Accounting 202: Intermediate Accounting II Ch 3. Accounting for Liabilities & Contingencies

Liabilities

• obligations that a business owes

• categorized as current and long term

Current liabilities

obligations that are due within a year

Long term liabilities

obligations that will come due after a year

A small business took out a loan to purchase a building that will be paid off in 15 years. They are currently making monthly payments on the loan. Which of the following is true?

1. The loan itself is a current liability, while the interest due on the loan is a current liability.

2. The loan itself is a current liability while the portion due within the next 12 months is a long-term liability.

3. The loan itself is a long-term liability while the portion due within the next 12 months is a current liability.

4. The loan itself is a long-term liability, while the interest due on the loan is a current liability.

The loan itself is a long-term liability while the portion due within the next 12 months is a current liability.

Which of these is the best example of a current liability?

1. Taxes

2. Truck loan

3. Mortgage loan

4. Car loan

Taxes

Which of these is the best example of a long term liability?

1. Mortgage loan

2. Taxes payable

3. Accounts payable

4. Salaries payable

Mortgage loan

Which of the following statements is true regarding current liabilities?

1. Current liabilities are obligations owed within 5 to 7 years.

2. Current liabilities are obligations owed within 15 to 30 years.

3. Current liabilities are obligations owed after a year.

4. Current liabilities are obligations due within a year.

Current liabilities are obligations due within a year.

A new accountant is confused about current versus long-term liabilities. After asking a senior accountant, the new accountant realizes that _____ are current liabilities.

1. Amounts due to vendors and suppliers

2. Taxes owed to the government

3. Amounts due to employees

4. All of these are current liabilities

All of these are current liabilities

Known Assets

owned item with a specific value

Known Liabilities

• liabilities that have a specific dollar amount

• these types of liabilities are created by agreement, contract, or law

Liabilities by Agreement

an arrangement between two or more parties that is not enforceable by law

What is the definition of liabilities?

1. Obligations owed.

2. Items of value that are owned.

3. Sales.

4. The costs of running a business.

Obligations owed.

Which of the following statements is true regarding known liabilities by contract?

1. Liabilities by contract are not enforceable by law.

2. Liabilities by contract are enforceable by law.

3. Liabilities by contract can only be formed by federal judges.

4. Liabilities by contract are created by governmental taxing agencies.

Liabilities by contract are enforceable by law.

Which of the following statements is true regarding known liabilities by law?

1. Liabilities by law are not enforceable by law.

2. Liabilities by law are listed as accounts payable on the income statement.

3. Liabilities by law are typically considered tax liabilities.

4. Liabilities by law are considered notes payable on the income statement.

Liabilities by law are typically considered tax liabilities.

What are known liabilities?

1. Liabilities where owners are aware of the specific dollar amount of the obligation.

2. Liabilities where owners are aware of the specific dollar amount of the asset.

3. Liabilities where owners are unaware of the specific dollar amount of the obligation.

4. Liabilities where owners are aware of the specific dollar amount of the expense.

Liabilities where owners are aware of the specific dollar amount of the obligation.

Which of the following statements is true regarding known liability by agreement?

1. Liability by agreement is not enforceable by law.

2. Liability by agreement is listed as a tax liability on the balance sheet.

3. Liability by agreement is listed as accounts payable on the income statement.

4. Liability by agreement is enforceable by law.

Liability by agreement is not enforceable by law.

Estimated Liabilities

retirement, warranties and property taxes

Pension

is a retirement plan where the employee, during their working career, has a percentage of their paycheck deducted for retirement

Warrenty

a promise to repair or replace a damaged part or product

Property Taxes

taxes a business owes on property it owns

Which of the following statements is TRUE regarding estimated liabilities?

1. Estimated liabilities are obligations where the amount owed is known but can be estimated to benefit the company.

2. Estimated liabilities are obligations where the amount owed is estimated based on the cost of goods.

3. Estimated liabilities are obligations that are approximated based on the competitor's balance sheet.

4. Estimated liabilities are obligations where the amount owed is uncertain.

Estimated liabilities are obligations where the amount owed is uncertain.

A car manufacturer has 400 employees. Ten of its employees are eligible to retire at the end of the month. The impending retirement for these ten employees should be recorded as a:

1. Long-term liability

2. Current liability

3. Retirement liability

4. Warranty liability

Retirement liability

A computer company manufactures and sells its computers with a one year limited warranty. The computer itself costs $1,200. The company estimates that 400 computers will be returned under warranty. How much would be the estimated warranty liability?

1. $240,000

2. $120,000

3. $360,000

4. $480,000

$480,000

Why are warranties considered estimated liabilities?

1. Warranties are considered estimated liabilities because claims are constant.

2. Warranties are considered estimated liabilities because companies pay tax on how many warranties are redeemed.

3. Warranties are considered estimated liabilities because a company does not know how many warranty claims will be presented.

4. Warranties are considered estimated liabilities because a company who does not offer a warranty is able to estimate the dollar amount for tax benefits.

Warranties are considered estimated liabilities because a company does not know how many warranty claims will be presented.

Why are property taxes considered estimated liabilities?

1. Property taxes are considered estimated liabilities since the value of the property may change, and the taxing agency may impose changes to the tax rates.

