CHAPTER 12
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE
1. A zero-interest-bearing note payable that is issued at a discount will not result in interest
expense being recognized.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
2. Anticipated losses should not be reported as liabilities because they have not yet occurred.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
3. A company must accrue a liability for sick pay that accumulates but does not vest.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping. IFRS: None
4. Companies report the amount of social security taxes withheld from employees as well as
the companies’ matching portion as current liabilities until they are remitted.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. Accumulated rights exist when an employer must make payment to an employee even after
terminating his employment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping, IFRS: None
6. Companies should recognize the expense and related liability for compensated absences in
the year earned by employees.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
7. Payment must be probable in order for a compensated absence to be accrued.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
8. Discount on Notes Payable is reported as a contra account to Notes Payable on the
balance sheet.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
9. Many companies do not segregate the sales tax collected from the amount of the sale at the
time of the sale.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping. IFRS: None
10. Both the sale of magazine subscriptions and airline ticket can result in the recording of
unearned revenues.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Record Keeping, IFRS: None
, Current Liabilities and Contingencies 12 - 2
11. When recipients of gift cards fail to use them, additional sales revenue is recorded by
issuers.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping, IFRS: None
12. Companies should accrue an estimated loss from a loss contingency if information available
before the issuance of financial statements indicates that it is reasonably possible that a
liability has been incurred.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
13. A company discloses gain contingencies in the notes only when a high probability exists for
realizing them.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The revenue from a service-type warranty that covers several years should all be
recognized in the period the warranty is sold.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
15. Contingent liabilities are not recorded for unfiled lawsuits.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
16. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. Under an assurance-type warranty, companies charge warranty costs only to the period in
which they comply with the warranty.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
18. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
19. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis and demonstrates the ability to consummate the
refinancing.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
20. Prepaid insurance should be included in the numerator when computing the acid-test
(quick) ratio.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Analysis, IMA, IFRS: None
21. Paying a current liability with cash will always reduce the current ratio
Ans: F, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
22. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
, Current Liabilities and Contingencies 12 - 3
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
MULTIPLE CHOICE—Conceptual
23. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IMA:
Reporting and Control: Financial Record Keeping, IFRS: None
24. Which of the following is true about accounts payable?
1. Accounts payable are also called trade accounts payable.
2. Accounts payable are generally interest-bearing.
3. Accounts payable are generally recorded upon receipt of the purchased goods.
a. 1
b. 2
c. 3
d. Both 1 and 3 are true.
Ans: D, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
c. Discount on Notes Payable is amortized to Interest Expense over the term of the note.
d. Discount on Notes Payable is a contra account to Notes Payable.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these answers are correct.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
27. Which of the following is a characteristic of a current liability but not a long-term liability?
a. It is an unavoidable obligation.
b. It is a present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
c. Its liquidation is reasonably expected to require the use of existing resources classified
as current assets or create other current liabilities.
d. The transaction or other event creating the liability has already occurred.
Ans: C, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS:
None
, Current Liabilities and Contingencies 12 - 4
28. Which of the following is not considered a part of the definition of a liability?
a. It is an unavoidable obligation.
b. The transaction or other event creating the liability has already occurred.
c. It is a present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
d. Its liquidation is reasonably expected to require the use of existing resources classified
as current assets or create other current liabilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS:
None
29. United Company has experienced a decline in its employee base from 500 in the final
month of 2025 to 200 in the final month of 2026. The weekly payroll also decreased from
$1,000,000 to $400,000 for the noted periods. Payroll is paid weekly every Friday for the
current week. December 31, 2025 was a Monday, and December 31, 2026 is Friday.
What conclusion can be drawn with respect to the salaries and wages liability from
December 31, 2025 to December 31, 2026?
a. The salaries and wages liability at December 31, 2026 must be less.
b. The salaries and wages liability at December 31, 2026 must be greater.
c. The salaries and wages liability at December 31, 2026 will be the same.
d. It depends on the expectation regarding January 2027 salaries.
Ans: A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: None, IFRS: None
30. If payroll is paid every two weeks during a 52-week year, which of the following
statements is correct with respect to salaries and wages expense and salaries and wages
payable assuming the same workforce and salaries throughout the year?
a. Salaries and wages expense will remain the same each month and the salaries and
wages payable will fluctuate.
b. Salaries and wages expense and salaries and wages payable will remain the same
each month.
c. Salaries and wages expense and salaries and wages payable will increase each
month.
d. There is no relationship between salaries and wages expense and salaries and wages
payable.
Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Prob. Solving, IMA: Reporting & Control: Financial Record Keeping, IFRS: None
31. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
Ans: A, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
32. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE
1. A zero-interest-bearing note payable that is issued at a discount will not result in interest
expense being recognized.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
2. Anticipated losses should not be reported as liabilities because they have not yet occurred.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
3. A company must accrue a liability for sick pay that accumulates but does not vest.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping. IFRS: None
4. Companies report the amount of social security taxes withheld from employees as well as
the companies’ matching portion as current liabilities until they are remitted.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. Accumulated rights exist when an employer must make payment to an employee even after
terminating his employment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping, IFRS: None
6. Companies should recognize the expense and related liability for compensated absences in
the year earned by employees.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
7. Payment must be probable in order for a compensated absence to be accrued.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
8. Discount on Notes Payable is reported as a contra account to Notes Payable on the
balance sheet.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
9. Many companies do not segregate the sales tax collected from the amount of the sale at the
time of the sale.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping. IFRS: None
10. Both the sale of magazine subscriptions and airline ticket can result in the recording of
unearned revenues.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Record Keeping, IFRS: None
, Current Liabilities and Contingencies 12 - 2
11. When recipients of gift cards fail to use them, additional sales revenue is recorded by
issuers.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Record Keeping, IFRS: None
12. Companies should accrue an estimated loss from a loss contingency if information available
before the issuance of financial statements indicates that it is reasonably possible that a
liability has been incurred.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
13. A company discloses gain contingencies in the notes only when a high probability exists for
realizing them.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The revenue from a service-type warranty that covers several years should all be
recognized in the period the warranty is sold.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
15. Contingent liabilities are not recorded for unfiled lawsuits.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
16. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. Under an assurance-type warranty, companies charge warranty costs only to the period in
which they comply with the warranty.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
18. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
19. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis and demonstrates the ability to consummate the
refinancing.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
20. Prepaid insurance should be included in the numerator when computing the acid-test
(quick) ratio.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Analysis, IMA, IFRS: None
21. Paying a current liability with cash will always reduce the current ratio
Ans: F, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
22. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
, Current Liabilities and Contingencies 12 - 3
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting & Control: Financial Statement Preparation, IFRS: None
MULTIPLE CHOICE—Conceptual
23. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IMA:
Reporting and Control: Financial Record Keeping, IFRS: None
24. Which of the following is true about accounts payable?
1. Accounts payable are also called trade accounts payable.
2. Accounts payable are generally interest-bearing.
3. Accounts payable are generally recorded upon receipt of the purchased goods.
a. 1
b. 2
c. 3
d. Both 1 and 3 are true.
Ans: D, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting and Control: Financial Record Keeping, IFRS: None
25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
c. Discount on Notes Payable is amortized to Interest Expense over the term of the note.
d. Discount on Notes Payable is a contra account to Notes Payable.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these answers are correct.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
27. Which of the following is a characteristic of a current liability but not a long-term liability?
a. It is an unavoidable obligation.
b. It is a present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
c. Its liquidation is reasonably expected to require the use of existing resources classified
as current assets or create other current liabilities.
d. The transaction or other event creating the liability has already occurred.
Ans: C, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS:
None
, Current Liabilities and Contingencies 12 - 4
28. Which of the following is not considered a part of the definition of a liability?
a. It is an unavoidable obligation.
b. The transaction or other event creating the liability has already occurred.
c. It is a present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
d. Its liquidation is reasonably expected to require the use of existing resources classified
as current assets or create other current liabilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS:
None
29. United Company has experienced a decline in its employee base from 500 in the final
month of 2025 to 200 in the final month of 2026. The weekly payroll also decreased from
$1,000,000 to $400,000 for the noted periods. Payroll is paid weekly every Friday for the
current week. December 31, 2025 was a Monday, and December 31, 2026 is Friday.
What conclusion can be drawn with respect to the salaries and wages liability from
December 31, 2025 to December 31, 2026?
a. The salaries and wages liability at December 31, 2026 must be less.
b. The salaries and wages liability at December 31, 2026 must be greater.
c. The salaries and wages liability at December 31, 2026 will be the same.
d. It depends on the expectation regarding January 2027 salaries.
Ans: A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: None, IFRS: None
30. If payroll is paid every two weeks during a 52-week year, which of the following
statements is correct with respect to salaries and wages expense and salaries and wages
payable assuming the same workforce and salaries throughout the year?
a. Salaries and wages expense will remain the same each month and the salaries and
wages payable will fluctuate.
b. Salaries and wages expense and salaries and wages payable will remain the same
each month.
c. Salaries and wages expense and salaries and wages payable will increase each
month.
d. There is no relationship between salaries and wages expense and salaries and wages
payable.
Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Prob. Solving, IMA: Reporting & Control: Financial Record Keeping, IFRS: None
31. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
Ans: A, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
32. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
