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Intermediate Accounting Volume 2, Seventh Canadian Edition Test Bank

Simplify your preparation with Intermediate Accounting Volume 2, Seventh Canadian Edition Test Bank, offering a detailed review of key concepts and exam strategies.

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    Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) 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? 1) A) The cost of the overhaul should be deferred and amortized. B) An accrual should be made in each of the 5 years preceding the overhaul. C) The estimated cost of the overhaul should be disclosed as part of a continuity schedule in the notes to the financial statements. D) The costs of the overhaul should be expensed as incurred. Answer: A Explanation: A) B) C) D) 2) Which of the following statements is correct? 2) A) Under IFRS, content gains should be recognized if they are reasonably certain to occur. B) Under IFRS, contingencies may be accrued, but not under ASPE. C) A contingency is more likely to require an accrual than a provision. D) Litigation for which the company will probably be found guilty would normally be accrued as a provision. Answer: D Explanation: A) B) C) D) 3) Which of the following contingencies should be accrued in the accounts and reported in the financial statements? 3) A) The company is forcefully contesting a personal injury suit and a loss is possible and reasonably estimable. B) The estimated expenses of a one-year product warranty. C) An accommodation endorsement involving a remote loss. D) It is probable that the company will receive $50,000 in settlement of a lawsuit. Answer: B Explanation: A) B) C) D) 1

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    4) On January 1, 2014, DWW borrowed $400,000 cash and signed a one-year, 12 percent interest-bearing note payable. Assuming a 40 percent average income tax rate for DWW Corporation, the net effective interest rate on this note was: 4) A) 4.8 percent. B) 7.2 percent. C) 6.0 percent. D) 12.0 percent. Answer: B Explanation: A) B) C) D) 5) A brewing company operating in an Ontario city experiencing water shortages received its water bill for December 2013, on December 31, 2013. The bill ($8,000) represents the cost of water used in December to make its product. The company will not publish the 2013 financial statements until February 2014. Therefore, the adjusting entry as of December 31, 2013 includes which of the following? 5) A) cr. utilities expense $8,000 B) cr. cash $8,000 C) cr. utilities payable $8,000 D) no adjusting entry needed because the bill will not be paid until January 2014 Answer: C Explanation: A) B) C) D) 6) Which of the following statements is correct? 6) A) There is no guidance for self-insurance under IFRS. B) Contingent assets are only recorded when it is virtually certain that the benefits relating to the contingent assets will be received. C) Contingent assets are only recorded when it is reasonably certain that the benefits relating to the contingent assets will be received. D) For companies that are self-insured, a provision must be established for events taking place prior to the reporting period if known. Answer: B Explanation: A) B) C) D) 2

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    7) 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: 7) A) Disclosed in the financial statements but not accrued. B) Neither accrued nor disclosed in the financial statements. C) Accrued in the accounts and reported in the financial statements. D) Recognized as an appropriation of retained earnings. Answer: C Explanation: A) B) C) D) 8) Ryan Company borrow $45,000 US when the exchange rate for US $1.00 is Cdn. $1.46. When the debt was repaid the exchange rate changes to US $1.00 = Cdn. $1.38. Ryan Company records the amount on the date of exchange as: 8) A) A foreign exchange loss of $3,600. B) A foreign exchange loss of $62,100. C) A foreign exchange gain of $3,600. D) A foreign exchange gain of $62,100. Answer: C Explanation: A) B) C) D) 9) A firm sold $100,000 worth of goods during 2014. The firm extends warranty coverage on these goods. Historically, warranty costs have averaged 2% of total sales. During 2014, the firm incurred $1,000 to service goods sold in 2013 and $200 to service goods sold in 2014. What is warranty expense for 2014? 9) A) $1,200 B) $2,000 C) $200 D) $3,200 Answer: B Explanation: A) B) C) D) 3

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    10) Constructive obligations may arise from: 10) A) Warranty obligations. B) Accrued Liabilities resulting from operations. C) Unearned Revenues. D) Notes Payable. Answer: A Explanation: A) B) C) D) 11) Long-term obligations (i.e., debts) that is callable for early payment: 11) A) Must be reported as current liabilities by the debtor if callable on demand. B) Can be reported as current liabilities by the debtor only if callable because a provision of the debt covenant has been violated. C) Must continue to be classified as a long-term liability in all situations. D) Must continue to be classified as a long-term liability by the debtor, if a provision of the debt covenant has been violated. Answer: A Explanation: A) B) C) D) 12) 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? Received Earned 1 6 6 2 6 2 3 2 2 4 4 4 5 6 4 12) A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4 E) Choice 5 Answer: B Explanation: A) B) C) D) E) 4

