CPA Financial Accounting and Reporting Far Quiz: Evaluate And Record Loss Contingencies

What this quiz covers

This quiz focuses on Evaluate And Record Loss Contingencies, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Disclose only; guarantees are off-balance-sheet instruments.
2. Recognize a contingent asset for the right of recovery from the subsidiary.
3. Accrue a $300,000 loss contingency liability. (correct answer)
4. Reduce the investment in the subsidiary by $300,000.

Explanation: When payment under a guarantee is probable and reasonably estimable, ASC 450 requires accrual of a loss contingency. The parent records a $300,000 liability. Answer C is correct. Answer A incorrectly treats all guarantees as off-balance-sheet. Answer B records an asset rather than a liability - recovery rights may be disclosed but the primary entry is the liability. Answer D reduces the investment account, which is not the correct entry for a guarantee payment obligation.

Question 2

1. No accrual and no disclosure required. (correct answer)
2. Disclose only; remote contingencies must always be disclosed.
3. Accrue the minimum estimated loss.
4. Disclose and accrue the probable loss.

Explanation: Under ASC 450, remote contingencies generally require neither accrual nor disclosure. When the likelihood is remote, the loss is not accrued and disclosure is not required (with limited exceptions for guarantees). Answer A is correct. Answer B incorrectly requires disclosure for all remote contingencies. Answers C and D require accrual, which is only appropriate when loss is probable and estimable.

Question 3

1. Accrue $150,000 as a tax liability.
2. No accrual; no disclosure required since the likelihood is remote. (correct answer)
3. Disclose the $150,000 assessment in the notes.
4. Accrue $75,000 as a partial loss contingency.

Explanation: Under ASC 450, when the likelihood of an unfavorable outcome is remote, neither accrual nor disclosure is required. Answer B is correct. Answer A accrues a remote contingency, which is not warranted under ASC 450 - accrual requires the loss to be both probable and reasonably estimable. Answer C requires disclosure for a remote contingency, which is generally not required except in limited circumstances such as guarantees of others' indebtedness. Answer D accrues 50% of a remote contingency with no basis in the standard.

Question 4

1. Debit Warranty Expense $25,000; Credit Warranty Liability$25,000. (correct answer)
2. Debit Warranty Liability $25,000; Credit Cash$25,000.
3. Debit Warranty Expense $18,000; Credit Cash$18,000.
4. Debit Warranty Expense $7,000; Credit Warranty Liability$7,000.

Explanation: The warranty expense accrual entry records the estimated future obligation: Debit Warranty Expense and Credit Warranty Liability for the current-year estimate of $25,000. Answer A is correct. Answer B debits the liability and credits cash, which records payment of claims, not the accrual. Answer C records the cash payments as expense, bypassing the liability account. Answer D records only the net change in the liability, which is not the correct accrual entry.

Question 5

1. $280,000 (probability-weighted expected value).
2. $500,000 (maximum loss).
3. $200,000 (minimum of the estimated range). (correct answer)
4. $0; the uncertainty precludes accrual.

Explanation: Under ASC 450, when a range can be identified and no amount within the range is a better estimate, the minimum of the range is accrued. The range of probable loss is $200,000 to$500,000. The minimum is $200,000. Answer C is correct. Answer A uses expected value (probability-weighted), which is the IFRS approach under IAS 37, not U.S. GAAP. Answer B accrues the maximum. Answer D incorrectly concludes the uncertainty precludes accrual.

Question 6

1. Accrue a liability at the minimum possible loss.
2. No disclosure required since likelihood cannot be assessed.
3. Accrue a liability at the maximum possible loss.
4. Disclose the nature and status of the contingency and state that an estimate of the loss cannot be made. (correct answer)

Explanation: When the likelihood of loss cannot be assessed, neither accrual nor omission of disclosure is appropriate. ASC 450 requires disclosure of the nature of the contingency and a statement that an estimate cannot be made. Answer D is correct. Answers A and C accrue a liability when the loss is not assessed as probable. Answer B omits required disclosure - even uncertain contingencies of significance require disclosure.

