ACCT301B - E3 MCQ (C12, 14, 15, 18) Flashcards

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1

Which of the following is true about contingencies?

  1. Loss contingencies can be reported in the financial statements, disclosed in the footnotes, or ignored.
  2. Gain contingencies can only be disclosed in the footnotes or ignored.
  3. Both of these statements are true.
  4. None of these is true.

c

2

A lawsuit has been filed against Sunland Company for wrongful termination. Sunland’s legal counsel had encouraged the company to settle because it is likely they will lose the case. The amount of the loss is estimated to be between $546000 and $1036000. Legal counsel believes that the case could be settled for $822000. Sunland should report

  1. a contingent liability for $822000.
  2. an estimated liability for $546000.
  3. a contingent loss of $1036000.
  4. no loss or liability until the case is settled.

a

3

In determining the amount to be accrued for a contingency when there is a range of possible amounts of loss and no amount within the range is a better estimate than any other amount, the liability to be accrued should be measured

  1. using the midpoint of the range between the lowest possible loss and the highest possible loss.
  2. using the minimum amount of the loss in the range.
  3. using an average of the lowest possible loss and the highest possible loss.
  4. using the maximum amount of the loss in the range.

b

4

A large anticipated insurance recovery is reported as

  1. an account receivable with additional disclosure explaining the nature of the contingency.
  2. an accrued amount.
  3. a disclosure only.
  4. deferred revenue.

c

5

Crane Inc. is being sued by former employees as a result of negligence on the company's part. Crane's lawyers state that it is probable that the company will lose the suit and be found liable for a judgment costing the company anywhere from $100394000 to $200398000. However, the lawyer states that the most probable cost is $127859000. As a result of the above facts, Crane should accrue

  1. a loss contingency of $127859000 but not disclose any additional contingency.
  2. a loss contingency of $127859000 and disclose an additional contingency of up to $72539000.
  3. no loss contingency but disclose a contingency of $100394000 to $200398000.
  4. a loss contingency of $100394000 and disclose an additional contingency of up to $100394000.

b

6

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

  1. Event is unusual in nature and occurrence of the event is probable.
  2. Event is unusual in nature and event occurs infrequently.
  3. Amount of loss is reasonably estimable and occurrence of the event is probable.
  4. Amount of loss is reasonably estimable and the event occurs infrequently.

c

7

Gain contingencies include all of the following except

  1. possible receipts of donations and gifts.
  2. pending court cases where the probable outcome is favorable.
  3. possible refunds from the government in tax disputes.
  4. all of the options are gain contingencies.

d

8

A loss related to general or unspecified business risks is

  1. not accrued.
  2. usually accrued.
  3. sometimes accrued.
  4. always accrued.

a

9

Which of the following factors need not be considered in determining whether a liability should be recorded with respect to pending or threatened litigation?

  1. The time period in which the cause of action occurred.
  2. The probability of an unfavorable outcome.
  3. The ability to make a reasonable estimate of the loss.
  4. All of the options must be considered.

d

10

Gain contingencies are recorded when

  1. it is probable that a benefit will be received.
  2. the amount of the gain can be reasonably estimated.
  3. it is probable that a benefit will be received, and the amount of the gain can be reasonably estimated.
  4. none of these answers is correct.

d

11

Crane Company has a loss contingency. The company’s legal council’s opinion is that the contingency is probable and that they estimate that the amount of the loss will be $459000. What is the proper accounting treatment for this contingency?

  1. Only the amount of $459000 should be disclosed in the notes to the financial statements.
  2. The amount is neither accrued nor disclosed.
  3. There is not enough information given to determine the accounting treatment.
  4. $459000 should be accrued as a liability.

d

12

Which of the following is correct regarding contingencies?