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    13) VCR Company owed a $73,311 debt due on January 1, 2012. An agreement was reached to pay it off in three equal annual payments of $30,000 each, starting on December 31, 2012. The interest rate was 11 percent. The balance in the liability account of VCR Company on January 1, 2014 is (round annual payment to nearest $1): 13) A) $51,875 B) $73,311 C) $90,000 D) $27,026 Answer: D Explanation: A) B) C) D) 14) Under IFRS, which of the following will only require only a note disclosure as a contingency? 14) A) Probable claim for an income tax refund B) Cash discounts given for early payment by customers; almost always taken C) Loss from an investment in equity securities that is certain D) Remote chance of loss from a lawsuit in process Answer: D Explanation: A) B) C) D) 15) XY Company owed a $45,489 due on January 1, 2015. An agreement was reached to pay it off in five equal annual payments, starting on December 31, 2015. The interest rate was 10 percent. The total amount of interest paid under the terms of the agreement was (round annual payment to nearest $1): 15) A) $22,745 B) $6,000 C) $14,511 D) $25,000 Answer: C Explanation: A) B) C) D) 16) 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? 16) A) A provision for $100,000 must be recognized. B) No provision is necessary. C) A provision for $50,000 must be recognized. D) A provision for $1 million must be recognized. Answer: C Explanation: A) B) C) D) 5

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    17) A short-term note payable may include all of the following except: 17) A) Unearned revenue. B) A current portion of a long-term liability. C) Non trade notes payable. D) Trade notes payable. Answer: A Explanation: A) B) C) D) 18) 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? 18) A) This is an onerous contract, so the company must accrue a loss of $1.2 million plus any previously recognized profit. B) The company will have recognized $3 million in profit on the contract to date. C) There is a constructive obligation to finish the contract. D) The company has a constructive obligation to accrue a loss of $1.2 million plus any previously recognized profit. Answer: A Explanation: A) B) C) D) 19) ABC Inc. has 50 pending lawsuits for which it may be found liable. The expected value (sum of the probabilities of the outcomes multiplied by their respective payouts) amounts to $100,000. However, the company's controller believes that the most likely outcome will be a payout of $120,000. Which of the following statements pertaining to the accrual of the provision is correct? 19) A) There is a small population of lawsuits, so a provision of $120,000 must be accrued. B) There is a large population of lawsuits, so a provision of $120,000 must be accrued. C) There is a small population of lawsuits, so a provision of $100,000 must be accrued. D) There is a large population of lawsuits, so a provision of $100,000 must be accrued. Answer: B Explanation: A) B) C) D) 6

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    20) KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at its Glowworm plant site during 2013. At December 31, 2016, it appeared probable the Government would settle for approximately $150,000. This event should be recorded (i.e., recognized) in 2016 as a(n): 20) A) Prior period adjustment. B) Unusual loss. C) Loss on the lawsuit (operating expense). D) Unusual gain. E) Disclosure of contingency loss only in a note. Answer: C Explanation: A) B) C) D) E) 21) Jake Co. includes three coupons in each bag of dog food it sells. In return for fifteen coupons, customers receive a dog leash. The leashes cost Jones $2.00 each. Jake estimates that 50% of the coupons will be redeemed. Data for 2014 and 2015 are as follows: 2014 2015 Bags of dog food sold 200,000 300,000 Leashes purchased 50,000 50,000 Coupons redeemed 100,000 50,000 The estimated liability for premiums for Jake Co. as at December 31, 2015 is: 21) A) $160,000. B) $80,000. C) $50,000. D) $20,000. Answer: B Explanation: A) B) C) D) 22) Contingent liabilities will or will not become actual liabilities depending on: 22) A) The outcome of a future event B) The present condition suggesting a liability C) Whether they are probable and estimable D) The degree of uncertainty Answer: A Explanation: A) B) C) D) 7

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    23) On November 7, 2014 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, 2014 financial statements Brimley should: 23) A) Accrue a provision loss of $8,000,000 with no financial statement disclosure necessary. B) Do nothing as the lawsuit has not yet ended. C) Simply disclose the details regarding the lawsuit in a note. D) Accrue a provision loss of $4,000,000 and note disclose. Answer: D Explanation: A) B) C) D) 24) On January 1, 2014, JG purchased a machine and gave a $30,000 three-year, 8% note. The market or "going" interest rate was 12%. The annual interest payments are to be paid on each December 31. On January 1, 2014, JG should record the net liability amount determined as follows: 24) A) Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 8%. B) Use its face amount, $30,000 plus the $7,200 interest. C) Use its face amount, $30,000 minus $7,200 interest. D) Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 12%. Answer: D Explanation: A) B) C) D) 25) A firm sells products covered by a three-year warranty. From the past experience of the other firms in the industry, the firm expects to incur warranty costs equal to 1% of sales. Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively. In 2014, the firm spent $200 to repair goods sold in 2013, and $300 to repair goods sold in 2014. The firm received no warranty servicing demands from customers in 2013, the firm's first year of operations. What is the balance in the warranty liability account on January 1, 2014? 25) A) $400 B) $300 C) $500 D) $0 Answer: A Explanation: A) B) C) D) 8

