Concept explainers
Concept introduction:
Liabilities:
Liabilities are the obligation of the business or amount payable by the business. Liabilities can current or long term. Current liabilities are liabilities payable within the short term or business cycle of the company, for example Accounts payable for purchases and utilities payable. Long term liabilities are liabilities payable in a long period/ years, for example long term loan.
A
A contingent liability is recognized as a liability when it is probable and its reasonable amount can estimate. For example: Amount to be paid the company knows it has lost the case
To choose:
The true statement.
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Cornerstones of Financial Accounting
- A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility of becoming an actual liability. If the accountant decided not to report it in the notes to the financial statement, what effect would this have on the financial reporting of the company? A The liabilities on the balance sheet would be understated B The information about the item would be inadequately disclosed in the notes C The net income of the company would be understated D There would be no effectarrow_forwardAccording to FASB, when should a company journalize a contingent liability? A. Do not journalize the contingent liability under any circumstances. B. Journalize the contingent liability, even though you will probably win the lawsuit. C. Journalize the contingent liability only if the amount can be estimated and the probability of loss is reasonably possible. D. Journalize the contingent liability if it is probable that the loss will occur, and the amount of the loss can be reasonably estimated. thanks for help appareciated it rajtir harrow_forwarddefine contingent liability and give an example. How would you management of a company distort a liability if they wish to report less liability in the financial statement.arrow_forward
- The following legal claims exist for a company. Identify the accounting treatment for each claim as either(a) a liability that is recorded or (b) an item described in notes to its financial statements. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable.arrow_forwardWhen the likelihood a liability will occur is remote but the amount can be estimated, the liability is reported in the footnotes to the financial statements. -True -Falsearrow_forwardConsider the following independent situations. For each of the situations described, suggest the appropriate accounting treatment for recording the liability. Back-up your answer with reference to the appropriate recognition criteria and disclosure requirements for liabilities, as per AASB 137. a)A manufacturing company is being sued by a customer group for losses sustained due to a faulty product design. The company’s lawyers feel the suit will likely succeed, but they cannot estimate the potential amount of damages that will be awarded. B)A resource company is obligated by municipal regulations to clean up the site of an active drilling operation in 10 years’ time when the resource has been fully extracted. The company is in its first year of operations and has no previous experience in cleaning up drilling sites C) A mining company has determined that it will cost approximately $10 million to restore a site that it previously minedarrow_forward
- The following items represent various types of liabilities. Identify if the following independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither. ______ 1. A manufacturing company is sued for alleged product liability. The company’s attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. ______ 2. Alpha has sold products to Sparkle Jewelers, a retailer that sold the products to customers. The manufacturer’s warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement. ______ 3. A customer has filed a lawsuit for a minor amount against Sparkle Jewelers. Sparkle’s attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff.arrow_forward1. Which of the following is an essential characteristic for an obligation to qualify as a liability? a. The obligation should have a definite amount at the report date. b. The party to whom payment will be made should be especially identifiable at report date c. The obligation should be settled in cash. d. The obligation should arise from past transactions of the enterprise e. All of the choices 2. Which of these is not a current liability? a. Serial maturity of long-term obligations b. Payables in providing services to be offered for sale c. Accruals for salaries and wages d. Contractual obligations falling due at an early date which is expected to be refunded e. none of the choices 3. An estimated liability is an obligation that is uncertain as to: a. NO - amount; NO - existence b. YES - amount; NO - existence c. NO - amount; YES - existence d. YES - amount; YES - existencearrow_forwardManagement can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be a. Disclosed but not reported as a liability. b. Disclosed and reported as a liability. c. Neither disclosed nor reported as a liability. d. Reported as a liability but not disclosed.arrow_forward
- Which is a valid statement regarding recognition of liabilities? a. A non-interest bearing note is initially recognized at face value. b. A provision should not be recognized for future operating losses. c. For accumulating compensated absences, an entity should recognize the expense and related liability during the period the absences are incurred by the employees. d. The estimated future costs of supplying awards for customer loyalty program shall be recognized as an expense in the period the award credits are availed of by customers.arrow_forwardWhen recognizing a contingent liability, if the future event is probable (likely) and the amount can be reasonably estimated, what are we required to do? A.Group of answer choices B.Do not record or disclose C.Record the liability D. Disclose in notes on financial statementsarrow_forwardWhich of the following statement/s are incorrect?I. An enterprise should not recognize a contingent liabilityII. The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.III. A provision is a liability of certain timing and amount.IV. Accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid. I and IV only III only I, II and IV II and IV onlyarrow_forward
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