Question :
41. United Supply has a $5 million liability at December 31, : 1236239
41. United Supply has a $5 million liability at December 31, 2012, of which $1 million is payable in each of the next five years. United Supply reports the liability on the balance sheet as:
A. a $5 million current liability.
B. a $5 million long-term liability.
C. a $1 million current liability and a $4 million long-term liability.
D. a $4 million current liability and a $1 million long-term liability.
42. Which of the following is true regarding the relationship between net income reported in the income statement and taxable income reported to the Internal Revenue Service (IRS)?
A. Net income and taxable income are always the same amount.
B. Net income and taxable income are rarely the same amount.
C. Net income is always larger than taxable income.
D. Taxable income is always larger than net income.
43. If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the 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.
44. If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, 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.
45. Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins’ legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?
A. As a liability for $100,000 with disclosure of the range.
B. As a liability for $150,000 with disclosure of the range.
C. As a liability for $200,000 with disclosure of the range.
D. As a disclosure only. No liability is reported.
46. Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel’s legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?
A. As a liability for $100,000 with disclosure of the range.
B. As a liability for $150,000 with disclosure of the range.
C. As a liability for $200,000 with disclosure of the range.
D. As a disclosure only. No liability is reported.
47. Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel’s legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation?
A. As a receivable for $100,000 with disclosure of the range.
B. As a receivable for $150,000 with disclosure of the range.
C. As a receivable for $200,000 with disclosure of the range.
D. As a disclosure only. No receivable is reported.
48. Young Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:
A. Remote and the amount can be reasonably estimated.
B. Probable and the amount can be reasonably estimated.
C. Reasonably possible and the amount can be reasonably estimated.
D. Probable and the amount cannot be reasonably estimated.
49. Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet?
A. Record; decrease stockholders’ equity and increase liabilities.
B. Record; increase stockholders’ equity and decrease liabilities.
C. Disclose; no effect on the balance sheet.
D. Disclose; decrease stockholders’ equity and decrease liabilities.
50. Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?
A. Amplify, Inc. would record a loss and contingent liability for $50,000.
B. Sound City would record a gain and lawsuit receivable for $50,000.
C. Sound City would record nothing.
D. Both a. and c. are correct.
