AMSC

NAME : ____________________________________________ DATE: ____________ SCORE : ___________

Quiz # 2 LIABILITIES

FILL IN THE BLANK. Choose your answer from the words provided. Write your answer in the space provided. (1pt each)
CONTINGENT CURRENTCURRENTDISCOUNT TEMPORARY WARRANTY
1. A law suit brought against a company for dumping its toxic waste into a river is an example of a _____________ liability.
2. An invoice that is due within 60 days is an example of a _____________ liability.
3. Twelve-thousand dollars of a five-year note payable that requires monthly payments of $1,000 (excluding interest) should be shown
under the _____________ liability section of the balance sheet.
4. Payments of income taxes that are deferred until future years because of ____________ differences between GAAP and tax rules are
called deferred income tax liabilities.
5. The face value of a note payable is $12,000, the amount actually borrowed was $11,200. The $800 difference is called ____________
on notes payable.
6. Obligation of an uncertain amount that can be reasonably estimated, such as property taxes, are called (contingent, estimated,
known, actual, real) ____________ liabilities.
7. Obligations with little uncertainty are called ________________ (contingent, estimated, known, or real) liabilities.
8. A ___________ obligates the seller to pay for replacing or repairing the product (or service) when it fails to perform as expected.

MULTIPLE CHOICE. Write the letter of your answer before each number.

1. Which of the following is not essential for recognition as a liability:

a. It should be possible to make a reliable estimate of the amount
b. The obligation to transfer economic benefit should be certain
c. The obligating event triggering the obligation should have already happened
d. There should be a present obligation to transfer economic benefit

2. Which of the following statements is correct:

a. When an asset is acquired a provision will need to be made for all repairs needed during its use.
b. There is no need to account for a liability if the amount is not known for certain.
c. The amount of audit fees remaining unpaid may be referred to as a Provision.
d. A liability with uncertainty regarding either its timing or amount may be called a Provision

3. Which of the following statements is incorrect:

a. A liability has to be accounted for at the best reliable estimate even if the amount is not certain
b. Damages awarded by court against the business may be ignored because it will be appealed.
c. If the occurrence of the obligation is in doubt there is no need to account for the liability
d. A liability is a present obligation, arising from past transaction, which probably has to be paid

4. Which of the following requirements in IAS 37 are calculated to ensure that Provisions are not created and used to either
understate or overstate the performance and net assets of a business:
i) A provision cannot be made for anticipated future losses
ii) A provision is defined as a liability with uncertainty in timing or amount
iii) A provision cannot be used for any purpose other than what it was intended for
iv) The need for & amount of provision shall be reviewed on every reporting date
a. i and ii only
b. i, ii and iii
c. All four
d. ii, iii and iv

5. Alan Smith received summons dated 7th March for an interview, attended the interview on 28th March, received the
appointment letter dated 11th April and assumed duties on 15th April. Which of those listed on right is the obligating event
triggering recognition of liability by the employer?
a. Assumption of duties on 15th April.
b. Summoning for the interview on 7th March
c. Receipt of the letter of appointment –11th April
d. Attendance at interview on 28th March

6. A fashion designer received a claim for £100,000 as damages because some wedding garments were not delivered in time for
a wedding. The designer admits the delay but disputes the amount of the claim pointing out that alternative wedding
garments cost no more than £18,000. How would you advise the designer to treat the claim when finalising the financial
statements for the year. (2pts)
a. Account for the best estimate as liability
b. Ignore the claim
c. Account for a liability of £18,000
d. Account for a liability of £100,000

7. On 7th May 2012 Adler Printers signed a contract with Boon plc for £12 million. In terms of this contract Boon plc is required
to supply 40,000 reams per year of high quality printing paper for three years from 1st July 2012. By 31st December Boon has
supplied 16,000 reams and has sent an invoice for £4 million. Adler has made no payment to Boon. How and at what amount
should Adler Printers show the amount owed to Boon as at 31st December 2012. (2pts)
a. £12 million as a liability
b. £1.6 million as a liability
c. £1.6 million as a provision
d. £4 million as a liability
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8. A manufacturer of audio equipments offers a warranty to remedy manufacturing defects, at no cost to the customer, if
identified within six months of sale, but customarily has extended this facility for up to nine months. During the year to 31st
December 2012 the sales, made evenly through the year, amounted to £24 million. Past experience has been that around 5%
of items sold return for remedial treatment and remedial work costs, on average, 3% of sale price. How should the
manufacturer report its obligation for remedying manufacturing defects as at 31st December 2012? (5pts)
a. £18,000 as a liability
b. £18,000 as a provision
c. £27,000 as a provision
d. £27,000 as a liability

