Deck 13: Operating Liabilities and Contingencies

Question 1

Which of the following is not an operating liability?

A) bonds payable
B) unearned revenue
C) customer deposits
D) compensated absences

Answer 1

A

Question 2

The amount of revenue recognized from the sale of gift cards during the period is equal to gift card redemptions during the period minus estimated breakage.

Answer 2

False

Question 3

All liabilities are probable future economic sacrifices arising from present obligations.

Answer 3

True

Question 4

Which of the following situations typically results in unearned revenues?

A) charging customers a deposit for returnable containers
B) short-term zero-interest notes payable
C) providing manufacturer warranties
D) selling magazine subscriptions

Question 5

Which of the following is also referred to as deferred credits?

A) late fees
B) sales taxes payable
C) unearned revenues
D) accrued revenues

Question 6

Gift card breakage represents an estimate of the value of gift cards that will not be redeemed.

Question 7

Under what conditions is an employer required to accrue a liability for sick pay?

A) Sick pay benefits are reasonably estimable.
B) Sick pay benefits are non-vested and reasonably estimable.
C) Sick pay benefits accumulate.
D) Sick pay benefits are vested.

Question 8

Which of the following terms refers to gift card sales that are never redeemed?

A) spoilage
B) breakage
C) roughage
D) liftage

Question 9

Operating liabilities are short-term obligations.

Question 10

Which of the following represents amounts owed for goods, supplies, or services purchased?

A) bonds payable
B) accounts payable
C) customer -related payable
D) liability for compensated absences

Question 11

The obligation for compensated absences includes amounts payable for future holidays.

Question 12

The obligation for compensated absences is based on services to be performed by the employee in the future.

Question 13

Accounts payable are formal, written promises to pay a certain sum of money on a specified date and typically specify a stated rate of interest.

Question 14

The sales tax liability account is debited when the seller collects sales taxes from customers.

Question 15

What are compensated absences?

A) paid time off
B) unpaid time off
C) payroll deductions
D) healthcare benefits

Question 16

The deposit liability account is debited when it is determined that deposits will not be returned.

Question 17

Which of the following is not a characteristic of a liability?

A) obligation always arises from past events
B) probably requires future sacrifice of resources
C) requires sacrifice of cash or other current asset in the current period
D) present obligation

Question 18

Under IFRS, the obligation for compensated absences should be valued at known future wage rates.

Question 19

Income tax payable, as reported on a company's balance sheet, represents the amount that is owed to the governmental units.

Question 20

One of the three characteristics of liabilities is that they must arise from the firm's primary business obligations.

Question 21

Distinguish between an interest-bearing note and a non-interest-bearing note. How are the proceeds computed for a non-interest-bearing note?

Question 22

A company gives each of its 50 employees (assume they were all employed continuously through 2018 and 2019) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2018, they made $17.50 per hour and in 2019 they made $20 per hour. During 2019, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. Under U.S. GAAP, what amount of vacation liability would be reflected on the 2018 and 2019 balance sheets, respectively?

A) $84,000; $117,000
B) $96,000; $108,000
C) $84,000; $24,000
D) $96,000; $24,000

Question 23

On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year insurance policy beginning on the same date. The company has a December 31 year end. How much Insurance Revenue will be recognized in 2018? (Do not round any intermediary calculations. Round your final answer to the nearest dollar.)

A) $347,083
B) $142,917
C) $245,000
D) $102,083

Question 24

On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year insurance policy beginning on the same date. The company has a December 31 year end. What is the balance of the unearned revenue account after adjusting entries on December 31, 2018? (Do not round any intermediary calculations. Round your final answer to the nearest dollar.)

A) $347,083
B) $142,917
C) $245,000
D) $102,083

Question 25

A company gives each of its 80 employees (assume they were all employed continuously through 2018 and 2019) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2018, they made $17.50 per hour and in 2019 they made $20 per hour. During 2019, they took an average of 8 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. Under U.S. GAAP, what amount of vacation liability would be reflected on the 2018 and 2019 balance sheets?

