Problem 4-8 Multiple Choice (AICPA Adapted)

1. The likelihood that the future event will or will not occur can be expressed by a
range of outcome. Which range means that the future event occurring is very
slight?

a. Probable
b. Reasonably certain
c. Certain
d. Remote

2. An entity did not record an accrual for a present obligation but disclose the nature
of the obligation and range of the loss. How likely is the loss?

a. Remote
b. Reasonably possible
c. Probable
d. Certain

3. A present obligation that is probable and for which the amount can be reliably
estimated shall

a. Not be accrued but shall be disclose in the notes of financial statement

b. Be accrued by debiting an appropriated retained earnings account and crediting
a liability account
c. Be accrued by debiting an expense account and crediting an appropriated
retained earnings account
d. Be accrued by debiting an expense accounting and crediting a liability account

4. An entity has self-insurance plan. Each year, the entity appropriated retained
earnings for contingencies in amount equal to insurance premiums saved less
recognized losses from lawsuits and other claims. As a result of an accident in the
current year, the entity is a defendant in a lawsuit in which it will probably have to
pay amount measurable damages. What are the effects of this lawsuits probable
outcome on the entitys financial statement for the current year?

a. An increase in expenses and no effect on liabilities

b. An increase in both expense and liabilities
c. No effect on expenses and increase in liabilities
d. No effect on either expenses or liabilities

5. Contingent assets are usually recognized when

a. Realized
 b. Occurrence is reasonable and the amount can be reasonably estimated
c. The amount can be reasonably estimated
d. The amount can be reasonably estimated

6. Which of the following is the proper way to report a contingent asset, receipt of
which is certain?

a. As an asset
b. As a unearned revenue
c. As a disclosure only
d. No disclosure and no accrual

7. Which of the following is the proper accounting treatment of a probable contingent

asset?

a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure explaining the nature of
transaction
d. A disclosure only

8. When the occurrence of a contingent asset is probable and the amount can be
reasonably estimated, the contingent asset should

a. Recognized in the statement of financial position and disclosed

b. Classified as an appropriation of retained earnings
c. Disclosed but not recognized in the statement of financial position
d. Neither recognized in the statement of financial position nor disclosed

9. An entity operates a plant in a foreign country. It is probable that the plant will be
expropriated. However, the foreign government has indicated that the entity will
received definite amount of compensation for the plant. The amount of
compensation is less than the fair value but exceeds the carrying amount of the
plant. The contingent should reported

a. As a valuation allowance as part of the shareholders equity

b. As a fixed asset valuation allowance account
c. In the notes to the financial statement
d. In the statement of financial position
10. At year end, an entity was suing a competitor for a patent infringement. The award
from the probable favourable outcome could be reasonably estimated. The entitys
financial statements should report the expected award as

a. Receivable and revenue

b. Receivable and reduction of patent
c. Receivable and deferred revenue
d. Disclosure only

ANSWERS:
1. D 6. C
2. B 7. D
3. D 8. C
4. B 9. C
5. A 10. D