Question 7

1. $750,000 (correct answer)
2. $600,000
3. $900,000
4. $1,200,000

Explanation: When a single amount within the range is a better estimate than any other (the most likely outcome), that amount is accrued. Legal counsel has identified $750,000 as the most likely settlement. Answer A is correct. Answer B accrues the minimum, which applies only when no amount in the range is a better estimate. Answer C is the midpoint. Answer D is the maximum.

Question 8

1. Debit Guarantee Expense $30,000; Credit Cash$30,000.
2. Debit Loss on Guarantee $30,000; Credit Cash$30,000.
3. Debit Guarantee Liability $30,000; Credit Guarantee Revenue$30,000.
4. Debit Guarantee Liability $30,000; Credit Cash$30,000. (correct answer)

Explanation: Under ASC 460, the guarantee liability recognized at inception is reduced when payment is made. The entry debits the Guarantee Liability and credits Cash. Answer D is correct. Answers A and B record an expense or loss at payment, but the expense was recognized at the inception of the guarantee when the liability was established. Answer C credits revenue, which is incorrect - settling a liability does not generate revenue.

Question 9

1. The chance of the future event occurring is slight.
2. The future event is likely to occur.
3. The chance of the future event occurring is more than remote but less than probable. (correct answer)
4. The future event will virtually certainly occur.

Explanation: ASC 450 defines three likelihood categories: probable (likely to occur), reasonably possible (more than remote but less than probable), and remote (slight chance). Answer C correctly describes 'reasonably possible.' Answer A describes 'remote.' Answer B describes 'probable.' Answer D describes 'virtually certain,' which is not a defined ASC 450 term.

Question 10

1. The $350,000 settlement is recorded in Year 2 only; Year 1 statements are not adjusted.
2. The Year 1 accrual is adjusted to $350,000 because the settlement provides evidence of conditions existing at December 31, Year 1. (correct answer)
3. The $300,000 accrual remains; a$50,000 loss is recorded in Year 2.
4. No accrual in Year 1; the full $350,000 is recorded in Year 2.

Explanation: Under ASC 855, a recognized subsequent event provides additional evidence of conditions that existed at the balance sheet date. The settlement of a lawsuit that existed at year-end is a Type I (recognized) subsequent event. The Year 1 accrual is adjusted to $350,000 before issuance. Answer B is correct. Answer A treats the settlement as a non-recognized (Type II) event. Answer C records the additional$50,000 in Year 2. Answer D defers all recognition to Year 2.

Question 11

1. The contingency need not be disclosed.
2. Accrue the contingency at a nominal amount of $1.
3. Disclose only the maximum possible loss.
4. Disclose the nature of the contingency and state that an estimate of the possible loss cannot be made. (correct answer)

Explanation: For a reasonably possible contingency that cannot be estimated, ASC 450 requires disclosure of the nature of the contingency and a statement that an estimate cannot be made. Answer D is correct. Answer A omits required disclosure. Answer B accrues a nominal amount with no basis in the standard. Answer C discloses only the maximum, which is not a prescribed approach when an estimate cannot be made.

Question 12

1. Accrue an estimated remediation liability at the minimum possible cost.
2. No action required until a government order is received.
3. Disclose the nature of the contingency and state that a loss amount cannot be estimated, if the loss is at least reasonably possible. (correct answer)
4. Record a nominal $1 liability to acknowledge the obligation.

Explanation: If remediation is at least reasonably possible but cannot be estimated, ASC 450 requires disclosure: nature of the contingency and a statement that the amount cannot be estimated. Answer C is correct. Answer A accrues without a basis for estimation. Answer B defers all action, ignoring disclosure requirements. Answer D records a nominal liability with no GAAP basis.

Question 13

1. A regulatory agency has identified the site but no action has been taken against the company.
2. Contamination exists but the company believes it is not responsible.
3. It is probable that the company is liable and the remediation costs can be reasonably estimated. (correct answer)
4. Remediation costs are possible but cannot be estimated.

Explanation: Environmental remediation liabilities follow the same ASC 450 accrual criteria: probable and reasonably estimable. Answer C is correct. Regulatory identification (A) alone does not establish probability of company liability. A belief of non-responsibility (B) suggests loss is not probable. Possible but inestimable (D) requires disclosure but not accrual.