Question 26

On September 1, Dondra purchased $9,000 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $500. Payment for the purchase was made on September 18. Assuming Dondra uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded on September 1 as accounts payable from this purchase?

A) $9,500
B) $9,410
C) $9,000
D) $8,910

Question 27

How do GAAP and IFRS differ in the treatment of compensated absences?

Question 28

What are compensated absences? How does a company account for them?

Question 29

If a company is able to estimate the rate of redemption for gift cards, they should use the ________ method to account for breakage.

A) proportional
B) accrual
C) remote
D) credit

Question 30

Bull's Eye Department Stores, Inc. records $180,000 in gift card sales and receives cash in year 1. Customers redeemed 20% of the gift cards to purchase merchandise in year 1. The company estimates breakage as 12% and uses the proportional method. What is the proper treatment for redemption of the gift cards and recognition of breakage?

Question 31

Bull's Eye Department Stores, Inc. records $200,000 in gift card sales and receives cash in year 1. Customers redeemed 10% of the gift cards to purchase merchandise in year 2. Which of the following would be included in the summary journal entry to reflect the year 2 redemption transactions?

A) debit Unearned Revenue $20,000
B) credit Unearned Revenue $20,000
C) debit Sales Revenue $180,000
D) credit Sales Revenue $180,000

Question 32

Bull's Eye Department Stores, Inc. records $170,000 in gift card sales and receives cash in year 1. Customers redeemed 25% of the gift cards to purchase merchandise in year 1. The company estimates breakage as 13% and uses the proportional method. How much breakage revenue should be recorded at the end of year 1? (Round any intermediary percentages two decimal places, X.XX%. Round your final answer to the nearest dollar.)

A) $22,100
B) $42,500
C) $5,525
D) $6,352

Question 33

Pegasus Corp. signed a three-month, 6% note on November 1, 2019 for the purchase of $260,000 of inventory. If Pegasus makes adjusting entries only at the end of the year, the adjusting entry made at December 31, 2019 will include a ________. (Do not round any intermediary calculations. Round your final answer to the nearest dollar.)

A) debit to Note Payable for $2,600
B) debit to Interest Expense for $2,600
C) credit to Note Payable for $15,600
D) debit to Interest Expense for $3,900

Question 34

Pegasus Corp. signed a three-month, 10% note on November 1, 2019 for the purchase of $246,000 of inventory. If Pegasus makes adjusting entries only at the end of the year, the entry made at January 31, 2020 will include a ________. (Do not round any intermediary calculations. Round your final answer to the nearest dollar.)

A) debit to Note Payable for $246,000
B) debit to Interest Expense for $4,100
C) credit to Note Payable for $246,000
D) debit to Interest Expense for $6,150

Question 35

Reducto Co. pays a weekly payroll of $95,000 that includes federal taxes withheld of $12,000 FICA taxes withheld of $7,250, and retirement withholdings of $6,000. What is the effect on assets and liabilities from this transaction?

A) Assets decrease $95,000 and liabilities decrease $69,750.
B) Assets decrease $95,000 and liabilities increase $95,000.
C) Assets decrease $69,750 and liabilities decrease $25,250.
D) Assets decrease $69,750 and liabilities increase $25,250.

Question 36

On June 1, 2018, Superior Insurance Company collected $490,000 for a 2-year insurance policy beginning on the same date. The company has a December 31 year end. What is the balance of the unearned revenue account after adjusting entries on December 31, 2019? (Do not round any intermediary calculations. Round your final answer to the nearest dollar.)

A) $347,083
B) $142,917
C) $245,000
D) $102,083

Question 37

Kool's Stores made cash sales during the month of May of $79,000. The sales are subject to a 7% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the May sales transactions?

A) debit Cash for $79,000
B) credit Sales Tax Payable for $73,470
C) credit Sales for $73,470
D) credit Sales Tax Payable for $5,530

Question 38

What is breakage and how does it relate to the accounting for sales of gift cards? Describe two methods for estimating the amount of breakage.

