Intermediate Accounting Volume 2, Seventh Canadian Edition Test Bank

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ExamName___________________________________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 itsscheduled 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 continuityschedule in the notes to the financial statements.D)The costs of the overhaul should be expensed as incurred.Answer:AExplanation: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 tooccur.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 beaccrued as a provision.Answer:DExplanation:A)B)C)D)3)Which of the following contingencies should be accrued in the accounts and reported inthe financial statements?3)A)The company is forcefully contesting a personal injury suit and a loss is possibleand 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:BExplanation: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 percentinterest-bearing note payable. Assuming a 40 percent average income tax rate for DWWCorporation, 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:BExplanation:A)B)C)D)5)A brewing company operating in an Ontario city experiencing water shortages receivedits water bill for December 2013, on December 31, 2013. The bill ($8,000) represents thecost of water used in December to make its product. The company will not publish the2013 financial statements until February 2014. Therefore, the adjusting entry as ofDecember 31, 2013 includes which of the following?5)A)cr. utilities expense $8,000B)cr. cash $8,000C)cr. utilities payable $8,000D)no adjusting entry needed because the bill will not be paid until January 2014Answer:CExplanation: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 benefitsrelating to the contingent assets will be received.C)Contingent assets are only recorded when it is reasonably certain that the benefitsrelating to the contingent assets will be received.D)For companies that are self-insured, a provision must be established for eventstaking place prior to the reporting period if known.Answer:BExplanation:A)B)C)D)2

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7)Information obtained prior to the issuance of the current period's financial statements ofKG Company indicates that it is probable that, at the date of the financial statements, aliability will be incurred for obligations related to product warranties on products soldduring the current period. During the past three years, product warranty costs have beenapproximately 1 1/2 percent of annual sales revenue. An estimated loss contingencyshould 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:CExplanation: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. RyanCompany 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:CExplanation:A)B)C)D)9)A firm sold $100,000 worth of goods during 2014. The firm extends warranty coverageon these goods. Historically, warranty costs have averaged 2% of total sales. During2014, the firm incurred $1,000 to service goods sold in 2013 and $200 to service goodssold in 2014. What is warranty expense for 2014?9)A)$1,200B)$2,000C)$200D)$3,200Answer:BExplanation: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:AExplanation: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 aprovision 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 ofthe debt covenant has been violated.Answer:AExplanation:A)B)C)D)12)You are an investor and have just purchased a bond on July 1 which pays interest everyMarch 1 and September 1. When you receive your first interest cheque, you will receiveand have earned how many months interest?ReceivedEarned16626232244456412)A)Choice 1B)Choice 2C)Choice 3D)Choice 4E)Choice 5Answer:BExplanation: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 reachedto 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 VCRCompany on January 1, 2014 is (round annual payment to nearest $1):13)A)$51,875B)$73,311C)$90,000D)$27,026Answer:DExplanation:A)B)C)D)14)Under IFRS, which of the following will only require only a note disclosure as acontingency?14)A)Probable claim for an income tax refundB)Cash discounts given for early payment by customers; almost always takenC)Loss from an investment in equity securities that is certainD)Remote chance of loss from a lawsuit in processAnswer:DExplanation:A)B)C)D)15)XY Company owed a $45,489 due on January 1, 2015. An agreement was reached to payit off in five equal annual payments, starting on December 31, 2015. The interest ratewas 10 percent. The total amount of interest paid under the terms of the agreement was(round annual payment to nearest $1):15)A)$22,745B)$6,000C)$14,511D)$25,000Answer:CExplanation:A)B)C)D)16)A company had sales of $1 million. Coupons in the amount of $1 per $10 in sales weregiven 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:CExplanation: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:AExplanation:A)B)C)D)18)A company has commenced work on a non-cancellable fixed price construction contractin the amount of $6 million. Costs of $4 million have been incurred to date, and it isexpected that $3.2 million in additional costs will have to be incurred to complete thecontract. The company adheres to IFRS. Which of the following statements with respectto the contract are correct?18)A)This is an onerous contract, so the company must accrue a loss of $1.2 million plusany 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 anypreviously recognized profit.Answer:AExplanation: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) amountsto $100,000. However, the company's controller believes that the most likely outcomewill be a payout of $120,000. Which of the following statements pertaining to the accrualof 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:BExplanation:A)B)C)D)6

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20)KR Corporation was involved in a lawsuit with the Government alleging inadequate airpollution 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:CExplanation:A)B)C)D)E)21)Jake Co. includes three coupons in each bag of dog food it sells. In return for fifteencoupons, customers receive a dog leash. The leashes cost Jones $2.00 each. Jake estimatesthat 50% of the coupons will be redeemed. Data for 2014 and 2015 are as follows:20142015Bags of dog food sold200,000300,000Leashes purchased50,00050,000Coupons redeemed100,00050,000The 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:BExplanation:A)B)C)D)22)Contingent liabilities will or will not become actual liabilities depending on:22)A)The outcome of a future eventB)The present condition suggesting a liabilityC)Whether they are probable and estimableD)The degree of uncertaintyAnswer:AExplanation:A)B)C)D)7

