66 Free Test Bank for Intermediate Accounting Volume 2 5th Edition by Beechy

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Which of the following statements is/are correct?

•  B. Litigation for which the company will probably be found guilty would normally be accrued as a
•  D. Both B & C are correct.
•  provision.
•  A. Under IFRS, contingencies may be accrued, but not under ASPE.
•  C. Under IFRS, contingencies should be disclosed but not accrued.

Proposed changes to the IFRS definition of a liability include:

•  C. The addition of the requirement that a liability be a present obligation.
•  B. The removal of the requirement that a liability relate to a past event.
•  A. The addition of the requirement that a liability relate to a past event.
•  D. The addition of the requirement that a liability be a legal obligation.

A short-term note payable may include all of the following except:

•  B. Nontrade notes payable.
•  D. Unearned revenue.
•  C. A current portion of a long-term liability.
•  A. Trade notes payable.

$5,000 (face value) of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity. The dollar amount (excluding interest) paid to retire the bonds was $4,700. The entry to record the retirement would include:

•  A. dr. bonds payable $5,000
•  C. dr. bonds payable $4,700
•  B. cr. cash $4,300
•  D. cr. unusual gain $400

On November 7, 1999 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, 1999 financial statements Brimley should:

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

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

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

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?

•  C. The company has a constructive obligation to accrue a loss of $1.2 million plus any previously
•  D. This is an onerous contract, so the company must accrue a loss of $1.2 million plus any previously
•  recognized profit.
•  A. There is a constructive obligation to finish the contract.
•  B. The company will have recognized $3 million in profit on the contract to date.
•  recognized profit.

Constructive obligations may arise from:

•  C. Notes Payable
•  B. Warranty obligations.
•  D. Both A & B
•  A. Asset retirement obligations

Contingent liabilities will or will not become actual liabilities depending on:

•  A. Whether they are probable and estimable
•  B. The degree of uncertainty
•  D. The outcome of a future event
•  C. The present condition suggesting a liability

By law, a fleet of aircraft must be subject to a major overhaul every 5 years as part of its scheduled maintenance program. Which of the following statements is correct?

•  C. The cost of the overhaul should be deferred and amortized.
•  D. The estimated cost of the overhaul should be disclosed as part of a continuity schedule in the notes to the financial statements.
•  A. An accrual should be made in each of the 5 years preceding the overhaul.
•  B. The costs of the overhaul should be expensed as incurred.

Information obtained prior to the issuance of the current period's financial statements of KG Company indicates that it is probable that, at the date of the financial statements, a liability will be incurred for obligations related to product warranties on products sold during the current period. During the past three years, product warranty costs have been approximately 1 1/2 percent of annual sales revenue. An estimated loss contingency should be:

•  A. Neither accrued nor disclosed in the financial statements.
•  C. Accrued in the accounts and reported in the financial statements.
•  B. Recognized as an appropriation of retained earnings.
•  D. Disclosed in the financial statements but not accrued.

You are an investor and have just purchased a bond on July 1 which pays interest every March 1 and September 1. When you receive your first interest cheque, you will receive and have earned how many months interest?

•  A. Choice 1
•  D. Choice 4
•  E. Choice 5
•  B. Choice 2
•  C. Choice 3

A company had sales of $1 million. Coupons in the amount of $1 per $10 in sales were given to paying customers. History has shown that 50% of all coupons are redeemed. Which of the following statements is correct?

•  B. A provision for $100,000 must be recognized.
•  C. A provision for $1 million must be recognized.
•  D. No provision is necessary.
•  A. A provision for $50,000 must be recognized.

All of the following are true with respect to sinking funds except:

•  B. A sinking fund may be handled by a trustee or by the individual company.
•  C. A sinking fund may make the investment more attractive to investors.
•  D. Once the sinking fund is established, the company has no more responsibility to the debt.
•  A. A sinking fund is a cash fund that is restricted for retiring the debt of a company.

A brewing company operating in an Ontario city experiencing water shortages received its water bill for December 1999, on December 31, 1999. The bill ($8,000) represents the cost of water used in December to make its product. The company will not publish the 1999 financial statements until February 2000. Therefore, the adjusting entry as of December 31, 1999 includes which of the following?

•  D. no adjusting entry needed because the bill will not be paid until January 2000
•  A. cr. utilities payable $8,000
•  C. cr. utilities expense $8,000
•  B. cr. cash $8,000

Which of the following statements is/are correct?

•  A. For companies that are self-insured, a provision must be established for events taking place prior to the reporting period but not for loss events that have happened during the year but are not yet known.
•  B. For companies that are self-insured, a provision must be established for events taking place prior to the reporting period and for loss events that have happened during the year but are not yet known.
•  D. Both A & C are correct.
•  E. Both B & C are correct.
•  C. Contingent assets are only recorded when it is virtually certain that the benefits relating to the contingent assets will be received.

Bonds payable (due 5 years from the balance sheet date) should be classified as follows:

•  D. A current liability.
•  A. A contingent liability.
•  B. An element of the owners' equity.
•  C. A long-term liability.

R Company was indebted to A Inc. at January 1, 2000. The note called for a $25,000 payment to be made on December 31, 2000 and also on December 31, 2001. The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued. What is the book value of the note on R's January 1, 2000 balance sheet?

•  A. $47,727
•  D. $50,000
•  C. $43,389
•  E. $38,962
•  B. $47,500

JMR bought 15 Z Corporation $1,000 bonds for $15,270 total, on April 1, 2000, (five years prior to maturity). The bonds pay 8% annual interest on April 1 and October 1. On December 31, 2000, the bonds had a market value of $14,950 (not a permanent decline). JMR purchased these bonds at:

•  B. Par plus accrued interest.
•  D. A discount.
•  E. A discount plus accrued interest.
•  C. A premium.
•  A. Par.

A company is being sued by a competitor for $120,000. The company's legal team estimates that there is a 20% chance that the company will be sued. Under the PROPOSED changes to current IFRS standards,

•  A. No provision or note disclosure will be required.
•  D. A provision of $120,000 will be required.
•  C. A provision of $96,000 will be required.
•  B. A provision of $24,000 will be required.

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

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

The rate of interest used to discount the future cash payments on a debt to the cash equivalent borrowed is least likely to be described by which of the following terms:

•  A. Effective interest rate.
•  D. Prevailing interest rate.
•  B. Yield interest rate.
•  C. Stated interest rate.