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    26) On September 1, 2012, Company B signed a $7,392, two-year non-interest-bearing note payable in full on August 31, 2014. Company B received $6,000 cash. What was the yield or effective rate of interest? 26) A) 18 percent B) 11 percent C) 23 percent D) 14 percent Answer: B Explanation: A) B) C) D) 27) XYZ borrowed $60,000 for one year and signed an 18 percent, interest-bearing note payable. Assuming XYZ has an income tax rate of 45 percent, the net effective rate was: 27) A) 18 percent. B) 9.9 percent. C) 8.1 percent. D) 11.7 percent. Answer: B Explanation: A) B) C) D) 28) Which one of the following items is not a liability? 28) A) Dividends payable in shares B) The portion of long-term debt due within one year C) Advances from customers on contracts D) Accrued estimated warranty costs Answer: A Explanation: A) B) C) D) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 29) Under the warranty expense approach, there should be no income statement effects for warranty repairs performed after the year of sale (assuming that accrued warranty expenses and expenditures equal one another). 29) Answer: True False Explanation: 30) Under IFRS, provisions are always recorded at their expected value. 30) Answer: True False Explanation: 31) Accounts payable should include only obligations directly related to the primary and continuing operations of an entity. 31) Answer: True False Explanation: 9

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    32) An onerous contract is one where the unavoidable costs of meeting the contract may or may not exceed the benefits derived from the contract. 32) Answer: True False Explanation: 33) For a small population, the best estimate for the amount of a provision that must be recognized is the expected value of the possible outcomes. 33) Answer: True False Explanation: 34) Under ASPE, contingent liabilities which are more likely than not, are accrued at the lowest end of the range. 34) Answer: True False Explanation: 35) Normal business risks that are insured must be provided for. 35) Answer: True False Explanation: 36) Financial liabilities are initially recognized at fair value and at cost, amortized cost or fair value post-acquisition. 36) Answer: True False Explanation: 37) Self-insurance costs for expected losses must never be provided for. 37) Answer: True False Explanation: 38) Contingent assets may be recorded under ASPE but not under IFRS. 38) Answer: True False Explanation: 39) Warranties provisions may arise from legal or constructive obligations. 39) Answer: True False Explanation: 40) Debt issue costs may be expensed or included in the cost of the debt. 40) Answer: True False Explanation: 41) Discounting is not required when the time value of money is immaterial or if the amount and timing of cash flows is highly uncertain. 41) Answer: True False Explanation: 10

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    42) Loyalty points are provided (accrued) for and reversed once the points are redeemed. 42) Answer: True False Explanation: 43) A lawsuit in progress wherein the defendant will probably be found guilty would likely be accounted for as a provision. 43) Answer: True False Explanation: 44) A company decides to relocate a group from a discontinued business segment to a division with ongoing operations. The expenses incurred in doing so would qualify as a restructuring charge. 44) Answer: True False Explanation: 45) Current liabilities are usually discounted. 45) Answer: True False Explanation: 46) An administrative fee pertaining to an unsuccessful loan application is to be immediately expensed. 46) Answer: True False Explanation: 47) A gain contingency will usually not be recorded in the accounts and reported in the financial statements even though its occurrence is probable. 47) Answer: True False Explanation: 48) Under IFRS, most financial liabilities are valued at Fair Value. 48) Answer: True False Explanation: 49) A reasonable expectation on the part of a company's stakeholders arising from a company's past practices or behaviour may constitute a constructive obligation in certain instances. 49) Answer: True False Explanation: 50) Capitalization of borrowing costs on qualifying assets will continue even if work on the asset has temporarily ceased. 50) Answer: True False Explanation: 51) Loan guarantees are only recorded if they are likely to be paid. 51) Answer: True False Explanation: 11