Question 39

National Refuse requires customers to pay $40 for each toter used for trash collection and charges this amount when delivered. When toters are returned, the amount is refunded to the customer. If a customer cancels the trash collection contract, but does not return the toter, the amount is forfeited by the customer. During the current year, 30 customers cancelled their contracts and failed to return their toter, while 105 toters are returned upon cancellation. Which of the following would be included in the journal entry to reflect the forfeiture?

A) debit to Deposit Liability for $4,200
B) debit to Deposit Liability for $1,200
C) credit to Deposit Liability for $4,200
D) credit to Deposit Liability for $5,400

Question 40

Pegasus Corp. signed a three-month, zero-interest-bearing $323,000 note on November 1, 2019 for the purchase of $250,000 of inventory. If Pegasus makes adjusting entries only at the end of the year, the adjusting entry made at December 31, 2019 will include a ________.

A) debit to Note Payable for $24,333
B) debit to Interest Expense for $48,667
C) credit to Note Payable for $24,333
D) credit to Interest Expense for $48,667

Question 41

Accounting requirements for AROs under IFRS are the same as U.S. GAAP requirements.

Question 42

Lifeline Biofuels built an oil rig at a cost of $4.5 million. At the time that construction was complete, the company estimated the oil rig would have a useful life of 20 years (with no salvage value), after which Federal regulations would require that the oil rig be dismantled and the land area restored. The fair value of this asset retirement project was $815,000 and the present value of these asset retirement costs was $307,000 based on the 5% after-tax discount rate. At the end of the 20 year life, the company dismantles the oil rig and restores the land at a cost of $890,000. Following U.S. GAAP, the journal entry to record the completion of the restoration process would include:

A) credit Loss on Settlement of Asset Retirement Obligation for $583,000
B) debit Loss on Settlement of Asset Retirement Obligation for $75,000
C) credit Asset Retirement Obligation for $75,000
D) debit Loss on Settlement of Asset Retirement Obligation for $583,000

Question 43

Which of the following is not a way IFRS differs from U.S. GAAP for asset retirement obligations?

A) The transaction may be accounted for using either the proportional method or remote method, not just the proportional method.
B) The nature of the obligation may be either economic or legal, not just legal.
C) Valuation is based on estimated costs, not fair value.
D) Valuation is discounted using a pre-tax rate, not an after-tax rate.

Question 44

Lifeline Biofuels built an oil rig at a cost of $4.5 million that it places into service on the first day of the current year. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored. The expected fair value of this asset retirement project is $845,000. The present value of these asset retirement costs is $126,000 based on the 10% after-tax discount rate. Under U.S. GAAP, what is the company's accretion expense for the first year?

A) $12,600
B) $42,250
C) $6,300
D) $0

Question 45

Dismantling an ocean oil-rig platform is an example of an asset retirement obligation.

Question 46

Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored at an expected fair value of $1.3 million. The present value of these asset retirement costs is $400,000 based on the 6% after-tax discount rate. The company follows U.S. GAAP.
a. Prepare the journal entry prepared at the completion of construction to value the oil rig.
b. Prepare the journal entry to record the annual increase in the carrying value of the liability.
c. At the end of 20 years, the company dismantles the oil rig and restores the land area at a cost of $1.5 million. Prepare the journal entry to record payment of the settlement costs in cash.

Question 47

Under U.S. GAAP, accounting for an ARO requires estimating the fair value that the company would have to pay to retire the asset in today's market.

Question 48

Under U.S. GAAP, what is the expense resulting from the increase in the carrying amount of an asset retirement obligation?

A) contingent expense
B) accretion expense
C) vested expense
D) depletion expense

Question 49

Lifeline Biofuels built an oil rig at a cost of $10.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored. The fair value of the costs of this asset retirement project is $900,000. The present value of these asset retirement costs is $280,000 based on the 6% after-tax discount rate. Under U.S. GAAP, what is the initial capitalized carrying value of the oil rig at the completion of construction?

A) $10,500,000
B) $10,220,000
C) $10,780,000
D) $630,000

Question 50

Asset retirement obligations must be legal obligations under both U.S. GAAP and IFRS.

