I. Which of the following statements is true regarding contingent liabilities? a
ID: 2562913 • Letter: I
Question
I. Which of the following statements is true regarding contingent liabilities?
a. Losses that are reasonably possible should be recorded and disclosed.
b. Losses that are probable and reasonably estimable should be recorded.
c. Contingent liabilities that are unlikely to occur should be disclosed but not recorded.
d. None of the above.
II. Bonds issued with staggered maturity dates are called
a. term bonds. b. serial bonds. c. junk bonds. d. callable bonds.
III. Unsecured, high risk, high-interest-rate bonds that are often used to finance acquisitions or buyouts are called
a. junk bonds. b. mortgage bonds. c. redeemable bonds. d. income bonds.
IV. A change in accounting estimate
a. is reported in the financial statements of current and future periods affected with footnote disclosure of the change, and with no prior period adjustments or restatement.
b. is reported in the financial statements of current and future periods affected with footnote disclosure of the change and with prior period adjustments or restatement.
c. is reported in the financial statements of past (restated), current and future periods affected with footnote disclosure of the change and with no prior period adjustments or restatement.
V. Which of the following statements is true regarding goodwill?
a. Goodwill may be recorded when a firm determines that the fair value of its net assets exceeds the book value of its net assets.
b. If objectively verifiable through estimation and independent appraisal, goodwill may be recorded when it is determined that the fair value of a firm’s net assets exceeds the book value of its net assets.
c. As is done with other intangible assets, goodwill will be amortized to expense.
d. Goodwill may be recorded when one company acquires another company at a price in excess of the fair value of the net assets of the acquired company.
d. is reported in the financial statements of current and future periods affected with no footnote disclosure, prior period adjustments or restatement required.
Explanation / Answer
I. b. Losses that are probable and reasonably estimable should be recorded.
A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.
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II. b.Serial Bonds,
An issue of bonds that have one issue date and staggered maturity dates scheduled at regular intervals until issue paid in full. Interest cost to issuer would go down over life of issue.
III. a.Junk Bonds
Junk bonds are corporate bonds that are high-risk and high-return
IV. a. is reported in the financial statements of current and future periods affected with footnote disclosure of the change, and with no prior period adjustments or restatement.
When there is a change in estimate, account for it in the period of change. If the change affects future periods, then the change will likely have an accounting impact in those periods, as well. A change in accounting estimate does not require the restatement of earlier financial statements, nor the retrospective adjustment of account balances.
Disclose the change in estimate if the amount is material. Also, if the change affects several future periods, note the effect on income from continuing operations, net income, and per share amounts.
V. d. Goodwill may be recorded when one company acquires another company at a price in excess of the fair value of the net assets of the acquired company.