  1. To accurately represent a company’s financial position, management must either report or disclose all contingent losses as they are discovered.
  2. A contingent gain may be either reported or disclosed depending on its probability of occurrence.
  3. Contingent losses that are reasonably probable and difficult to estimate are likely to be disclosed in a footnote to the financial statements.
  4. The FASB has standardized the probability thresholds that companies use to determine how they should treat a contingency.

d

13

A contingency that is disclosed in the notes to the financial statements can be

  1. A gain contingency
  2. A loss contingency
  3. Either a loss or gain contingency

c

14

Which of the following features of preferred stock makes the security more like debt than an equity instrument?

  1. Participating
  2. Voting
  3. Noncumulative
  4. Redeemable

d

15

Additional paid-in capital is not affected by the issuance of:

  1. preferred stock.
  2. no-par stock.
  3. no par with a stated value stock.
  4. par value stock.

b

16

Preferred stock does not increase Additional Paid-in Capital when issued.

  1. True
  2. False

b

17

Preferred stockholders generally have no voting rights.

  1. True
  2. False

a

18

Cumulative preferred dividends in arrears should be shown in a corporation's financial statements as

  1. an increase in stockholders' equity.
  2. a footnote.
  3. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.
  4. an increase in current liabilities.

b

19

The type of preferred stock that would generate a dividend in arrears is:

  1. cumulative preferred stock.
  2. convertible preferred stock.
  3. participating preferred stock.
  4. callable preferred stock.

a

20

Preferred stock with a redemption feature is reported between debt and equity in a temporary section.

  1. True
  2. False

a

21

All of the following statements are true regarding preferred stock except:

  1. companies usually issue preferred stock with a par value.
  2. a company often issues preferred stock instead of debt, because of a high debt-to-equity ratio.
  3. a preference as to dividends assures the payment of dividends.
  4. the dividend preference for preferred stock is expressed as a percentage of the par value.

c

22

Which of the following features of preferred stock makes the security more like debt than an equity instrument?

  1. Noncumulative
  2. Voting
  3. Participating
  4. Redeemable

d

23

All of the following are features of preferred stock except:

  1. voting rights.
  2. preference as to dividends.
  3. convertible into common stock.
  4. callable at the corporation’s option.

a

24

When a property dividend is declared, Retained Earnings is reduced by the:

  1. cost of the property.
  2. book value of the property.
  3. fair value of the property.
  4. carrying value of the property.

c

25

Noncumulative preferred dividends in arrears

  1. must be paid before any other cash dividends can be distributed.
  2. are not paid or disclosed.
  3. are disclosed as a liability until paid.
  4. are paid to preferred stockholders if sufficient funds remain after payment of the current preferred dividend.

b

26

Which of the following is true about accounting for convertible securities?

  1. Under US GAAP, when convertible bonds are issued the debt and equity components should be recorded separately.
  2. Converting bonds or preferred stock into common stock should be recorded using the book value method.
  3. Both of these statements are true.
  4. None of these statements is true.

b

27

When accounting for restricted stock compensation, the value of the unearned compensation is equal to the fair market value of the stock on the date of ________.

  1. Delivering the stock to the executive (at the end of the service period)
  2. None of these, we do not use the fair market value of the stock
  3. Grant of restricted stock
  4. Recording the compensation expense at the end of the year (during the service period)

c

28

The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.

  1. True
  2. False

a

29

When convertible debt is retired:

  1. either a gain or a loss on retirement is recognized.
  2. neither gains nor losses are recognized.
  3. only losses on retirement are recognized.
  4. only gains on retirement are recognized.

a

30

Disclosure for compensation plans should include all of the following except the:

  1. cash flow effects resulting from share-based payment arrangements.
  2. nature and terms of such arrangements that existed during the period.
  3. effect on the income statement of compensations cost arising from share-based payment arrangements.
  4. all of these answer choices are required disclosures.

d

31

Which of the following is not one of the commonly used stock compensation plans?

