Question

- 29. It is possible to settle a liability by a. transfer of an asset, including but not limited to cash. b. delivery of goods or services. c. creation of another liability, d. all of the above. - 30. An oil company purchased 10,000 acres of land on January 1, 2019, for $5,000,000, on which it developed an underground oil site. The company spent $11,000,000 to prepare the site for operation but believes that 500,000 barrels of oil can be extracted from the site over 5 years after drilling begins. The land has a residual value of $250,000. Assuming 50,000 barrels of oil were extracted from the land in 2021, how much depletion would be recorded? a. $1,600,000 b. $1,575,000 c. $160,000 d. $157,500 31. German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attomeys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements? a. Do nothing, since it was not recognized in previous periods. b. Do nothing until the matter is settled or a judgment or verdict is obtained. c. Disclose the matter in the footnotes accompanying the financial statements. d. Record a contingent liability in the amount of S5 million. General Lighting During the first quarter of the current year, the company sold 4,000 batteries on credit for $150 each plus state sales tax of 6% 32. Refer to General Lighting. Sales taxes are required to be paid to the state taxing authority at the end of the quarter. Which of the following records the sale of the batteries? a. Accounts Receivable 636,000 Sales Revenue 600,000 Sales Tax Payable 36,000 b. Accounts Receivable 600,000 Sales Revenue 600,000 c. Accounts Receivable 600,000 Sales Revenue 564,000 Sales Tax Payable 36,000 d. Accounts Receivable 636,000 Sales Revenue 636,000

Answer 1

Answer to question no 29 – d. All of the above

Explanation – Liability refers to the obligation of a company and the same can be settled through transfer of any assets including cash. For example – If a company has a supplier due liability of INR 10,000, then the company can settle the liability through cash payment or may transfer fixed assets, fixed deposit etc. for settlement of the liability.

The liability can also be settled through transfer of goods or services such as happened in case of sales. In case of sales, the company has receives payment from customer and settles customer liability by providing goods and services.

In certain cases, company may settle liability through creation of another liability. Suppose, a company is require to pay $ 10,000 to Mr.X. The company may take loan from Mr. Y amounting to $ 10,000 and can settle liability to Mr. X which result in settlement of 1 liability and creation of other.

Thus, all the above options can be use for settlement of liability

Answer to Question No.30 – b. $ 1,575,000

Explanation

Total Cost of the site (Purchase Price + Expense Incurred i.e. $5,000,000 + $11,000,000) = $ 16,000,000

Residual value of the site = $ 250000

Depreciable Value of the site = $ (16,000,000 – 250,000) = $ 15,750,000

Expected Oil Extraction during life of site = 500,000

Barrels of Oil extracted from the land in 2021 = 50,000

Depletion Cost of land for the year 2021 = $ (15,750,000/500,000)*50,000 = $1,575,000

Answer to Question No. 31 – d. Record a Contingent liability in the amount of $5 million

Explanation : As per the given scenario, in current year there is reasonable possibility of loss in lawsuit, so the company should recognize contingent liability in financial statement.

Contingent liability refers to the liability which is not certain but there is reasonable possibility of occurrence of same and the loss can be reliably estimated. In current case there is reasonable possibility and amount of loss can be estimated. Thus, the same should be recorded as Contingent liability

Answer to Question No. 32 – a. Accounts Receivable A/C ……. Dr        636,000

                                                                  Sales Revenue                                         600,000

                                                                        Sales Tax Payable                                    36,000

Explanation

In current case, the sales revenue should be $ 150 X 4000 = $ 600,000. The sales tax liability is over and above $ 150. Thus, the sales tax payable amount is $ 600,000 x 6% = $36,000. The company need to collect the sale value and tax liability from customer and thus accounts receivable is being debited by $ 636,000