Definition Of Liability Quiz
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Liabilities are
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Any accounts having credit balances after closing entries are made.
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Deferred credits that are recognized and measured in conformity with generallyaccepted accounting principles.
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Obligations to transfer ownership shares to other entities in the future.
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Obligations arising from past transactions and payable in assets or services in the future.
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Take this Legal liability quiz and test your knowledge on definitions of liability. All the best for this quiz!
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- 2.
Which of the following is a current liability?
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A long-term debt maturing currently, which is to be paid with cash in a sinking fund
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A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
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A long-term debt maturing currently, which is to be converted into common stock
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None of these
Correct Answer
A. None of theseExplanation
None of the options provided in the question are considered a current liability. A current liability refers to a debt or obligation that is expected to be settled within one year or the operating cycle of a business, whichever is longer. In this case, all the options describe long-term debts that are not due for settlement in the near future, therefore they do not qualify as current liabilities.Rate this question:
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- 3.
Which of the following is true about accounts payable? 1. Accounts payable should not be reported at their present value. 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.
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1
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2
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3
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Both 2 and 3 are true.
Correct Answer
A. 1 -
- 4.
Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as
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Current liabilities.
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Deferred charges.
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Long-term liabilities.
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Intermediate debt.
Correct Answer
A. Current liabilities.Explanation
The notes payable totaling $250,000 with the Madison National Bank are short-term obligations that are due within 90 days. Since they are due within one year from the balance sheet date, they should be classified as current liabilities on the balance sheet of Lance Company.Rate this question:
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- 5.
Which of the following is not true about the discount on short-term notes payable?
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The Discount on Notes Payable account has a debit balance.
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The Discount on Notes Payable account should be reported as an asset on the balance sheet.
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When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
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All of these are true.
Correct Answer
A. The Discount on Notes Payable account should be reported as an asset on the balance sheet.Explanation
The Discount on Notes Payable account should not be reported as an asset on the balance sheet because it represents a contra liability account. It is used to offset the Notes Payable account and reflects the discount given to the borrower for early payment. As a contra liability account, it has a debit balance, which is opposite to the usual credit balance of liability accounts. Therefore, the statement that the Discount on Notes Payable account should be reported as an asset on the balance sheet is not true.Rate this question:
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- 6.
Which of the following may be a current liability?
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Withheld Income Taxes
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Deposits Received from Customers
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Deferred Revenue
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All of these
Correct Answer
A. All of theseExplanation
All of the options listed - Withheld Income Taxes, Deposits Received from Customers, and Deferred Revenue - may be considered current liabilities. Withheld Income Taxes are amounts that have been deducted from employees' salaries but not yet remitted to the government. Deposits Received from Customers represent funds received in advance for goods or services that have not yet been provided. Deferred Revenue refers to income that has been received but not yet earned. All of these items represent obligations that are expected to be settled within a short period of time, typically within one year, and therefore classify as current liabilities.Rate this question:
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- 7.
Which of the following items is a current liability?
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Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
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Bonds due in three years.
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Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
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Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
Correct Answer
A. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.Explanation
The correct answer is "Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months." This is because a current liability is a debt or obligation that is expected to be settled within one year or the operating cycle of a business, whichever is longer. In this case, the bonds are due in eleven months, which falls within the one-year timeframe. Additionally, the fact that there is an adequate appropriation of retained earnings further supports the classification of these bonds as a current liability.Rate this question:
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- 8.
Which of the following should not be included in the current liabilities section of the balance sheet?
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Trade notes payable
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Short-term zero-interest-bearing notes payable
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The discount on short-term notes payable
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All of these are included
Correct Answer
A. All of these are includedExplanation
All of these items should be included in the current liabilities section of the balance sheet. Trade notes payable represent amounts owed to suppliers for goods or services purchased on credit. Short-term zero-interest-bearing notes payable are liabilities that need to be repaid within a short period of time and do not accrue interest. The discount on short-term notes payable represents the difference between the face value of the notes and the amount received when they were issued. Including all of these items provides a comprehensive view of the company's current obligations.Rate this question:
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- 9.
