Ch8 Student: ___________________________________________________________________________ 1. Delta, Northwest, and United Airlines have all, at one time, filed for bankruptcy. True 2. In a classified balance sheet, we categorize all liabilities as current. True 3. False A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. True 9. False We record interest expense in the period in which we pay it, rather than in the period we incur it. True 8. False Interest is stated in terms of a percentage rate to be applied to the face value of the loan. True 7. False When a company borrows cash from a bank promising to repay the …show more content…
True False 30. Regarding a contingent liability, when no amount within a range of potential losses appears more likely than others, we record the maximum amount in the range. True False 31. If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a footnote to the financial statements to describe the contingency. True False 32. If the likelihood of loss is remote, disclosure usually is not required. True False 33. A contingent liability is recorded only if a loss is at least reasonably possible and the amount can be reasonably estimated. True False 34. The balance in the Warranty Liability account is always equal to Warranty Expense. True False 35. A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side of loss contingencies. True False 36. We record gain contingencies when the gain is probable and can be reasonably estimated. True False 37. A company is said to be liquid if it has sufficient cash to pay currently maturing debts. True False 38. The current ratio is calculated by dividing current liabilities by current assets. True False 39. The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. True False 40. Quick assets include only cash, short-term investments, and accounts
25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”
An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:
D) LLCs are not liable for losses caused due to negligence of their managers during the ordinary
One liability that the amount must be estimated is associated with warranties. Many companies offer warranty coverage of their products. It is important for the potential warranty expenses to be calculated in the same period as the products are sold. This expense is usually estimated as a percentage of sales revenue based on historical data relating to warranty claims. In accordance with the matching principle and GAAP standards, the revenue and warranty expense must be recorded within the same reporting period. This is the only way to ensure that revenues are not overstated and liabilities are not overstated. In this way the financial health of a company can be accurately assessed. Contingent liabilities are another type of liability that must be estimated. Contingent liabilities are potential liabilities that are contingent upon certain circumstances. They are only potentially liabilities, however, they must still be recorded as such in accordance with the matching principle. One example of a contingent liability is a pending lawsuit. If the lawsuit is lost then the company will need to pay, therefore the money must be thought of as already spent until the lawsuit is final. Another example of a contingent liability occurs when one company cosigns
According to ASC 450-20-25-1, “When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly
A loss contingency as per ASC 450-10-20 is “An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for conveniences to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses.” Contingent liabilities depend on the occurrence of one or more future events to confirm the: amount payable, the payee, the date payable, or its existence.
The probability that liability will occur due to the litigation meets the definition of a loss contingency as stated in ASC 450. Hence:
(TCO C) Debt securities sold to investors that must be repaid at a particular date some years in the future are called:
____ 10. Which of the following is n ot one of the three criteria for recognition of a liability?
8. Times interest earned = (Net Income + Interest) in Statement of Operations / Interest in
Interest for the year is calculated on the PBO at the beginning of the year (ie use simple interest)
Contingent Liability is a condition that refers to the possibility of a future event happening and addresses the responsibility of the party liable should the event take place. In today’s real estate market both sellers and buyers may have contingencies stated in the terms and conditions for selling and purchasing a home. The most common contingent liability are guarantees to debt.
Liquidity is an important factor in financial statement analysis since an entity that can not meet its short term obligations may be forced into liquidation. The focus of this aspect of analysis is on working capital, or some computer of working capital.
G. Indemnification of Attorney Fees and out-of-pocket costs. Should any party materially breach this agreement (including representations and warranties made to the other side), the non-breaching party shall be indemnified by the breaching party for its reasonable attorney fees and out-of-pocket costs which in any way relate to, or were precipitated by, the breach of this contract (including the breach of representations or warranties). This provision shall not limit in any way the
c. ‘A reliable estimate can be made of the amount of the obligation’ (IASC 2009). According to Elliot and Eliot (2002) ‘best estimate’ should be used to recognise the amount of provision. However Rees (2006) disagrees with this standard as ‘best estimate’ can be interpreted in many ways and does not clarify on measuring the liabilities.