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    52) A company may reclassify a current financial liability to a long-term one only if there is a contractual agreement in place by the reporting date to replace the financing. 52) Answer: True False Explanation: 53) Once a company has formally decided to restructure its operations, a provision must be made for the restructuring. 53) Answer: True False Explanation: 54) An improvement to a company's credit rating under IFRS will lead to a reduction in the carrying amount of any financial liabilities and a gain being reported in OCI. 54) Answer: True False Explanation: 55) Under ASPE, disclosure in the footnotes to the financial statements is the only way to properly report contingent losses. 55) Answer: True False Explanation: 56) Under the warranty revenue approach, there should be no income statement effects for warranty repairs performed after the year of sale (assuming that accrued warranty expenses and expenditures equal one another). 56) Answer: True False Explanation: 57) Under IFRS, a continuity schedule must be provided for both provisions and contingencies. 57) Answer: True False Explanation: 58) Adjustments to fair value relating to FVTPL liabilities will always flow through earnings. 58) Answer: True False Explanation: 59) Under ASPE, only legal obligations are recognized. 59) Answer: True False Explanation: 60) Under IFRS, a loss contingency must be credited to a liability account only if the occurrence of the contingent event is probable and if the amount of loss can be reasonably estimated. 60) Answer: True False Explanation: 12

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    61) A decline in value of a company's reporting currency relative to the foreign currency in which it has payables will result in a foreign exchange gain on the reporting company's books. 61) Answer: True False Explanation: 62) For a large population, the best estimate for the amount of a provision that must be recognized is the most likely outcome with respect to the expected value and cumulative probabilities. 62) Answer: True False Explanation: 63) Conceptually, liabilities constitute a present obligation as a result of a past event and entail an expected future sacrifice of assets or services. 63) Answer: True False Explanation: 64) Executory contracts seldom require a journal entry, while onerous contracts do. 64) Answer: True False Explanation: 65) Loan guarantees must be provided for; the amount of the provision is the probability of payout multiplied by the fair value of the loan guarantee. 65) Answer: True False Explanation: 66) A contingency may become a provision if the likelihood of the contingent event greatly increases. 66) Answer: True False Explanation: 67) Accrued liabilities made due to routine operating expenses are not normally discounted. 67) Answer: True False Explanation: 68) Capitalization of borrowing costs on qualifying assets is mandatory under both IFRS and ASPE. 68) Answer: True False Explanation: 13

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    ESSAY. Write your answer in the space provided or on a separate sheet of paper. 69) Quality 9000 International Inc., which began operations in 1996, sells 20,000 units of its product each year under the following warranty: defective units will be fixed free of charge during the calendar year of purchase and the next two calendar years. (This means it is best to buy from this company early in the year.) Only 1% of units sold have required warranty service in the past. The average cost has been $200 per unit for servicing. Units require service only once and the likelihood of a unit requiring service is the same during each year in the warranty period. What is the balance in the warranty liability account at December 31, 1999? Answer: As of Dec. 31/99, the warranty for 1996, 1997 units is expired; Dec. 31/99 liability = For 1998 sales: 1/3(20,000)($200)(.01) = $13,333 For 1999 sales: 2/3(20,000)($200)(.01) = 26,667 Total liability at Dec. 31/1999 $40,000 70) On September 1, 2014, XYZ borrowed $100,000 on a 9%, two-year, note payable. Simple interest is payable on August 31, 2015 and 2016. XYZ's reporting year ends December 31 and the company does not use reversing entries for interest. The required entry on August 31, 2001, is: Answer: Please see the following table: Interest Expense 6,000 Interest Payable 3,000 Cash 9,000 14

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    71) A retail store has completed certain transactions that management believes may have caused current liabilities. Indicate by check mark whether the following items should be classified as current liabilities. Assume a December 31 year-end. Classified as a Current Liability Items Yes No Unknown (a) Dividend issuable in stock of the company. ____ ____ ____ (b) Interest for January through March, which is not payable until July 1 next year. ____ ____ ____ (c) Amounts withheld in January for income tax from employee pay cheques; amount not yet remitted. ____ ____ ____ (d) Bonds maturing in 11 months from the financial statement date for which inadequate sinking fund exists. ____ ____ ____ (e) Obligation to service warranted (one year) products sold with store's private label. ____ ____ ____ (f) Obligation on gift certificates redeemable during the upcoming year. ____ ____ ____ (g) Shipping cost for goods sold, in transit, shipped FOB point of shipment. ____ ____ ____ Answer: (a) No, (b) Yes, (c) Yes, (d) No, (e) Yes, (f) Yes, (g) No 72) On September 1, 2020, a company purchased a machine and paid for it by signing a two-year noninterest-bearing note, face $4,000. The note is payable August 31, 2022. The going rate of interest was 18% per year. The accounting period ends December 31. (a) Compute the cost of the machine. (b) Give all appropriate entries throughout the term of the note. Use the net method. Answer: (a) $4,000 x (PV1, 18%, 2) (.71818) = $2,873 (b) September 1, 2000 Machine 2,873 Note payable 2,873 December 31, 2020 Interest expense ($2,873 x .18 x 4/12) 172 Note payable 172 December 31, 2021 Interest expense 548* 15

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