Exam 1: The Framework for Financial Reporting

A company has been sued for damages as a result of illness caused to local residents due to the emission of highly toxic chemicals from its plant.The company's legal firm advises that it is probable that the company will lose the suit and that it probably will result in a judgment of $2 million to $10 million in damages.However,the legal firm believes that the most probable amount of the loss will be $6 million,and that the suit will be terminated about three years hence.The company has no other lawsuits pending. (a)Should the company disclose this event in the year the suit was filed? (check one)_____ No; _____ Note only; _____ A loss in the income statement. (b)If a loss should be reported,give the journal entry required:

On January 1,2000,a corporation purchased a machine (10 year estimated useful life; no residual value; straight-line method)by paying cash $1,500 and signing a note payable with a face amount of $4,500,8% interest payable each December 31.The maturity date is December 31,2002.The going market rate of interest was 10%.Give all required entry (entries)at each of the following dates: January 1,2000: December 31,2000:

Under IFRS,which of the following will only require only a note disclosure as a contingency?

A retail store has completed certain transactions that management believes may have caused current liabilities.Indicate by check mark whether the following items should be classified as current liabilities.Assume a December 31 year-end.

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):

For a small population,the best estimate for the amount of a provision that must be recognized is the expected value of the possible outcomes.

Quality 9000 International Inc.,which began operations in 1996,sells 20,000 units of its product each year under the following warranty: defective units will be fixed free of charge during the calendar year of purchase and the next two calendar years.(This means it is best to buy from this company early in the year.)Only 1% of units sold have required warranty service in the past.The average cost has been $200 per unit for servicing.Units require service only once and the likelihood of a unit requiring service is the same during each year in the warranty period.What is the balance in the warranty liability account at December 31,1999?

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

Which of the following statements is correct?

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.

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

On January 1,2014,JG purchased a machine and gave a $30,000 three-year,8% note.The market or "going" interest rate was 12%.The annual interest payments are to be paid on each December 31.On January 1,2014,JG should record the net liability amount determined as follows:

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.

Contingent gains may be accrued if they are certain to be realized.

Long-term obligations (i.e.,debts)that is callable for early payment:

On January 1,2012,a company purchased a machine that had a list price of $23,500.The purchase terms agreed upon were: cash down payment $12,000 plus a 15% note payable of $9,132 (its present value).The note is payable in three equal annual instalments (interest plus principal)on each December 31.Round to the nearest dollar. Required: (a)Give the entry to record the acquisition of the machine. (b)Give the adjusting entry required on September 30,2014,for interest assuming this is the end of the accounting period.

Under ASPE,only legal obligations are recognized.

Which of the following contingencies should be accrued in the accounts and reported in the financial statements?

KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at its Glowworm plant site during 2013.At December 31,2016,it appeared probable the Government would settle for approximately $150,000.This event should be recorded (i.e.,recognized)in 2016 as a(n):