Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE CHOICE TYPE QUESTIONS

1. Question

   (L.O. 1) A company has a contingency. If it is probable that an actual liability exists at the balance sheet date, but the amount is not reasonably estimable, the contingent liability should be:

   1. ignored and not disclosed.
   2. reported on the face of the balance sheet without an amount.
   3. disclosed only in the notes accompanying the financial statements.
   4. reported only in the following period.

   Approach and Explanation: Briefly review in your mind the guidelines for reporting contingent liabilities:

   If it is probable that a loss will occur and the amount is estimable, accrue the loss and report the liability on the face of the balance sheet.

   If it is only reasonably possible a loss will occur, or if it is probable but not estimable, disclose only in the notes.

   If the loss is remotely possible, it need not be disclosed or accrued.

   (Solution = c.)

   TIP: In the context of accounting for contingencies, probable means “likely;” remotely possible means “not likely”; reasonably possible means “less than likely and more than remote.”

2. Question

   (L.O. 1) An example of a contingent liability is:

   1. Sales taxes payable.
   2. Accrued salaries.
   3. Property taxes payable.
   4. A pending lawsuit.

   Approach and Explanation: Mentally define contingent liability and think of examples before you read the alternative answer selections. A contingent liability is a situation involving uncertainty as to possible loss or expense that will ultimately be resolved when one ...