2. Property taxes are considered estimated liabilities because they are considered constant.

3. Property taxes are considered estimated liabilities because property, such as commercial buildings, trucks and inventory, may be loaned to another business.

4. Property taxes are considered estimated liabilities because the true cost can never be calculated.

Property taxes are considered estimated liabilities since the value of the property may change, and the taxing agency may impose changes to the tax rates.

contingent liabilities

possible obligations the company may owe

Which of the following statements offers the BEST explanation of contingent liabilities?

1. Contingent liabilities are obligations that have a high probability of occurring and must be listed on the balance sheet.

2. Contingent liabilities are obligations that are included on the income statement.

3. Contingent liabilities are obligations that have a low probability of occurring and must be listed on the income statement.

4. Contingent liabilities are obligations that have already occurred but do not need to be included on the balance sheet.

Contingent liabilities are obligations that have a high probability of occurring and must be listed on the balance sheet.

How can product recalls be a contingent liability?

1. They can be a contingent liability if there is a tax benefit to the company recalling the product.

2. They can be a contingent liability if there is a low probability of the products being recalled.

3. They can be a contingent liability if there is a high probability of the products being recalled.

4. They can be a contingent liability if there is a high probability of the products working to the satisfaction of the customer.

They can be a contingent liability if there is a high probability of the products being recalled.

Jenna's law firm is evaluating a possible change in legislation that would force them to increase the salaries for all their paralegals. Does the firm have to include this potential legislation as a footnote on their balance sheet?

1. No, it only needs to be included if it actually happens.

2. No, changes in legislation that cause cost changes are never included on the balance sheet.

3. Yes, if it has a high probability of passing, it must be included as a footnote.

4. Yes, no matter the probability, it must be included as a footnote.

Yes, if it has a high probability of passing, it must be included as a footnote.

Pending lawsuits can be a contingent liability if:

1. There is a low probability of the company losing the lawsuit.

2. There is a high probability of the company losing the lawsuit.

3. The lawsuit has been won.

4. The lawsuit has already been lost and paid.

There is a high probability of the company losing the lawsuit.

Which of the following statements about liabilities is TRUE?

1. Liabilities are also called obligatory revenue.

2. Liabilities are valued obligations that are distributed.

3. Liabilities refer to obligations as the cost of doing business.

4. Liabilities are obligations owed.

Liabilities are obligations owed.

Contingency

something that is likely to happen in the future that could affect a company’s profits

Gain Contingencies

things likely to happen in the future that will affect the bottom line of the business in a positive way

Liability Contingencies

things likely to happen in the future that will affect the company’s bottom line in a negative way

Environmental Contingencies

the future cost of the environmental impact of the company

GAAP rules forbid the claiming of gain contingencies on financial statements because:

1. Claiming the gain will undervalue the company.

2. The GAAP principle of conservatism applies here.

3. Claiming the gain will result in more regulation of a company.

4. Claiming the gain will cause a dividend to be paid to stockholders.

The GAAP principle of conservatism applies here.

ABC Electronics has two large warehouses, but they have realized that they do not need one of them. They have put that warehouse on the market, and are currently waiting for it to sell. The warehouse is listed for 2.5 million dollars which would be a significant influx of cash for the company. Should the accountant include this contingency in her statements?

1. No, it is an environmental contingency and should not be included.

2. Yes, it is a cost-benefit contingency and should be included.

3. Yes, it is an improved cost contingency and should be included.

4. No, it is a gain contingency and should not be included.

No, it is a gain contingency and should not be included.

_____ contingencies should not be included on the accounting statement because they may overstate the value of the company, which is against the rule of conservatism.

1. Liability

2. Improved cost

3. Cost benefit

4. Gain

Gain

Which type of contingency is a lawsuit that might end up making a company have to pay money or potentially lower the value of the company?

1. Liability

2. Gain

3. Cost benefit

4. Improved cost

Liability

For the past 10 years, XYZ company has had to pay penalties to the IRS of $34,000. Should XYZ's accountant go ahead and report the penalty on its statements?

1. No, it is an environmental contingency and should not be included.

2. Yes, it is a cost-benefit contingency and should be included.

3. No, it is an gain contingency and should not be included.

4. Yes, it is a liability contingency and should be included.

Yes, it is a liability contingency and should be included.

liability

a future sacrifice of economic benefit that arises from a past transaction or event

matching principle

we must record an expense as it is incurred

loss contingency

the future outcome is most likely to result in a liability

disclosed note

provides the reader of the financial statements with more information about a certain account value

To record a liability, the accountant will credit _____.

1. the asset account

2. an expense

3. a gain

4. the liability

the liability

Liabilities, like assets, are categorized into either _____ or _____.

1. this month, this year

2. this year, future years

3. this invoice, non-current

4. current, non-current

current, non-current

All of the following are examples of liabilities EXCEPT:

1. accounts payable

2. short-term investments

3. accrued expenses

4. bonds/notes payable

short-term investments

A(n) _____ is when the future outcome is most likely to result in a liability.

1. loss contingency

2. profit

3. asset

4. gain contingency

loss contingency

A(n) _____ is a future sacrifice of economic benefit that arises from a past transaction or event.

1. liability

2. gain contingency

3. profit

4. asset

liability