Question 1

Loan guarantees must be provided for; the amount of the provision is the probability of payout multiplied by the fair value of the loan guarantee.

Accepted Answer

A) True 
 B)False  False

Question 2

At December 31, 2015, ABC Company has the following three separate lawsuits pending against it: Suit A-Plaintiffs seek damages of $40,000; Suit B-Plaintiff seeks damages of $200,000; and Suit
C-Plaintiff seeks damages of $20,000.
ABC management and legal counsel have made the assessments indicated below.For each suit, taking into account the assessment, you are to (a)give the accrual entry if it is required (if not, state why)and (b)indicate whether a disclosure note is required and explain the reason.
CASE A-Remote that ABC will lose the suit.
(a)Accrual entry:
(b)Disclosure note Yes
________No.

Accepted Answer

CASE A
(a)None permitted for remote loss contingencies
(b)No (permissible but not required)
CASE B
(a)None
(b)Yes (required for reasonably possible loss contingencies)
CASE C  (b)Yes or no (Disclosure often required in addition to the journal entry)for full disclosure.

Question 3

Contingent assets may be recorded under ASPE but not under IFRS.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

A)  Must be reported as current liabilities by the debtor if callable on demand.
B)  Must continue to be classified as a long-term liability in all situations.
C)  Can be reported as current liabilities by the debtor only if callable because a provision of the debt covenant has been violated.
D)  Must continue to be classified as a long-term liability by the debtor, if a provision of the debt covenant has been violated.

Question 5

On November 7, 2014 local residents sued Brimley Corporation for excess chemical emissions that caused some of them to seek medical attention.The total lawsuit is $8,000,000.Brimley Corporation's lawyers believe that the lawsuit will be successful and that the amount to be paid to the residents will be $4,000,000.On its December 31, 2014 financial statements Brimley should:

Accepted Answer

A)  Accrue a provision loss of $4,000,000 and note disclose.
B)  Do nothing as the lawsuit has not yet ended.
C)  Simply disclose the details regarding the lawsuit in a note.
D)  Accrue a provision loss of $8,000,000 with no financial statement disclosure necessary.

Question 6

Which of the following statements is correct?

Accepted Answer

A)  Contingent assets are only recorded when it is virtually certain that the benefits relating to the contingent assets will be received.
B)  There is no guidance for self-insurance under IFRS.
C)  Contingent assets are only recorded when it is reasonably certain that the benefits relating to the contingent assets will be received.
D)  For companies that are self-insured, a provision must be established for events taking place prior to the reporting period if known.

Question 7

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

Accepted Answer

A)  Remote chance of loss from a lawsuit in process
B)  Loss from an investment in equity securities that is certain
C)  Cash discounts given for early payment by customers; almost always taken
D)  Probable claim for an income tax refund

Question 8

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.

Accepted Answer

The answer of A retail store has completed certain transactions...

Question 9

Which of the following statements is correct?

Accepted Answer

A)  Under IFRS, content gains should be recognized if they are reasonably certain to occur.
B)  A contingency is more likely to require an accrual than a provision.
C)  Under IFRS, contingencies may be accrued, but not under ASPE.
D)  Litigation for which the company will probably be found guilty would normally be accrued as a provision.

Question 10

Under the warranty revenue approach, there should be no income statement effects for warranty repairs performed after the year of sale (assuming that accrued warranty expenses and expenditures equal one another).

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

The answer of Quality 9000 International Inc., which began operations...

Question 12

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):

Accepted Answer

A)  Unusual loss.
B)  Loss on the lawsuit (operating expense) .
C)  Prior period adjustment.
D)  Disclosure of contingency loss only in a note.
E)  Unusual gain.

Question 13

Accrued liabilities made due to routine operating expenses are not normally discounted.

Accepted Answer

A) True 
 B)False

Question 14

Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn.$1.46.When the debt was repaid the exchange rate changes to US $1.00 = Cdn.$1.38.Ryan Company records the amount on the date of exchange as:

Accepted Answer

A)  A foreign exchange gain of $3,600.
B)  A foreign exchange gain of $62,100.
C)  A foreign exchange loss of $3,600.
D)  A foreign exchange loss of $62,100.

Question 15

For a large population, the best estimate for the amount of a provision that must be recognized is the most likely outcome with respect to the expected value and cumulative probabilities.

Accepted Answer

A) True 
 B)False

Question 16

ABC Inc.has 50 pending lawsuits for which it may be found liable.The expected value (sum of the probabilities of the outcomes multiplied by their respective payouts)amounts to $100,000.However, the company's controller believes that the most likely outcome will be a payout of $120,000.Which of the following statements pertaining to the accrual of the provision is correct?

Accepted Answer

A)  There is a small population of lawsuits, so a provision of $100,000 must be accrued.
B)  There is a large population of lawsuits, so a provision of $100,000 must be accrued.
C)  There is a large population of lawsuits, so a provision of $120,000 must be accrued.
D)  There is a small population of lawsuits, so a provision of $120,000 must be accrued.

Question 17

An onerous contract is one where the unavoidable costs of meeting the contract may or may not exceed the benefits derived from the contract.

Accepted Answer

A) True 
 B)False

Question 18

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:

Accepted Answer

A)  Use its face amount, $30,000 minus $7,200 interest.
B)  Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 8%.
C)  Use its face amount, $30,000 plus the $7,200 interest.
D)  Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 12%.

Question 19

A contingency may become a provision if the likelihood of the contingent event greatly increases.

Accepted Answer

A) True 
 B)False

Question 20

XY Company owed a $45,489 due on January 1, 2015.An agreement was reached to pay it off in five equal annual payments, starting on December 31, 2015.The interest rate was 10 percent.The total amount of interest paid under the terms of the agreement was (round annual payment to nearest $1):

Accepted Answer

A)  $14,511
B)  $6,000
C)  $25,000
D)  $22,745

Exam 12: Financial Liabilities and Provisions

Loan guarantees must be provided for; the amount of the provision is the probability of payout multiplied by the fair value of the loan guarantee.

Contingent assets may be recorded under ASPE but not under IFRS.

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

Which of the following statements is correct?

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.

Which of the following statements is correct?

Under the warranty revenue approach, there should be no income statement effects for warranty repairs performed after the year of sale (assuming that accrued warranty expenses and expenditures equal one another).

Accrued liabilities made due to routine operating expenses are not normally discounted.

Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn.$1.46.When the debt was repaid the exchange rate changes to US $1.00 = Cdn.$1.38.Ryan Company records the amount on the date of exchange as:

For a large population, the best estimate for the amount of a provision that must be recognized is the most likely outcome with respect to the expected value and cumulative probabilities.

An onerous contract is one where the unavoidable costs of meeting the contract may or may not exceed the benefits derived from the contract.

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:

A contingency may become a provision if the likelihood of the contingent event greatly increases.

XY Company owed a $45,489 due on January 1, 2015.An agreement was reached to pay it off in five equal annual payments, starting on December 31, 2015.The interest rate was 10 percent.The total amount of interest paid under the terms of the agreement was (round annual payment to nearest $1) :