1. A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility...

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Question

1. A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility...

1. A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility of becoming an actual liability. If the accountant decided not to report it in the notes to the financial statement, what effect would this have on the financial reporting of the company?

		The liabilities on the balance sheet would be understated.
		The information about the transaction would be inadequately disclosed in the notes.
		The net income of the company would be understated.
		There would be no effect.

2. The information related to interest expense of Stereo Music Inc. is given below:

Net income	$255,000
Income tax expense	102,000
Interest expense	65,000

Based on the above data, which of the following is the interest coverage ratio?

		6.49 times
		3.92 times
		4.92 times
		4.14 times

business accounting

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Answer 1

Answer #1

1.
Answer is a. The liabilities on the balance sheet would be understated.
This is because, if the contigent liability is reasonable to become actual liability, it should be provided for in financial statements.

2.
Income before interest and tax = $255000 + 102000 + 65000 = $422000

Interest Coverage Ratio = Income before interest and tax / Interest Expense
= $422000 / $65000 = 6.49 times

Answer is a. 6.49 times

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Answer 2

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