  1. Employee Stock-Purchase plans.
  2. Stock conversion plans.
  3. Restricted-stock plans.
  4. Stock option plans.

b

32

Compensation expense resulting from a compensatory stock option plan is generally

  1. recognized in the period of the grant.
  2. allocated to the periods benefited by the employee's required service.
  3. recognized in the period of exercise.
  4. allocated to the periods from the grant date until the employee’s expected retirement date.

b

33

Under the fair-value method of recording stock options, companies will report

  1. no increase in compensation expense.
  2. a lower compensation cost relative to the intrinsic- value method.
  3. a higher compensation cost relative to the intrinsic-value method.
  4. the same compensation expense relative to the intrinsic-value method.

c

34

Accounting for stock option plans must be based on:

  1. the option-pricing method.
  2. the fair value method.
  3. the intrinsic value method.
  4. either the fair value method or the intrinsic value method.

b

35

Under the fair value method, compensation expense is recorded:

  1. on the date of grant.
  2. on the date of exercise.
  3. evenly over the service period.
  4. evenly over the period from the grant date to the measurement date.

c

36

Convertible bonds

  1. may be exchanged for equity securities.
  2. are usually secured by a first or second mortgage.
  3. have priority over other indebtedness.
  4. pay interest only in the event earnings are sufficient to cover the interest.

a

37

In accounting for stock-based compensation, which of the following methods reflects the current FASB position?

  1. Book value method.
  2. Par value method.
  3. Intrinsic value method.
  4. Fair value method.

d

38

The ___ method is used to account for the conversion of bonds into common stock.

  1. Incremental
  2. Fair value
  3. Proportional
  4. Book value

d

39

The issuance of stock warrants to current shareholders, to exercise their preemptive right to buy new stock, is not recorded using any journal entry.

  1. True
  2. False

a

40

When the company grants its executives restricted stock, the unearned compensation is recorded at the fair value of the stock on the grant date.

  1. True
  2. False

a

41

At the end of 2019, Delta Corporation had a deferred tax asset of $20,000. What entry is required if it is more likely than not that $9,000 of that deferred tax asset will NOT be realized?

  1. Debit income tax expense $9,000, credit allowance for deferred tax asset $9,000
  2. Debit income tax expense $9,000, credit deferred tax asset $9,000
  3. Debit income tax payable $9,000, credit allowance for deferred tax asset $9,000
  4. Debit income tax payable $9,000, credit deferred tax asset $9,000

a

42

A valuation account is used to:

  1. reduce a deferred tax liability.
  2. increase a deferred tax asset.
  3. reduce a deferred tax asset.
  4. increase a deferred tax liability.

c

43

A deferred tax valuation allowance account is used to recognize a reduction in

  1. a deferred tax liability only.
  2. a deferred tax asset only.
  3. income tax expense.
  4. both a deferred tax asset and a deferred tax liability.

b

44

On December 31, 2021, Winston Inc. has determined that it is more likely than not that $267000 of a $648000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a

  1. credit to Income Tax Expense for $381000.
  2. debit to Income Tax Expense for $381000
  3. credit to the Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $267000.
  4. debit to Income Tax Payable of $267000.

c

45

Isbell Corp. is a start-up technology company that has been reporting net losses for the past three years. At the end of the current year, Isbell has a deferred tax asset of $100,000 related to net operating losses. However, the company's future profitability is uncertain. Based on this information, should Isbell recognize a valuation allowance for the deferred tax asset, and why?

  1. Yes, but only if Isbell has other taxable temporary differences that can offset the DTA.
  2. Yes, because the future realization of the DTA is uncertain given Isbell's history of losses.
  3. No, because the DTA is related to NOLs that can be carried forward indefinitely.
  4. No, because Isbell is a start-up and is expected to have future taxable income.

b

46

Recognition of tax benefits in the loss year due to a loss carryforward requires

  1. the establishment of a deferred tax liability.
  2. the establishment of an income tax refund receivable.
  3. only a note to the financial statements.
  4. the establishment of a deferred tax asset.

d

47

Assume that during 2013 the company believes that it is more likely than not that 60% of its deferred tax asset will not be used. Which of the following is correct?

  1. The company might use a valuation account if future taxable income is expected to be excessive.
  2. When recording an allowance for a deferred tax asset, the company should increase income tax payable.
  3. Allowance for deferred tax asset is inversely related to income tax expense.
  4. None of these statements is true.

d