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Contingency
Contingency MCQs
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A liability arising from a loss contingency should be recorded if the
Amount of the loss can be reasonably estimated.
Contingent future events have a reasonably possible chance of occurring.
Contingent future events have a reasonably possible chance of occurring and the amount of the loss can be reasonably estimated.
Contingent future events will probably occur and the amount of the loss can be reasonably estimated.
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Which one of the following loss contingencies would be accrued as a liability rather than disclosed in the notes to the financial statement?
A guarantee of the indebtedness of another.
A dispute over additional income taxes assessed for prior years (now in litigation).
A pending lawsuit with an uncertain outcome.
Liabilities for service or product warranties made as a regular part of business.
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Linden Corporation is a defendant in a lawsuit where the plaintiff is seeking $1,000,000 in damages. The company had terminated the plaintiff, George...
$200,000
$100,000
$5,000
$0
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Ichabod Company is the plaintiff in two lawsuits. The first suit involves a competitor who has made an exact copy of one of Ichabod’s products,...
$0
$5,000,000
$5,125,000
$5,250,000
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Warren Company is being sued in a wrongful discharge suit for $500,000. The company attorney has advised Warren that the probability of the plaintiff...
Record $500,000 as a loss contingency.
Record $400,000 as a loss contingency.
Disclose the loss contingency in the footnotes.
Not record or footnote the loss contingency.
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In May Year 1, Caso Co. filed suit against Wayne, Inc., seeking $1.9 million in damages for patent infringement. A court verdict in November Year 4 aw...
$0
$800,000
$1,000,000
$1,500,000
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In May Year 1, Caso Co. filed suit against Wayne, Inc., seeking $1.9 million in damages for patent infringement. A court verdict in November Year 4 aw...
$0
$800,000
$1,000,000
$1,500,000
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On January 17, year 2, an explosion occurred at a Sims Co. plant causing extensive property damage to area buildings. Although no claims had yet bee...
As an accrued liability of $250,000.
As a footnote disclosure indicating the possible loss of $250,000.
As a footnote disclosure indicating the possible loss of $1,250,000.
No footnote disclosure or accrual is necessary.
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Brite Corp. had the following liabilities at December 31, year 2: Accounts payable $55,000 Unsecured notes, 8%, due 7/1/Y3 400,000 Accrued expense...
$ 515,000
$ 940,000
$1,490,000
$1,515,000
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On February 5, year 3, an employee filed a $2,000,000 lawsuit against Steel Co. for damages suffered when one of Steel’s plants exploded on Decemb...
$2,000,000
$1,000,000
$ 900,000
$ 500,000
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On November 5, year 2, a Dunn Corp. truck was in an accident with an auto driven by Bell. Dunn received notice on January 12, year 3, of a lawsuit f...
$0
$200,000
$300,000
$450,000
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During year 2, Haft Co. became involved in a tax dispute with the IRS. At December 31, year 2, Haft’s tax advisor believed that an unfavorable out...
$200,000
$250,000
$275,000
$300,000
?
Management can estimate the amount of loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably ...
Disclosed but not accrued as a liability.
Disclosed and accrued as a liability.
Accrued as a liability but not disclosed.
Neither accrued as a liability nor disclosed.
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Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums save...
An increase in expenses and no effect on liabilities.
An increase in both expenses and liabilities.
No effect on expenses and an increase in liabilities.
No effect on either expenses or liabilities.
?
In year 1, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate, Halsey reported a $50,000 liability in its Decemb...
$30,000 $50,000
$30,000 $0
$0 $20,000
$0 $0
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During January year 2, Haze Corp. won a litigation award for $15,000 that was tripled to $45,000 to include punitive damages. The defendant, who is ...
$15,000
$45,000
$50,000
$95,000
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In May year 1 Caso Co. filed suit against Wayne, Inc. seeking $1,900,000 damages for patent infringement. A court verdict in November year 5 awarded...
$0
$ 800,000
$1,000,000
$1,500,000
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During year 2, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At December 31, year 2, Smith’s legal counsel beli...
As a receivable and revenue of $100,000.
As a receivable and deferred revenue of $100,000.
As a disclosure of a contingent gain of $100,000.
As a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000.
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In year 2, a contract dispute between Dollis Co. and Brooks Co. was submitted to binding arbitration. In year 2, each party’s attorney indicated p...
Year 2 Year 2
Year 2 Year 3
Year 3 Year 2
Year 3 Year 3
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Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default....
Disclosed only.
Accrued only.
Accrued and disclosed.
Neither accrued nor disclosed.
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North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation an...
$36,000
$22,500
$21,000
$15,000
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Ross Co. pays all salaried employees on a Monday for the five-day workweek ended the previous Friday. The last payroll recorded for the year ended D...
$64,000
$68,000
$69,000
$89,000
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At December 31, year 2, Taos Co. estimates that its employees have earned vacation pay of $100,000. Employees will receive their vacation pay in yea...
Yes No
No No
Yes Yes
No Yes
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If the payment of employees’ compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to r...
Accrued if attributable to employees’ services not already rendered.
Accrued if attributable to employees’ services already rendered.
Accrued if attributable to employees’ services whether already rendered or not.
Recognized when paid.
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Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a con...
Evenly over the life of the warranty.
When the service calls are performed.
When payments are made to the mechanic.
When the machines are sold.
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Lute Corporation sells furnaces that include a three-year warranty. Lute can contract with a third party to provide these warranty services. Lute el...
The cost of expected warranty services.
The present value of expected warranty costs.
The fair value of the contract to settle the warranty services.
The fair value of the contract to settle less the cost to provide services.
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Case Cereal Co. frequently distributes coupons to promote new products. On October 1, year 2, Case mailed 1,000,000 coupons for $.45 off each box of...
$35,000
$29,000
$25,000
$22,500
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Chemrite Inc. reported a total asset retirement obligation of $350,000 in last year’s balance sheet. This year, Chemrite acquired a new chemi...
$350,000
$373,000
$455,000
$478,000
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Chemrite Inc. reported a total asset retirement obligation of $350,000 in last year’s balance sheet. This year, Chemrite acquired a new chemi...
$350,000
$373,000
$455,000
$478,000
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Under IFRS, a contingency is described as
An estimated liability.
An event which is not recognized because it is not probable that an outflow will be required or the amount cannot be reasonably estimated.
The same as it is described by US generally accepted accounting principles.
A potentially large liability.
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A controller became aware that a competitor appeared to have access to the company’s pricing information. The internal auditor determined that...
Asynchronous transmission.
Encryption.
Use of fiber-optic transmission lines.
Use of passwords.
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Management’s enthusiasm for computer security seems to vary with changes in the environment, particularly with occurrence of the other compute...
I only.
I and II only.
III only.
I, II and III
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Each day after all processing is finished, a bank performs a backup of its online deposit files and retains it for 7 days. Copies of each day’...
Valid, in that having a week’s worth of backups permits recovery even ifone backup is unreadable.
Risky, in that restoring from the most recent backup file would omit subsequent transactions.
Valid, in that it minimizes the complexity of backup/recovery procedures if the online file has to be restored.
Risky, in that no checkpoint/restart information is kept with the backup files.