Question 14

1. $55,000 (correct answer)
2. $30,000
3. $25,000
4. $80,000

Explanation: Warranty expense accrued = $4,000,000 x 2$80,000. Ending balance = $30,000 +$80,000 - $55,000 =$55,000. Answer A is correct. Answer D ($80,000) is beginning balance plus accrual before deducting claims paid. Answer B is the beginning balance unchanged, ignoring both accruals and claims. Answer C results from subtracting claims paid from the beginning balance only, ignoring the current-year accrual.

Question 15

1. The loss is possible and the amount can be reasonably estimated.
2. The loss is probable and the amount is known with certainty.
3. The loss is reasonably possible and disclosure is required.
4. The loss is probable and the amount can be reasonably estimated. (correct answer)

Explanation: Under ASC 450-20-25-2, a loss contingency is accrued when (1) it is probable that a liability has been incurred, and (2) the amount can be reasonably estimated. Both conditions must be met. Answer D is correct. Answer A uses 'possible' instead of 'probable.' Answer B requires certainty, which is too high a threshold. Answer C describes the disclosure threshold (reasonably possible), not the accrual threshold.

Question 16

1. $45,000
2. $60,000 (correct answer)
3. $15,000
4. $105,000

Explanation: Warranty expense is based on the estimate, not actual claims paid. Warranty expense = $2,000,000 x 3$60,000. Answer B is correct. Answer A records only actual claims paid (cash basis), ignoring the accrual requirement. Answer C is the difference between the estimate and claims paid. Answer D adds both the estimate and actual claims.

Question 17

1. Liability of $400,000 and a separate receivable of$150,000, if receipt of the insurance proceeds is probable. (correct answer)
2. Net liability of $250,000.
3. Only the $400,000 liability; insurance recoveries are not recognized until received.
4. No entry until the litigation is settled.

Explanation: Under U.S. GAAP, the gross liability ($400,000) is recorded separately from any recovery. An insurance recovery receivable may be recognized separately when receipt is probable (ASC 450-20-55-19 / ASC 410). The two cannot be netted on the balance sheet. Answer A is correct. Answer B nets the two amounts, which violates the gross presentation requirement. Answer C is overly conservative - probable insurance recoveries can be recognized. Answer D defers recognition of a probable, estimable loss.

Question 18

1. A probable loss that can be reasonably estimated at $200,000.
2. A reasonably possible loss that cannot be reasonably estimated. (correct answer)
3. A remote loss with a fixed amount of $50,000.
4. A probable loss that cannot be reasonably estimated.

Explanation: A reasonably possible loss that cannot be estimated requires disclosure of the nature of the contingency and a statement that an estimate cannot be made - but it is not accrued. Answer B is correct. A probable, estimable loss (A) requires accrual. A remote loss (C) requires neither accrual nor disclosure in most cases. A probable but inestimable loss (D) requires disclosure but also does not meet both accrual criteria - it is disclosed only.

Question 19

1. Reduce the accrual to $200,000; the new information relates to conditions existing at the balance sheet date. (correct answer)
2. Keep the $500,000 accrual; changes are recognized only in future periods.
3. Reverse the full $500,000 accrual and record$200,000 in the next period.
4. Average the two estimates and record $350,000.

Explanation: New information received after the balance sheet date but before financial statement issuance that provides evidence of conditions existing at the balance sheet date is a recognized subsequent event under ASC 855. The accrual is adjusted to $200,000. Answer A is correct. Answer B ignores Type I subsequent event guidance. Answer C reverses and defers, creating a period mismatch. Answer D has no basis in GAAP.

Question 20

1. Remote contingencies must always be disclosed because of the materiality of the potential loss.
2. Remote contingencies must be disclosed if the potential loss exceeds 5% of total assets.
3. Remote contingencies must be disclosed if they involve related parties.
4. Remote contingencies generally need not be disclosed, except for certain guarantees of others' indebtedness. (correct answer)

Explanation: Under ASC 450, remote contingencies generally do not require disclosure. The primary exception is for guarantees of indebtedness of others - even if the probability of loss is remote, guarantees must be disclosed. Companies may also choose to voluntarily disclose large remote contingencies, but it is not required. Answer D is correct. Answers A, B, and C impose disclosure requirements for remote contingencies beyond what ASC 450 mandates.