9. Radon plc is facing a claim for £500,000 from a customer, in respect of a fire the cause of which has been traced to defective
electric circuit in a refrigerator sold by Radon. The legal opinion is that the claim will succeed; but Radon will be able to re-
claim 75% of the amount from Fallon who supplied the circuit- breakers which malfunctioned. How should Radon report this
on its Statement of financial position? (3pts)
a. £500,000 as Provision and £375,000 as asset
b. £125,000 as a Provision
c. £500,000 as a liability and £375,000 as asset
d. £125,000 as a liability

10. A builder finds that, on account of the negligence of his workmen, he has to replace the bathroom suite in a residence still
under construction. The replacement is expected to cost £15,000; but it is anticipated that the damaged suite may fetch
around £1000. At what amount should the builder account for his obligation to replace the bathroom suite on his year-end
Statement of financial position? (2pts)
a. £15,000 as a liability and £1,000 as an asset
b. £14,000 as a Provision
c. £15,000 as a liability
d. £14,000 as a liability

11. Which of the following statements is correct:

a. A contingent liability may be accounted for if its occurrence is certain
b. A contingent liability should always be disclosed in a note
c. A contingent liability should be disclosed as a note, unless its occurrence is remote
d. A contingent liability may always be ignored

12. Which of the following should be disclosed as a note to financial statements as a contingent liability?
a. A customer’s claim which, according to legal opinion, has a 75% chance of success.
b. A customer’s claim for injuries suffered on company premises with 5% chance of success
c. Damages awarded against a company by court, for wrongful dismissal of an employee
d. A customer’s claim that is unlikely to succeed

Problem 1 (5pts)
Summa Company manufactures a special product. To promote the sale of the product, a premium is offered to customers who send in
three wrappers and remittance of P25. The distribution cost per premium is P5. Data for the premium are:
2014 2015
Sales 4,000,000 5,000,000
Premium purchased (in units) at P80 each 400,000 416,000
Number of premiums distributed 4,000 5,500
Number of premiums to be distributed in the next period 200 500
What amount should be reported as premium expense for 2015?
a. 464,000 c. 360,000
b. 348,000 d. 330,000

Problem 2 (5pts each)

Jeane Company participates in a customer loyalty program operated by an airline. The entity grants program members one air travel
point for every P1,000 spent on goods purchased. Program members can redeem the points for travel with the airline subject to
availability. The entity pays the airline P100 for each point. During the current year, the entity sold goods for consideration totaling
P8,000,000 and granted 8,000 points. The fair value of each point is P120.
1. If the entity has collected the consideration allocated to the points on its own account as principal, what is the revenue to be
recognized on the date of sale of goods in relation to the travel points?
a. 960,000 c. 160,000
b. 800,000 d. 0

2. If the entity has collected the consideration allocated to the points on behalf of the airline, what is the revenue to be recognized
on the date of sale of goods in relation to the travel points?
a. 960,000 c. 160,000
b. 800,000 d. 0

Enter the letter corresponding to the response which best completes each of the following statements or questions. Write your letter
answer before each number.

1. The essential characteristics of a liability do not include:

a. The existence of a past causal transaction or event.
b. Present obligation.
c. The existence of a legal obligation.
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d. A future sacrifice of economic benefits.

2. Of the following, which usually would not be classified as a current liability?

a. A nine-month note to be paid with the proceeds from the sale of common stock.
b. Bonds payable maturing within the coming year.
c. Estimated warranty liability.
d. Subscription revenue received in advance.

3. Which of the following results in an accrued liability?

a. Interest on a 6 month bank loan due in two months: Yes
Sales taxes collected on recent sales: Yes
b. Interest on a 6 month bank loan due in two months: Yes
Sales taxes collected on recent sales: No
c. Interest on a 6 month bank loan due in two months: No
Sales taxes collected on recent sales: No
d. Interest on a 6 month bank loan due in two months: No
Sales taxes collected on recent sales: Yes

4. Liabilities payable within one year can be excluded from current liabilities only if:
a. The business intends to refinance the obligations on a long-term basis.
b. The business has the demonstrated ability to refinance the obligations on a long-term basis.
c. Both a and b.
d. Liabilities payable within one year always must be classified as current liabilities.

