The Most Conceptually Appropriate Method of Valuing a Liability Under

question 42

Multiple Choice

The most conceptually appropriate method of valuing a liability under the historical cost basis is to

• A) discount the amount of expected cash outflows that are necessary to liquidate the liability using the market rate of interest at the date the liability was initially incurred.
• B) discount the amount of expected cash outflows that are necessary to liquidate the liability using the market rate of interest at the date financial statements are prepared subsequent to issuance.
• C) record as a liability the amount of cash or cash-equivalent value that the company would be required to pay to eliminate the liability in the ordinary course of business on the date of the financial statements.
• D) record as a liability the amount of cash or cash-equivalent proceeds actually received when a liability was incurred.

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Definitions:

Plantwide Overhead Rate

A single overhead absorption rate used throughout a manufacturing facility to allocate overhead costs to products.

Activity-based Costing

A costing method that identifies the activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

Overhead Costs

Expenses related to the operation of a business that cannot be directly attributed to a specific product or service, such as rent, utilities, and administration expenses.

Activity Rate

The predetermined overhead rate used in activity-based costing to allocate costs to products or services based on specific activities.