided for.

A decline in value of a company's reporting currency relative to the foreign currency in which it has payables will result in a foreign exchange gain on the reporting company's books.

On September 1, 2020, a company purchased a machine and paid for it by signing a two-year noninterest-bearing note, face $4,000.The note is payable August 31, 2022.The going rate of interes was 18% per year.The accounting period ends December 31. (a)Compute the cost of the machine. (b)Give all appropriate entries throughout the term of the note. Use the net method.

On January 1, 2014, DWW borrowed $400,000 cash and signed a one-year, 12 percent interest-bearing note payable.Assuming a 40 percent average income tax rate for DWW Corporation, the net effective interest rate on this note was:

Once a company has formally decided to restructure its operations, a provision must be made for the restructuring.

VCR Company owed a $73,311 debt due on January 1, 2012.An agreement was reached to pay it off in three equal annual payments of $30,000 each, starting on December 31, 2012.The interest rate was 11 percent.The balance in the liability account of VCR Company on January 1, 2014 is (round annual payment to nearest $1):

Capitalization of borrowing costs on qualifying assets will continue even if work on the asset has temporarily ceased.

Debt issue costs may be expensed or included in the cost of the debt.

A reasonable expectation on the part of a company's stakeholders arising from a company's past practices or behaviour may constitute a constructive obligation in certain instances.

Current liabilities are usually discounted.

Discounting is not required when the time value of money is immaterial or if the amount and timing of cash flows is highly uncertain.

Under IFRS, a continuity schedule must be provided for both provisions and contingencies.