Exam
Name___________________________________
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1) Conceptually, liabilities constitute a present obligation as a result of a past event and
entail an expected future sacrifice of assets or services.
1) _______
2) Under ASPE, only legal obligations are recognized. 2) _______
3) 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.
3) _______
4) A contingency may become a provision if the likelihood of the contingent event greatly
increases.
4) _______
5) Under IFRS, most financial liabilities are valued at Fair Value. 5) _______
6) 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.
6) _______
7) Loan guarantees are only recorded if they are likely to be paid. 7) _______
8) Accrued liabilities made due to routine operating expenses are not normally discounted. 8) _______
9) 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.
9) _______
10) Under IFRS, provisions are always recorded at their expected value. 10) ______
11) 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.
11) ______
12) Under ASPE, contingent liabilities which are more likely than not, are accrued at the
lowest end of the range.
12) ______
13) Contingent assets may be recorded under ASPE but not under IFRS. 13) ______
14) Executory contracts seldom require a journal entry, while onerous contracts do. 14) ______
15) Discounting is not required when the time value of money is immaterial or if the amount
and timing of cash flows is highly uncertain.
15) ______
16) Financial liabilities are initially recognized at fair value and at cost, amortized cost or
fair value post-acquisition.
16) ______
17) 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.
17) ______
18) Under the warranty expense approach, there should be no income statement effects for warranty

repairs
perform
ed after
the year
of sale
(assumi
ng that
accrued
warrant
y
expense
s and
expendit
ures
equal
one
another)
.
18) ___
___
19) 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).
19) ______
20) An onerous contract is one where the unavoidable costs of meeting the contract may or
may not exceed the benefits derived from the contract.
20) ______
21) A lawsuit in progress wherein the defendant will probably be found guilty would likely
be accounted for as a provision.
21) ______
22) Warranties provisions may arise from legal or constructive obligations. 22) ______
23) Once a company has formally decided to restructure its operations, a provision must be
made for the restructuring.
23) ______
24) Loyalty points are provided (accrued) for and reversed once the points are redeemed. 24) ______
25) Self-insurance costs for expected losses must never be provided for. 25) ______
26) Current liabilities are usually discounted. 26) ______
27) 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.
27) ______
28) Adjustments to fair value relating to FVTPL liabilities will always flow through
earnings.
28) ______
29) 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.
29) ______
30) A company may reclassify a current financial liability to a long-term one only if there is a contra

ctual
agreeme
nt in
place by
the
reportin
g date to
replace
the
financin
g.
30) ___
___
31) Debt issue costs may be expensed or included in the cost of the debt. 31) ______
32) Normal business risks that are insured must be provided for. 32) ______
33) An administrative fee pertaining to an unsuccessful loan application is to be immediately
expensed.
33) ______
34) Capitalization of borrowing costs on qualifying assets will continue even if work on the
asset has temporarily ceased.
34) ______
35) Accounts payable should include only obligations directly related to the primary and
continuing operations of an entity.
35) ______
36) Capitalization of borrowing costs on qualifying assets is mandatory under both IFRS and
ASPE.
36) ______
37) 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.
37) ______
38) A gain contingency will usually not be recorded in the accounts and reported in the
financial statements even though its occurrence is probable.
38) ______
39) Under ASPE, disclosure in the footnotes to the financial statements is the only way to
properly report contingent losses.
39) ______
40) Under IFRS, a continuity schedule must be provided for both provisions and
contingencies.
40) ______
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
41) 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?
41) ______
A) cr. cash $8,000
B) cr. utilities payable $8,000
C) cr. utilities expense $8,000
D) no adjusting entry needed because the bill will not be paid until January 2014

42) A short-term note payable may include all of the following except: 42) ______
A) A current portion of a long-term liability.
B) Unearned revenue.
C) Non trade notes payable.
D) Trade notes payable.
43) Which of the following statements is correct? 43) ______
A) Under IFRS, contingencies may be accrued, but not under ASPE.
B) A contingency is more likely to require an accrual than a provision.
C) Litigation for which the company will probably be found guilty would normally be
accrued as a provision.
D) Under IFRS, content gains should be recognized if they are reasonably certain to
occur.
44) 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?
44) ______
A) $1,200 B) $200 C) $3,200 D) $2,000
45) 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
45) ______
A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4 E) Choice 5
46) 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:
46) ______
A) Simply disclose the details regarding the lawsuit in a note.
B) Accrue a provision loss of $4,000,000 and note disclose.
C) Accrue a provision loss of $8,000,000 with no financial statement disclosure
necessary.
D) Do nothing as the lawsuit has not yet ended.
47) 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?
47) ______
A) There is a small population of lawsuits, so a provision of $100,000 must be accrued.
B) There is a large population of lawsuits, so a provision of $120,000 must be accrued.

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Intermediate Accounting Volume 2 Seventh Canadian Edition Test Bank

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