Which of the following is a current liability?
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Preferred dividends in arrears
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A dividend payable in the form of additional shares of stock
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A cash dividend payable to preferred stockholders
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All of these
Correct Answer
A. A cash dividend payable to preferred stockholdersExplanation
A cash dividend payable to preferred stockholders is a current liability because it represents an obligation of the company to pay a dividend in cash to its preferred stockholders within a short period of time, typically within the next year. Current liabilities are obligations that are expected to be settled within one year or the operating cycle of the business, whichever is longer. Since the cash dividend payable to preferred stockholders meets this criteria, it is considered a current liability.Rate this question:
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- 10.
Stock dividends distributable should be classified on the
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Income statement as an expense
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Balance sheet as an asset.
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Balance sheet as a liability.
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Balance sheet as an item of stockholders' equity.
Correct Answer
A. Balance sheet as an item of stockholders' equity.Explanation
Stock dividends distributable should be classified on the balance sheet as an item of stockholders' equity because it represents the portion of retained earnings that is being distributed to shareholders in the form of additional shares. It is not an expense because it does not involve any outflow of assets or incurrence of liabilities. Instead, it reflects a reallocation of existing equity among shareholders. As such, it is reported as a component of stockholders' equity on the balance sheet.Rate this question:
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- 11.
Of the following items, the only one which should not be classified as a current liability is
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Current maturities of long-term debt.
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Sales taxes payable.
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Short-term obligations expected to be refinanced.
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Unearned revenues.
Correct Answer
A. Short-term obligations expected to be refinanced.Explanation
Short-term obligations expected to be refinanced should not be classified as a current liability because they are expected to be refinanced and therefore do not represent an obligation that will be paid within the current operating cycle or one year, whichever is longer. Current maturities of long-term debt, sales taxes payable, and unearned revenues are all examples of current liabilities because they represent obligations that are expected to be settled within the current operating cycle or one year.Rate this question:
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- 12.
An account which would be classified as a current liability is
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Dividends payable in the company's stock.
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B. accounts payable—debit balances.
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Losses expected to be incurred within the next twelve months in excess of the company's insurance coverage.
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None of these.
Correct Answer
A. None of these.Explanation
The correct answer is "none of these" because dividends payable in the company's stock would be classified as an equity account, not a liability. Accounts payable with debit balances would also not be classified as a current liability, as accounts payable typically have credit balances. Lastly, losses expected to be incurred within the next twelve months in excess of the company's insurance coverage would be classified as an expense and not a liability. Therefore, none of these options correctly represent an account that would be classified as a current liability.Rate this question:
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- 13.
Which of the following is a characteristic of a current liability but not a long-term liability?
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Unavoidable obligation.
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Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
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Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
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Transaction or other event creating the liability has already occurred.
Correct Answer
A. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.Explanation
A characteristic of a current liability is that its liquidation is reasonably expected to require the use of existing resources classified as current assets or create other current liabilities. This means that in order to settle the current liability, the company will need to use its current assets or create additional current liabilities. This characteristic is not applicable to long-term liabilities, as they are typically settled over a longer period of time and do not require the use of current assets or creation of other current liabilities for their liquidation.Rate this question:
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- 14.
Which of the following is not considered a part of the definition of a liability?
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Unavoidable obligation.
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Transaction or other event creating the liability has already occurred.
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Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
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Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
Correct Answer
A. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.Explanation
The given answer, "Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities," is not considered a part of the definition of a liability. The definition of a liability includes an unavoidable obligation, a transaction or event that has already occurred, and a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. However, the expectation of liquidation requiring the use of existing resources or creating other current liabilities is not a part of the definition of a liability.Rate this question:
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- 15.
Why is the liability section of the balance sheet of primary importance to bankers?
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To evaluate the entity's credit quality.
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To assist in understanding the entity's liquidity.
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To better understand sources of repayment.
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To evaluate operating efficiency.
