If a company estimates that it is "reasonably possible"that it will lose a significant amount in a lawsuit, thenthis contingent liability:a. should be reported as a liability on the balance sheet.b. should be disclosed in the footnotes to the financialstatements.c. need not be disclosed.d. should be reported as a contra-liability on the balance.sheet.e. should be reported as a reduction of stockholders'equity on the balance sheet.

Part 2: Explanation:Step 1: Understand the Nature of Contingent Liabilities:Contingent liabilities…

Answered: If a company estimates that it is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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46
34. The following statements are correct, except a. A liability will be reported at less than its maturity amount prior to the maturity date if the stated rate of interest on the liability is higher than the market rate of interest. b. A liability is created because of the acquisition of an asset, payment of another liability, incurrence of an expense, declaration of cash or property dividend, a loss, or a revenue collected in advance. In all cases, each of these “causes” usually provides the basis for measuring the liability. c. Accounts payable with customary term of 18 months is classified as current liability. d. Most liabilities have stated and effective interest rates that are the same; in such a situation the principal, face, and maturity amounts are all the same.
2. Which of the following statement is correct about the statement of affairs? I. Net free assets are the excess of liquidation value of assets pledged to fully secured creditors over the amount of fully secured liabilities plus free assets less unsecured liabilities with priority. II. The estimated deficiency to unsecured creditors is total unsecured liabilities less total Net free assets III.Total unsecured liabilities includes unsecured liability with priority [A] I only [B] I and II only [C] II and III only [D] I, II and III 3. S1: For a joint venture, rights pertains to the rights and obligations associated with individual assets and liabilities, whereas with a joint the right operation, the rights and obligations pertains to the net assets. S2: Where the joint operators have designed the joint arrangement so that its activities primarily aim to provide the parties with an output it will be classified as joint venture. [A]Both statements are correct [B]Both statements are…
1(a) State with reason whether the following statements are true or false (i) Change in Method of Depreciation is regarded as change in Accounting Policy of the entity. (ii) Depreciation is non-cash and non- operating expense which is to be provided for whether there are profits/losses. (iii) Net Profit is reflected in higher cash balances and net loss is reflected in lower net worth. (iv) Contingent liability is an ascertained liability but its amount and due date are indeterminate. (v) Fundamental Assumptions are always required to be disclosed in the financial statements.
Accounting data does not consider off-balance sheet items, such as unused commitments of a firm. O True O False
If the statement of financial position error is discovered in a subsequent accounting period, what action is to be done by the entity? A. Reclassify the item to its proper real account but do not restate the statement of financial position of the prior year affected by the error. B. Reclassify the item to its proper real account. C. Restate the statement of financial position of the prior year affected by the error. D. Reclassify the item to its proper real account and restate the statement of financial position of the prior year affected by the error
Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet? Multiple Choice The outcome is probable and can be reasonably estimated. The amount can reasonably estimated. The outcome is probable. The outcome is reasonably possible.
An item or information is considered MATERIAL in accounting if a. Its non-disclosure would influence the decisions of the users of financial statements b. Its non-disclosure would not influence the decisions of the users of financial statements c. Both of the options d. None of the options
Star Company has a contingent liability that has a likelihood of actual occurrence that is classified as probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Star is required to Multiple Choice O recognize a liability only. disclose but not recognize the liability or the expense. recognize a liability and an expense in its financial statements. recognize an expense only.
Assuming proper accounting disclosure is used, a large, extraordinary loss has wha Multiple Choice O O O More information is needed to determine the effect. It lowers it. It raises it. It has no effect.
Misappropriation of assets: Select one: a. causes harm to stockholders because the assets are no longer available to their rightful owners b. causes the financial statements to be misstated since the misappropriation usually involves material amounts c. is generally committed by company management d. harms the users of the financial statements by providing them incorrect financial data for their decision making

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