CPA Financial Accounting and Reporting (FAR) : Current Liabilities
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Example Questions
Example Question #1 : Current Liabilities
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
$10,000 recovery
$68,000 recovery
$8,000 recovery
$15,000 loss
$8,000 recovery
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
Example Question #1 : Current Liabilities
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
If no estimated amount is more certain than any other, the maximum possible loss should be recorded
If no estimated amount is more certain than any other, the smallest possible loss should be recorded
If no estimated amount is more certain than any other, the average possible loss should be recorded
If no estimated amount is more certain than any other, no loss should be recorded
If no estimated amount is more certain than any other, the smallest possible loss should be recorded
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
Example Question #3 : Current Liabilities
Of the following costs, which is associated with exit and disposal activities?
Costs associated with the retirement of a fixed asset
Terminated employee benefits
Costs to relocate employees
Capital lease termination costs
Costs to relocate employees
Relocation costs for employees are related with exit and disposal activities.
Example Question #2 : Current Liabilities
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
$14,500 in Year 5 and $620 in Year 5
$0 in Year 5 and $15,120 in Year 6
$15,120 in Year 5 and $0 in Year 6
$15,000 in Year 5 and $1,120 in Year 6
$15,000 in Year 5 and $1,120 in Year 6
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
Example Question #3 : Current Liabilities
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
The entity has no discretion to avoid the future transfer of assets
A commitment to an exit plan
The existence of a present obligation to transfer assets in the future
The occurrence of an obligating event
A commitment to an exit plan
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
Example Question #5 : Current Liabilities
Which terms indicate that a contingent liability likely should be recognized?
Estimable
Probable
Both
Neither
Both
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Example Question #6 : Current Liabilities
Which of the following is true regarding purchases made from a seller that offers a discount for early payment?
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, under the gross or net method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the gross method
The purchase is recorded as a credit to accounts payable without regard for the discount, if using the net method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the net method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the net method
Under the net method, a company initially records a purchase as if the discount is going to be taken. Recording the purchase includes a credit to accounts payable.
Example Question #4 : Current Liabilities
Glidell Company issues coupons for its products, which are redeemable at grocery stores. Each coupon entities the customer to $.65 off their purchase of Glidell's products. Additionally, Glidell reimburses retailers an additional $.05 per coupon. On July 1 of the current year, Glidell mailed out $1 million coupons to consumers, and expects 300,000 to be redeemed by their expiration date of December 31. Retailers can take up to 90 days to mail their coupons to Glidell. As of December 31, Glidell has made payments of $95,000 to retailers, and has 115,000 coupons waiting to be processed for payment. What amount should Glidell report as outstanding liability for coupons in its December 31 balance sheet?
$175,000
$115,000
$210,000
$90,000
$115,000
Glidell must record an expense of $.70 ($.65 savings to customer + $.05 fee to retailers) for each of the 300K coupons it expects to be redeemed. 300K x $.70 = $210K. Glidell then subtracts the $95K it has already paid out.
Example Question #3 : Payables And Accrued Liabilities
The Wyman Company borrowed $250,000 on October 31, Year 1, and signed a two-year note bearing interest of 10% on that date. Interest is compounded annually and is payable in full at the note’s maturity date of March 31, Year 3. What amount of liability for interest should Wyman report at December 31, Year 2?
$4,167
$0
$29,584
$25,416
$29,584
The liability for interest at the end of Year 2 should include interest expense recorded in Year 1 and in Year 2. In Year 1, Wyman will record $4,167 in interest ($250K x 10% x 2/12 months). In Year 2, this interest will be compounded and added to the principal. Therefore, interest expense in Year 2 will be $25,417 ($245,167 x 10% x 12/12 months). The interest from both years will be added together to get the total liability at the end of Year 2.
Example Question #5 : Current Liabilities
Under which of the following circumstances does substantial doubt exist about an entity's ability to continue as a going concern?
The entity's CFO has retired and there is no definitive succession plan in place
It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance
The entity is not in compliance with statutory capital requirements
The entity projects that it will have negative cash flows from operating activities over the next 12 months
It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance
Substantial doubt exists when relevant conditions and events, indicate it is probable that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date.
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