Correct Answer
A. To assist in understanding the entity's liquidity.Explanation
The liability section of the balance sheet is important to bankers because it provides information about the entity's liquidity. By analyzing the liabilities, bankers can assess the company's ability to meet its short-term obligations and determine if it has enough assets to cover its liabilities. This is crucial for bankers as it helps them evaluate the entity's financial health and make informed decisions regarding lending or extending credit to the company.Rate this question:
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- 16.
What is the relationship between current liabilities and a company's operating cycle?
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Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
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Current liabilities are the result of operating transactions.
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Current liabilities can't exceed the amount incurred in one operating cycle.
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There is no relationship between the two.
Correct Answer
A. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).Explanation
The relationship between current liabilities and a company's operating cycle is that the liquidation of current liabilities is reasonably expected to occur within the company's operating cycle, which is typically one year or less. This means that the company expects to pay off its current liabilities using its operating cash flows within this time frame.Rate this question:
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- 17.
What is the relationship between present value and the concept of a liability?
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Present values are used to measure certain liabilities.
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Present values are not used to measure liabilities.
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Present values are used to measure all liabilities.
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Present values are only used to measure long-term liabilities.
Correct Answer
A. Present values are used to measure certain liabilities.Explanation
Present values are used to measure certain liabilities because the concept of present value takes into account the time value of money, which means that the value of money decreases over time. When measuring liabilities, it is important to consider the timing of cash flows. By using present value calculations, the future cash flows associated with certain liabilities can be discounted to their present value, providing a more accurate measure of the liability. However, not all liabilities require present value calculations as some may not involve future cash flows or have a significant time component. Therefore, present values are used to measure certain liabilities, but not all liabilities.Rate this question:
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- 18.
What is a discount as it relates to zero-interest-bearing notes payable?
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The discount represents the lender's costs to underwrite the note.
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The discount represents the credit quality of the borrower.
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The discount represents the cost of borrowing.
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The discount represents the allowance for uncollectible amounts.
Correct Answer
A. The discount represents the cost of borrowing.Explanation
The discount represents the cost of borrowing because when a zero-interest-bearing note payable is issued, it is typically sold at a discount. This means that the borrower receives less cash upfront than the face value of the note. The difference between the face value and the cash received is the discount, which represents the cost of borrowing for the borrower. The lender is essentially providing a loan at a lower amount than the face value, and the discount compensates the lender for the time value of money and the risk associated with lending.Rate this question:
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- 19.
Where is debt callable by the creditor reported on the debtor's financial statements?
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Long-term liability.
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Current liability if the creditor intends to call the debt within the year, otherwise a longterm liability.
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Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
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Current liability.
Correct Answer
A. Current liability.Explanation
Debt callable by the creditor is reported as a current liability on the debtor's financial statements if it is probable that the creditor will call the debt within the year. If the creditor does not intend to call the debt within the year, it is reported as a long-term liability.Rate this question:
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- 20.
Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?
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Intend to refinance the obligation on a long-term basis.
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Obligation must be due with one year.
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Demonstrate the ability to complete the refinancing.
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Subsequently refinance the obligation on a long-term basis.
Correct Answer
A. Subsequently refinance the obligation on a long-term basis.Explanation
The correct answer is "Subsequently refinance the obligation on a long-term basis." This is not a condition necessary to exclude a short-term obligation from current liabilities. The other conditions mentioned, such as intending to refinance the obligation on a long-term basis, the obligation being due within one year, and demonstrating the ability to complete the refinancing, are all necessary conditions to exclude a short-term obligation from current liabilities.Rate this question:
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- 21.
Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?
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Management indicated that they are going to refinance the obligation.
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Actually refinance the obligation.
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Have capacity under existing financing agreements that can be used to refinance the obligation.
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Enter into a financing agreement that clearly permits the entity to refinance the obligation.
