Card 0 of 48
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
Compare your answer with the correct one above
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
Compare your answer with the correct one above
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
Compare your answer with the correct one above
Of the following costs, which is associated with exit and disposal activities?
Relocation costs for employees are related with exit and disposal activities.
Compare your answer with the correct one above
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
Compare your answer with the correct one above
Which terms indicate that a contingent liability likely should be recognized?
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Compare your answer with the correct one above
Which of the following is true regarding purchases made from a seller that offers a discount for early payment?
Under the net method, a company initially records a purchase as if the discount is going to be taken. Recording the purchase includes a credit to accounts payable.
Compare your answer with the correct one above
Glidell Company issues coupons for its products, which are redeemable at grocery stores. Each coupon entities the customer to $.65 off their purchase of Glidell's products. Additionally, Glidell reimburses retailers an additional $.05 per coupon. On July 1 of the current year, Glidell mailed out $1 million coupons to consumers, and expects 300,000 to be redeemed by their expiration date of December 31. Retailers can take up to 90 days to mail their coupons to Glidell. As of December 31, Glidell has made payments of $95,000 to retailers, and has 115,000 coupons waiting to be processed for payment. What amount should Glidell report as outstanding liability for coupons in its December 31 balance sheet?
Glidell must record an expense of $.70 ($.65 savings to customer + $.05 fee to retailers) for each of the 300K coupons it expects to be redeemed. 300K x $.70 = $210K. Glidell then subtracts the $95K it has already paid out.
Compare your answer with the correct one above
The Wyman Company borrowed $250,000 on October 31, Year 1, and signed a two-year note bearing interest of 10% on that date. Interest is compounded annually and is payable in full at the note’s maturity date of March 31, Year 3. What amount of liability for interest should Wyman report at December 31, Year 2?
The liability for interest at the end of Year 2 should include interest expense recorded in Year 1 and in Year 2. In Year 1, Wyman will record $4,167 in interest ($250K x 10% x 2/12 months). In Year 2, this interest will be compounded and added to the principal. Therefore, interest expense in Year 2 will be $25,417 ($245,167 x 10% x 12/12 months). The interest from both years will be added together to get the total liability at the end of Year 2.
Compare your answer with the correct one above
Under which of the following circumstances does substantial doubt exist about an entity's ability to continue as a going concern?
Substantial doubt exists when relevant conditions and events, indicate it is probable that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date.
Compare your answer with the correct one above
Which of the following conditions or events would least likely raise substantial doubt about an entity's ability to continue as a going concern?
In this example, the warehouse is insured and likely to be covered by insurance after the flood.
Compare your answer with the correct one above
Of the following liabilities, which would a company include in the current liability section of its balance sheet?
While a mortgage is a long term liability, any portion of it due within one year is considered a current liability. The other options are all long term liabilities.
Compare your answer with the correct one above
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
Compare your answer with the correct one above
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
Compare your answer with the correct one above
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
Compare your answer with the correct one above
Of the following costs, which is associated with exit and disposal activities?
Relocation costs for employees are related with exit and disposal activities.
Compare your answer with the correct one above
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
Compare your answer with the correct one above
Which terms indicate that a contingent liability likely should be recognized?
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Compare your answer with the correct one above
Which of the following is true regarding purchases made from a seller that offers a discount for early payment?
Under the net method, a company initially records a purchase as if the discount is going to be taken. Recording the purchase includes a credit to accounts payable.
Compare your answer with the correct one above
Glidell Company issues coupons for its products, which are redeemable at grocery stores. Each coupon entities the customer to $.65 off their purchase of Glidell's products. Additionally, Glidell reimburses retailers an additional $.05 per coupon. On July 1 of the current year, Glidell mailed out $1 million coupons to consumers, and expects 300,000 to be redeemed by their expiration date of December 31. Retailers can take up to 90 days to mail their coupons to Glidell. As of December 31, Glidell has made payments of $95,000 to retailers, and has 115,000 coupons waiting to be processed for payment. What amount should Glidell report as outstanding liability for coupons in its December 31 balance sheet?
Glidell must record an expense of $.70 ($.65 savings to customer + $.05 fee to retailers) for each of the 300K coupons it expects to be redeemed. 300K x $.70 = $210K. Glidell then subtracts the $95K it has already paid out.
Compare your answer with the correct one above