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23)On November 7, 2014 local residents sued Brimley Corporation for excess chemicalemissions 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 successfuland 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 disclosurenecessary.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:DExplanation: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 paidon each December 31. On January 1, 2014, JG should record the net liability amountdetermined as follows:24)A)Compute the present value of its face amount and the three $2,400 interest amountsby 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 amountsby using a discount rate of 12%.Answer:DExplanation:A)B)C)D)25)A firm sells products covered by a three-year warranty. From the past experience of theother 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 firmspent $200 to repair goods sold in 2013, and $300 to repair goods sold in 2014. The firmreceived no warranty servicing demands from customers in 2013, the firm's first year ofoperations. What is the balance in the warranty liability account on January 1, 2014?25)A)$400B)$300C)$500D)$0Answer:AExplanation: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 notepayable in full on August 31, 2014. Company B received $6,000 cash. What was theyield or effective rate of interest?26)A)18 percentB)11 percentC)23 percentD)14 percentAnswer:BExplanation:A)B)C)D)27)XYZ borrowed $60,000 for one year and signed an 18 percent, interest-bearing notepayable. 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:BExplanation:A)B)C)D)28)Which one of the following items is not a liability?28)A)Dividends payable in sharesB)The portion of long-term debt due within one yearC)Advances from customers on contractsD)Accrued estimated warranty costsAnswer:AExplanation: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 forwarranty repairs performed after the year of sale (assuming that accrued warrantyexpenses and expenditures equal one another).29)Answer:TrueFalseExplanation:30)Under IFRS, provisions are always recorded at their expected value.30)Answer:TrueFalseExplanation:31)Accounts payable should include only obligations directly related to the primary andcontinuing operations of an entity.31)Answer:TrueFalseExplanation:9

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

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

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

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61)A decline in value of a company's reporting currency relative to the foreign currency inwhich it has payables will result in a foreign exchange gain on the reporting company'sbooks.61)Answer:TrueFalseExplanation:62)For a large population, the best estimate for the amount of a provision that must berecognized is the most likely outcome with respect to the expected value and cumulativeprobabilities.62)Answer:TrueFalseExplanation:63)Conceptually, liabilities constitute a present obligation as a result of a past event andentail an expected future sacrifice of assets or services.63)Answer:TrueFalseExplanation:64)Executory contracts seldom require a journal entry, while onerous contracts do.64)Answer:TrueFalseExplanation:65)Loan guarantees must be provided for; the amount of the provision is the probability ofpayout multiplied by the fair value of the loan guarantee.65)Answer:TrueFalseExplanation:66)A contingency may become a provision if the likelihood of the contingent event greatlyincreases.66)Answer:TrueFalseExplanation:67)Accrued liabilities made due to routine operating expenses are not normally discounted.67)Answer:TrueFalseExplanation:68)Capitalization of borrowing costs on qualifying assets is mandatory under both IFRS andASPE.68)Answer:TrueFalseExplanation: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 producteach year under the following warranty: defective units will be fixed free of charge during thecalendar year of purchase and the next two calendar years. (This means it is best to buy from thiscompany early in the year.) Only 1% of units sold have required warranty service in the past. Theaverage cost has been $200 per unit for servicing. Units require service only once and the likelihoodof a unit requiring service is the same during each year in the warranty period. What is the balancein 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)= $13,333For 1999 sales:2/3(20,000)($200)(.01)=26,667Total liability at Dec. 31/1999$40,00070)On September 1, 2014, XYZ borrowed $100,000 on a 9%, two-year, note payable. Simple interest ispayable on August 31, 2015 and 2016. XYZ's reporting year ends December 31 and the companydoes not use reversing entries for interest. The required entry on August 31, 2001, is:Answer:Please see the following table:Interest Expense6,000Interest Payable3,000Cash9,00014

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71)A retail store has completed certain transactions that management believes may have caused currentliabilities. Indicate by check mark whether the following items should be classified as currentliabilities. Assume a December 31 year-end.Classified as a Current LiabilityItemsYesNoUnknown(a) Dividend issuable in stock of the company.____________(b) Interest for January through March, which is notpayable until July 1 next year.____________(c) Amounts withheld in January for income tax fromemployee pay cheques; amount not yet remitted.____________(d) Bonds maturing in 11 months from the financialstatement date for which inadequate sinking fundexists.____________(e) Obligation to service warranted (one year)products sold with store's private label.____________(f) Obligation on gift certificates redeemable duringthe upcoming year.____________(g) Shipping cost for goods sold, in transit, shippedFOB point of shipment.____________Answer:(a) No, (b) Yes, (c) Yes, (d) No, (e) Yes, (f) Yes, (g) No72)On September 1, 2020, a company purchased a machine and paid for it by signing a two-yearnoninterest-bearing note, face $4,000. The note is payable August 31, 2022. The going rate of interestwas 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, 2000Machine2,873Note payable2,873December 31, 2020Interest expense ($2,873 x .18 x 4/12)172Note payable172December 31, 2021Interest expense548*15

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