Correct Answer
A. Management indicated that they are going to refinance the obligation.Explanation
This statement only indicates management's intention to refinance the obligation but does not provide any evidence that the refinancing has actually been consummated. Evidence would require actions or documentation that demonstrate the completion of the refinancing process, such as actually refinancing the obligation, having capacity under existing financing agreements, or entering into a financing agreement that permits refinancing.Rate this question:
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- 22.
A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
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Record a liability for cumulative amount of preferred stock dividends not declared.
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Disclose the amount of the dividends in arrears.
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Record a liability for the current year's dividends only.
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No disclosure or recognition is required.
Correct Answer
A. Disclose the amount of the dividends in arrears.Explanation
In this situation, the required accounting treatment or disclosure is to disclose the amount of the dividends in arrears. This means that the company needs to provide information about the cumulative preferred stock dividends that have not been declared for the past three years. This disclosure is important for investors and other stakeholders to understand the financial obligations of the company towards its preferred stockholders.Rate this question:
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- 23.
Which of the following situations may give rise to unearned revenue?
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Providing trade credit to customers.
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Selling inventory.
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Selling magazine subscriptions.
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Providing manufacturer warranties.
Correct Answer
A. Selling magazine subscriptions.Explanation
Selling magazine subscriptions may give rise to unearned revenue because when a customer pays for a subscription upfront, the company has not yet provided the full service. The revenue is considered unearned until the magazines are delivered to the customer over the subscription period.Rate this question:
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- 24.
Which of the following statements is correct?
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A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
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A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing
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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.
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None of these
Correct Answer
A. None of these -
- 25.
The ability to consummate the refinancing of a short-term obligation may be demonstrated by
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Actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
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Entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
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Actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
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All of these.
Correct Answer
A. All of these.Explanation
The correct answer is "all of these" because the ability to consummate the refinancing of a short-term obligation can be demonstrated by actually refinancing the obligation by issuing a long-term obligation, entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis, or actually refinancing the obligation by issuing equity securities.Rate this question:
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- 26.
Which of the following statements is false?
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A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
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Cash dividends should be recorded as a liability when they are declared by the board of directors.
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Under the cash basis method, warranty costs are charged to expense as they are paid.
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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
Correct Answer
A. 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 authorityExplanation
The statement that 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 is false. FICA taxes withheld from employees' payroll checks should be recorded as a liability because the employer has an obligation to remit these amounts to the appropriate taxing authority. The employer is acting as a trustee for the employees and is responsible for withholding and remitting these taxes on their behalf. Therefore, the amount withheld should be recognized as a liability until it is remitted.Rate this question:
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- 27.
Which of the following is not a correct statement about sales taxes?
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Sales taxes are an expense of the seller.
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Many companies record sales taxes in the sales account.
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If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
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All of these are true.
Correct Answer
A. Sales taxes are an expense of the seller.Explanation
Sales taxes are not considered an expense of the seller because they are collected from the buyer and then remitted to the government. The seller acts as an intermediary in collecting the taxes. Therefore, sales taxes are not directly recorded as an expense by the seller.Rate this question:
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- 28.
If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
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A general description of the financing arrangement.
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The terms of the new obligation incurred or to be incurred.
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The terms of any equity security issued or to be issued.
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The number of financing institutions that refused to refinance the debt, if any.
Correct Answer
A. The number of financing institutions that refused to refinance the debt, if any.Explanation
The footnote to the financial statements describing the exclusion of a short-term obligation from current liabilities due to refinancing should include a general description of the financing arrangement, the terms of the new obligation incurred or to be incurred, and the terms of any equity security issued or to be issued. However, it is not necessary to include the number of financing institutions that refused to refinance the debt, if any.Rate this question:
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- 29.
In accounting for compensated absences, the difference between vested rights and accumulated rights is
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Vested rights are normally for a longer period of employment than are accumulated rights.
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Vested rights are not contingent upon an employee's future service
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Vested rights are a legal and binding obligation on the company, whereas
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Vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.
