Problem 4-9 Multiple choice (IAA)

1. Contingent liabilities will or will not become actual liabilities depending on

a. Whether they are probable and estimable.

b. The degree of uncertainty.
c. The present condition suggesting a liability.
d. The outcome of a future event.

2. A contingent liability shall be recognized when

a. Any lawsuit is actually filed against an entity.

b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred even though the amount of the
loss cannot be reasonably estimated.
d. The amount of the loss can be reasonably estimated and it is probable prior to
issuance of financial statements that a liability has been incurred.

3. How should a contingent liability be reported in the financial statements when it is

reasonably possible that the entity will have to pay the liability at a future date?

a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable with an additional disclosure explaining the nature of
the transaction

4. Disclosure usually is not required for

a. Contingent gains that are probable and can be reasonably estimated.

b. Contingent losses that are reasonably possible and cannot be reasonably
estimated.
c. Contingent losses that are probable and cannot be reasonably estimated.
d. Contingent losses that are remote and can be reasonably estimated.

5. Provisions are accrued because the likelihood of an unfavorable outcome is

a. Virtually certain
b. Greater than 50%
c. At least 75%
d. Possible
6. Reporting is required for

a. Loss contingencies that are probable and can be reliably measured.

b. Gain contingencies that are probable and can be reliably measured.
c. Loss contingencies that are possible and can be reliably measured.
d. All loss contingencies.

7. Pending litigation would generally be considered

a. Nonmonetary liability
b. Contingent liability
c. Estimated liability
d. Current liability

8. Gain contingencies that are remote and can be reliably measured

a. Must be disclosed.
b. May be disclosed.
c. Must be reported.
d. Should not be reported or disclosed.

9. A contingent liability

a. Definitely exists as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.

10. Which of the following should be disclosed in the financial statements as a

contingent liability?

a. The entity has accepted liability prior to the year-end for unfair dismissal of an
employee and is to pay damages.
b. The entity has received a letter from a supplier complaining about an old unpaid
invoice.
c. The entity is involved in a legal case which it may possibly lose, although this is
not probable.
d. The entity has not yet paid certain claims under sales warranties.
ANSWERS:
1. D 6. A
2. D 7. B
3. C 8. D
4. D 9. D
5. B 10. C