The following questions dealing with current liabilities and contingencies are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
1. Lister Company intends to refinance a portion of its short-term debt next year and is negotiating a long-term financing agreement with a local bank. This agreement will be noncancelable and will extend for 2 years. The amount of short-term debt that Lister Company can exclude from its statement of financial position at December 31
a. May exceed the amount available for refinancing under the agreement.
b. Depends on the demonstrated ability to consummate the refinancing.
c. Must be adjusted by the difference between the present value and the market value of the short-term debt.
d. Is reduced by the proportionate change in the working capital ratio.
2. An employee has the right to receive compensation for future paid leave, and the payment of compensation is probable. If the obligation relates to rights that vest but the amount cannot be reasonably estimated, the employer should
a. Accrue a liability with proper disclosure.
b. Not accrue a liability nor disclose the situation.
c. Accrue a liability; however, the additional disclosure is not required.
d. Not accrue a liability; however, disclosure is required.
3. The accrual of a contingent liability and the related loss should be recorded when the
a. Loss resulting from a future event may be material in relation to income.
b. Future event that gives rise to the liability is unusual in nature and nonrecurring.
c. Amount of the loss resulting from the event is reasonably estimated and the occurrence of the loss is probable.
d. Event that gives rise to the liability is unusual and its occurrence is probable.
4. For the past 3 months, Kenton Inc. has been negotiating a labor contract with potentially significant wage increases. Before completing the year-end financial statements on November 30, Kenton determined that the contract was likely to be signed in the near future. Kenton has estimated that the effect of the new contract will cost the company either $100,000, $200,000, or $300,000. Also Kenton believes that each estimate has an equal chance of occurring and that the likelihood of the new contract being retroactive to the fiscal year ended November 30 is probable. According to GAAP regarding contingencies, Kenton should
a. Do nothing because no loss will occur if the contract is never signed.
b. Disclose each loss contingency amount in the notes to the November 30 financial statements.
c. Accrue $100,000 in the income statement, and disclose the nature of the contingency and the additional loss exposure.
d. Follow conservatism and accrue $300,000 in the income statement, and disclose the nature of the contingency.