Correct Answer
A. Vested rights are not contingent upon an employee's future serviceExplanation
Vested rights refer to the benefits that an employee is entitled to receive even if they leave the company before retirement or completion of a certain period of service. These rights are not contingent upon the employee's future service and are legally binding obligations on the company. On the other hand, accumulated rights represent the amount of compensated absences that an employee has earned based on their length of service. The correct answer states that vested rights are not contingent upon an employee's future service, which distinguishes them from accumulated rights.Rate this question:
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- 30.
An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's
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Portion of FICA taxes and unemployment taxes.
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And employer's portion of FICA taxes, and unemployment taxes.
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Portion of FICA taxes, unemployment taxes, and any voluntary deductions.
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Portion of FICA taxes and any voluntary deductions.
Correct Answer
A. Portion of FICA taxes and any voluntary deductions.Explanation
The employee's net pay is determined by subtracting the portion of FICA taxes and any voluntary deductions from their gross earnings. This means that after accounting for the required FICA taxes and any additional deductions that the employee has chosen to make, such as for retirement savings or health insurance, the remaining amount is their net pay or take-home pay.Rate this question:
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- 31.
Which of these is not included in an employer's payroll tax expense?
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F.I.C.A. (social security) taxes
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Federal unemployment taxes
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State unemployment taxes
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Federal income taxes
Correct Answer
A. Federal income taxesExplanation
An employer's payroll tax expense includes F.I.C.A. (social security) taxes, federal unemployment taxes, and state unemployment taxes. However, federal income taxes are not included in an employer's payroll tax expense. Federal income taxes are the responsibility of the employees and are withheld from their wages by the employer, but they are not considered a part of the employer's payroll tax expense.Rate this question:
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- 32.
Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
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The obligation relates to the rights that vest or accumulate.
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Payment of the compensation is probable
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The obligation is attributable to employee services already performed.
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All of these are conditions for the accrual.
Correct Answer
A. All of these are conditions for the accrual.Explanation
The correct answer is "All of these are conditions for the accrual." This means that all three conditions mentioned in the options are necessary for accruing a liability for the cost of compensation for future absences. The first condition states that the obligation must relate to the rights that vest or accumulate, meaning that there must be a legal or contractual obligation for the compensation. The second condition states that payment of the compensation is probable, indicating that it is likely to occur. The third condition states that the obligation must be attributable to employee services already performed, meaning that the compensation is for work that has already been completed.Rate this question:
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- 33.
A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should
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Be accrued during the period when the compensated time is expected to be used by employees.
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Be accrued during the period following vesting.
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Be accrued during the period when earned
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Not be accrued unless a written contractual obligation exists.
Correct Answer
A. Be accrued during the period when earnedExplanation
The correct answer is that a liability for compensated absences should be accrued during the period when earned. This means that when employees earn vacation or other compensated time off, the company should recognize this as an expense and record a liability for the amount that will need to be paid out in the future. Accruing the liability when earned ensures that the company accurately reflects its financial obligations and expenses related to employee absences.Rate this question:
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- 34.
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.
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1
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2
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3
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Either 1 or 2 is acceptable.
Correct Answer
A. Either 1 or 2 is acceptable.Explanation
The correct answer is either 1 or 2 is acceptable because the amount of liability for compensated absences can be based on either the current rates of pay when employees earn the right to compensated absences or the future rates of pay expected to be paid when employees use compensated time. Both approaches are acceptable in determining the amount of liability for compensated absences.Rate this question:
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- 35.
What are compensated absences?
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Unpaid time off.
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A form of healthcare.
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Payroll deductions.
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Paid time off
Correct Answer
A. Paid time offExplanation
Compensated absences refer to paid time off, where employees are granted leave with pay for various reasons such as vacation, sick leave, or personal days. This allows employees to take time off from work while still receiving their regular pay. It is a benefit provided by employers to promote work-life balance and employee well-being.Rate this question:
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- 36.
Which gives rise to the requirement to accrue a liability for the cost of compensated absences?
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Payment is probable.
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Employee rights vest or accumulate.
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Amount can be reasonably estimated.