5. On January 1, 2006, Yukon Company agreed to grant its employees two weeks vacation each year, with the provision that
vacations earned in a particular year could be taken the following year. For the year ended December 31, 2006, all twelve of
Yukon's employees earned $1,200 per week each. Eight of these vacation weeks were not taken during 2006. In Yukon's 2006
income statement, how much expense should be reported for compensated absences? (5pts)
a. $0
b. $9,600
c. $14,400
d. $28,800

6. An enterprise should accrue a liability for compensation of employees' unpaid vacations if certain conditions exist. Each of the
following is a condition for accrual except:
a. Compensation for the vacations is probable.
b. The employee has the right to carry forward the vacation time beyond the current period.
c. The amount of compensation is known.
d. The employee benefit has been earned.

7. In its 2006 financial statements, an enterprise should accrue a liability for a loss contingency involving a possible cash
payment if certain conditions exist. Each of the following is a condition for accrual except:
a. The payment is probable.
b. The cause of the loss contingency occurred prior to the end of 2006.
c. The amount of payment can be estimated before the 2006 financial statements are issued.
d. The obligation is a legally enforceable claim.

8. Which of the following loss contingencies generally do not require accrual?

a. Manufacturers' product guarantees.
b. Claims by government agencies with probable negative outcomes.
c. Obligations due to cash rebate offers.
d. Retailers' extended warranties.

9. Warren Advertising becomes aware of a lawsuit after the end of the fiscal year, but prior to the issuance of financial
statements. A loss should be accrued and a liability should be reported if the amount can be reasonably estimated and:
a. The cause for action occurred prior to the end of the fiscal year.
b. The damages would be payable within a year.
c. Both a. and b.
d. The contingency should not be accrued.

10. A loss contingency should be accrued when the amount of loss is known and the occurrence of the loss is:
a. Remote: No; Reasonably possible: No
b. Remote: Yes; Reasonably possible: Yes
c. Remote: Yes; Reasonably possible: No
d. Remote: No; Reasonably possible: Yes

11. During 2006 Green Thumb Company introduced a new line of garden shears that carry a two-year warranty against defects.
Experience indicates that warranty costs should be 2% of net sales in the year of sale and 3% in the year after sale. Net sales
and actual warranty expenditures were as follows:

Actual warranty
  Net sales
expenditures
2006 $   45,000        $1,000       
2007 120,000        3,500       
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At December 31, 2007, Green Thumb should report as a warranty liability of: (5pts)
a. $900
b. $1,250
c. $3,750
d. $4,500

12. There is a possibility of a safety hazard for a manufactured product. As yet, no claim has been made for damages, though
there is a reasonable possibility that a claim will be made. If a claim is made, it is probable that damages will be paid and the
amount of the loss can be reasonably estimated. This possible loss must be:
a. Accrued: Yes; Disclosed: Yes
b. Accrued: Yes; Disclosed: No
c. Accrued: No; Disclosed: Yes
d. Accrued: No; Disclosed: No

13. Gain contingencies usually are recognized in the income statement when:
a. The gain is realized.
b. The gain is probable and the amount is known.
c. The gain is probable and the amount can be reasonably estimated.
d. The gain is reasonably possible and the amount can be reasonably estimated.

14. When should a contingent liability be recognized?

a. When the contingent liability is probable
b. When a reasonable estimation can be made
c. A and B
d. neither A nor B

15. Which of the following is true?

a. A contingent liability should always be recorded in the footnotes to the financial statements.
b. A contingent liability should always be recorded within the financial statements.
c. A company can choose to record a contingent liability either within its financial statements or in the
footnotes to the financial statements.
d. No journal entries or footnotes are necessary if the possibility of a contingent liability is remote.

16. Warranty expense is:

a. Recorded in the period of sale.
b. Recorded as it is incurred.
c. Capitalized as a warranty asset.
d. None of the above.

17. To record warranties, the adjusting journal entry would be:

a. A debit to Warranty Expense and a credit to Estimated Warranty Liability.
b. A debit to Warranty Expense and a debit to Cash.
c. A debit to Estimated Warranty Liability and a credit to Warranty Expense.
d. A debit to Estimated Warranty Liability and a credit to Cash.