Q: A company estimates that 2% of its products will require warranty repairs at an average cost of $50 per unit. If 5,000 units are sold, what is the provision for warranty repairs?

$$5,000 \text{ units} \times 2\% \times \50$$ = \$$5,000$$

Q: A company purchases $8,000 of inventory on March 31 by signing a 10% note payable, expiring in 1 year. What is the interest expense to be accrued at year-end (December 31)?

$$8,000 \times 10\% \times \frac{9}{12} = \600$

Question 1

Which of the following best describes a liability according to financial accounting principles?

Accepted Answer

A present obligation of the enterprise arising from past events, expected to result in an outflow of resources.

Question 2

Which of the following is NOT a requirement for recognizing a liability on the balance sheet?

Accepted Answer

The obligation must be avoidable.

Question 3

A company receives $10,000 from a customer for services to be performed next month. How should this transaction be recorded?

Accepted Answer

Debit Cash $$10,000; Credit Unearned Revenue 10$$,000

Question 4

Which of the following is an example of a current liability with a known amount?

Accepted Answer

Accounts payable

Question 5

A retailer earned $200,000 in sales on a given day. The sales tax rate is 5%. What is the correct journal entry for the sales tax payable?

Accepted Answer

Debit Cash $$210,000; Credit Sales 200$$,000; Credit Sales Tax Payable $10,000

Question 6

Which of the following best describes a contingent liability?

Accepted Answer

A possible obligation depending on future events, or a present obligation that is not probable or cannot be reliably measured.

Question 7

A company estimates that 2% of its products will require warranty repairs at an average cost of $50 per unit. If 5,000 units are sold, what is the provision for warranty repairs?

Accepted Answer

$$5,000 	ext{ units} 	imes 2\% 	imes \50$$ = \$$5,000$$

Question 8

Which of the following is a key step in preparing consolidated financial statements under IFRS 10?

Accepted Answer

Elimination of intra-group debts and receivables and interest thereon.

Question 9

When a company issues bonds at a discount, how is the discount on bonds payable presented on the balance sheet?

Accepted Answer

As a contra-liability, subtracted from bonds payable.

Question 10

Which method is used to amortize the difference between the face value and market price of a bond over its lifetime?

Accepted Answer

Effective interest method

Question 11

A company purchases $8,000 of inventory on March 31 by signing a 10% note payable, expiring in 1 year. What is the interest expense to be accrued at year-end (December 31)?

Accepted Answer

$$8,000 	imes 10\% 	imes \frac{9}{12} = \600$

Question 12

Which of the following is NOT a current liability?

Accepted Answer

Long-term bonds payable

Question 13

What is the main difference between a liability and a contingent liability?

Accepted Answer

A liability is recognized when probable and measurable; a contingent liability is disclosed when not probable or not reliably measurable.

Question 14

If a company issues $100,000 of 9% five-year bonds at par, what is the semi-annual interest payment?

Accepted Answer

$$100,000 	imes 9\% 	imes \frac{1}{2} = \4$$,500$

Question 15

Which of the following is a constructive obligation?

Accepted Answer

An obligation created by a company's actions and legitimate expectations of third parties.

Question 16

A company has a lawsuit filed against it, but the probability of payment is low and the amount cannot be reliably estimated. How should this be reported?

Accepted Answer

Disclose as a contingent liability in the notes to the financial statements.

Question 17

Which of the following is a key feature of callable bonds?

Accepted Answer

The issuer can repay the bonds before maturity at a prearranged price.

Question 18

What is the main accounting treatment for intra-group transactions in consolidated financial statements?

Accepted Answer

Eliminate intra-group income, expenses, balances, and unrealized profits and losses.

Question 19

Which of the following is true regarding foreign-currency translation adjustment?

Accepted Answer

It is the amount that brings the dollar amount of liabilities and equity of a foreign subsidiary into agreement with the dollar amount of total assets.

Financial Accounting: Liabilities and Group Accounting

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