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All of the above
Correct Answer
A. All of the aboveExplanation
The requirement to accrue a liability for the cost of compensated absences arises when all of the following conditions are met: payment is probable, employee rights vest or accumulate, and the amount can be reasonably estimated. In other words, if it is likely that the company will have to make payments for absences, if the employees have earned the right to take those absences or if they accumulate over time, and if the amount of the liability can be reasonably estimated, then a liability should be accrued.Rate this question:
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- 37.
Under what conditions is an employer required to accrue a liability for sick pay?
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Sick pay benefits can be reasonably estimated.
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Sick pay benefits vest.
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Sick pay benefits equal 100% of the pay.
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Sick pay benefits accumulate
Correct Answer
A. Sick pay benefits vest.Explanation
An employer is required to accrue a liability for sick pay when the sick pay benefits vest. This means that the employees have met certain criteria, such as completing a certain amount of service or reaching a specific date, that entitles them to receive the sick pay benefits. Accruing a liability ensures that the employer recognizes and sets aside funds for the future payment of sick pay benefits to eligible employees.Rate this question:
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- 38.
Which of the following taxes does not represent a payroll deduction a company may incur?
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Federal income taxes.
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FICA taxes.
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State unemployment taxes.
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State income taxes.
Correct Answer
A. State unemployment taxes.Explanation
State unemployment taxes do not represent a payroll deduction that a company may incur. Payroll deductions are amounts withheld from an employee's paycheck by the employer to fulfill various obligations. Federal income taxes, FICA taxes (which include Social Security and Medicare taxes), and state income taxes are all examples of payroll deductions. However, state unemployment taxes are typically paid by employers to fund unemployment insurance programs and are not deducted from an employee's paycheck.Rate this question:
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- 39.
What is a contingency?
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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.
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An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
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An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
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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.
Correct Answer
A. 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.Explanation
A contingency refers to an existing situation where there is uncertainty regarding a possible gain or loss. This uncertainty will be resolved when one or more future events occur or fail to occur.Rate this question:
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- 40.
When is a contingent liability recorded?
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When the amount can be reasonably estimated.
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When the future events are probable to occur and the amount can be reasonably estimated.
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When the future events are probable to occur.
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When the future events will possibly occur and the amount can be reasonably estimated.
Correct Answer
A. When the future events are probable to occur and the amount can be reasonably estimated.Explanation
A contingent liability is recorded when there is a probable future event that may result in a loss and the amount of that loss can be reasonably estimated. This means that there is a likelihood of the event occurring, and the amount of the potential loss can be reasonably determined.Rate this question:
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- 41.
Which of the following is an example of a contingent liability?
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Obligations related to product warranties.
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Possible receipt from a litigation settlement.
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Pending court case with a probable favorable outcome.
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Tax loss carryforwards.
Correct Answer
A. Obligations related to product warranties.Explanation
Obligations related to product warranties are considered a contingent liability because they represent potential future costs that may arise if a product malfunctions or requires repairs. These obligations are contingent upon the occurrence of a specific event, such as a warranty claim being made by a customer. Therefore, they are recognized as liabilities on the balance sheet, but the exact amount of the liability is uncertain until the event occurs. This uncertainty makes it a contingent liability.Rate this question:
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- 42.
Which of the following terms is associated with recording a contingent liability?
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Possible.
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Likely.
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Remote.
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Probable.
Correct Answer
A. Probable.Explanation
The term "probable" is associated with recording a contingent liability. A contingent liability refers to a potential obligation that may arise in the future, depending on the outcome of a specific event. When a contingent liability is considered probable, it means that it is likely to occur. In accounting, probable contingent liabilities are recorded in the financial statements and disclosed in the accompanying notes, as they have a high chance of becoming actual liabilities.Rate this question:
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- 43.
Which of the following is the proper way to report a gain contingency?
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As an accrued amount.
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As deferred revenue.
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As an account receivable with additional disclosure explaining the nature of the contingency.
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As a disclosure only.