Question 51

Accretion expense required by U.S. GAAP is referred to as interest expense by IFRS.

Question 52

What account is debited when the liability is initially capitalized for an asset retirement obligation to dismantle an ocean oil rig?

A) a retirement expense account
B) an accretion expense account
C) the oil rig asset account
D) a separate quasi-asset account

Question 53

By recording a contingent gain, a company recognizes revenue when it is realized.

Question 54

According to U.S. GAAP, asset retirement obligations are ________.

A) measured as the present value of past resource usage
B) obligations to replace old buildings and equipment with new assets
C) sinking funds for bonds or other long-term liabilities
D) long-term legal requirements to restore property

Question 55

Under IFRS, asset retirement obligations are considered loss contingencies.

Question 56

Contingent gains are generally not recognized in the financial statements due to conservatism.

Question 57

When an Asset Retirement Obligation is first recognized, a liability account is credited.

Question 58

How does IFRS accounting for asset retirement obligations different from U.S. GAAP accounting?

Question 59

Asset retirement obligations (AROs) are short-term legal obligations to dismantle and scrap assets.

Question 60

Under IFRS, estimated costs of asset retirement obligations are discounted using an after-tax interest rate.

Question 61

In order to accrue a litigation-related liability, the company must be aware of the lawsuit before the company's year-end.

Question 62

If a litigation-related loss is not probable, it should not be accrued as a liability.

Question 63

A service-type warranty exists if the customer has the option to purchase the warranty separately.

Question 64

Warranties that cover longer time periods are more likely to be assurance-type warranties.

Question 65

When a company can estimate a range for the loss, but cannot identify a single most-likely outcome within that range, IFRS requires that it accrue the midpoint of the range while U.S. GAAP requires that it accrue the minimum value of the range.

Question 66

Some loss contingencies may be disclosed only in the footnotes even if the losses are deemed to be probable.

Question 67

Which of the following is the proper way to report a probable contingent asset?

A) as a disclosure only
B) as a deferred revenue
C) as an accrued revenue
D) as an increase to receivables

Question 68

Under U.S. GAAP, a contingency is deemed to be probable if it is considered to be likely to occur.

Question 69

If management can only estimate a range for the loss, but cannot identify a single most likely outcome within that range, under U.S. GAAP it should accrue the midpoint of the range.

Question 70

Under IFRS, provisions for contingent losses are accrued when the likelihood of an unfavorable outcome is ________.

A) virtually certain
B) more likely than not
C) reasonably possible
D) more than remote

Question 71

More contingencies are reported on the balance sheet under U.S. GAAP than under IFRS because of different definitions of "probable."

Question 72

What are the three characteristics of a liability as defined in the conceptual framework?

Question 73

A liability for a contingent loss of a known amount will be disclosed in a footnote if the occurrence of the obligation is deemed to be probable.

Question 74

Onopea Inc. considered two contingencies at the end of 2016: ** a probable loss in the range of $200,000 to $900,000
** a reasonably possible loss of $150,000
Under IFRS, what is the balance for contingent liabilities at the end of 2016?

A) $200,000
B) $550,000
C) $350,000
D) $1,050,000

Question 75

How is accounting for loss contingencies different under IFRS as compared to U.S. GAAP?

Question 76

Onopea Inc. considered two contingencies at the end of 2016: ** a probable loss in the range of $200,000 to $800,000
** a reasonably possible loss of $150,000
Under U.S. GAAP, what is the balance for contingent liabilities at the end of 2016?

A) $200,000
B) $500,000
C) $350,000
D) $650,000

Question 77

Which type of contingency are companies most likely to disclose in their annual report?

A) warranty
B) litigation
C) insurance
D) government investigations

Question 78

A liability for a contingent loss will be accrued and reported on the balance sheet if the occurrence of the obligation is at least reasonably possible.

Question 79

Under GAAP, a provision for a contingent loss is considered to be probable if the probability of its occurrence is ________.

A) slight
B) likely to occur
C) virtually certain
D) reasonably possible

Question 80

An assurance-type warranty is also referred to as an extended warranty.