Correct Answer
A. As a disclosure only.Explanation
The proper way to report a gain contingency is as a disclosure only. This means that the gain contingency is not recognized as an accrued amount, deferred revenue, or an account receivable. Instead, it is disclosed in the financial statements to provide information to the users about the nature of the contingency and its potential impact on the entity's financial position.Rate this question:
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- 44.
Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
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Probable losses not reasonably estimable
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Environmental liabilities that cannot be reasonably estimated
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Guarantees of indebtedness of others
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All of these must be disclosed. Current Liabilities and Contingencies
Correct Answer
A. All of these must be disclosed. Current Liabilities and ContingenciesExplanation
All of the contingencies mentioned in the options must be disclosed in the financial statements or the notes thereto. This means that probable losses not reasonably estimable, environmental liabilities that cannot be reasonably estimated, and guarantees of indebtedness of others must all be disclosed in the financial statements or the accompanying notes.Rate this question:
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- 45.
Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
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Amount of loss is reasonably estimable and event occurs infrequently.
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Amount of loss is reasonably estimable and occurrence of event is probable.
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Event is unusual in nature and occurrence of event is probable.
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Event is unusual in nature and event occurs infrequently.
Correct Answer
A. Amount of loss is reasonably estimable and occurrence of event is probable.Explanation
This answer is correct because under current generally accepted accounting principles, a contingency should be accrued if the amount of loss can be reasonably estimated and the occurrence of the event is probable. This means that there is a likelihood that the event will occur and that the amount of loss can be reasonably determined.Rate this question:
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- 46.
Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had 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 Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial statements should include the following related to the incident:
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Recognition of a loss and creation of a liability for the value of the land.
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Recognition of a loss only.
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Creation of a liability only
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Disclosure in note form only
Correct Answer
A. Recognition of a loss and creation of a liability for the value of the land.Explanation
The correct answer is recognition of a loss and creation of a liability for the value of the land. This is because the incident of the hay being set on fire due to the Railroad's negligence has resulted in a loss for Jeff Beck. The offer made by the Railroad to assign any rights they may have in the land to Beck in exchange for releasing his right to reimbursement indicates that there is a liability involved. Therefore, the financial statements should include the recognition of the loss and the creation of a liability for the value of the land.Rate this question:
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- 47.
A contingency can be accrued when
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It is certain that funds are available to settle the disputed amount.
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An asset may have been impaired.
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The amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
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. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
Correct Answer
A. The amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.Explanation
A 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 incurred. This means that there is enough information available to estimate the potential loss and it is likely that an asset has been damaged or a liability has been created. This allows for the recognition of the potential loss in the financial statements, ensuring that the financial information accurately reflects the potential impact on the company's financial position.Rate this question:
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- 48.
A contingent liability
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Definitely exists as a liability but its amount and due date are indeterminable.
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Is accrued even though not reasonably estimated.
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Is not disclosed in the financial statements.
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Is the result of a loss contingency.
Correct Answer
A. Is the result of a loss contingency.Explanation
A contingent liability is a potential obligation that may arise in the future due to a loss contingency. It is not a definite liability, as its amount and due date are uncertain. However, it is recognized and disclosed in the financial statements if it is probable and the amount can be reasonably estimated. Therefore, the correct answer is that a contingent liability is the result of a loss contingency.Rate this question:
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- 49.
To record an asset retirement obligation (ARO), the cost associated with the ARO is
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Expensed.
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Included in the carrying amount of the related long-lived asset.
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Included in a separate account.
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None of these.
Correct Answer
A. Included in the carrying amount of the related long-lived asset.Explanation
When recording an asset retirement obligation (ARO), the cost associated with the ARO is included in the carrying amount of the related long-lived asset. This means that the cost is added to the value of the asset on the balance sheet, increasing its carrying amount. By doing so, the company recognizes the future cost of retiring the asset and ensures that it is properly accounted for in the financial statements. This approach reflects the matching principle of accounting, which requires expenses to be recognized in the same period as the related revenue or asset.Rate this question:
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Mar 21, 2023Quiz Edited by
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May 11, 2012Quiz Created by
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