Question 1

Marin Company sells 9,000 units of its product in 2014 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount will be reported on Marin Company's statement of financial position as Warranty Liability on December 31, 2014?
A) $9,000.
B) $13,500.
C) $4,500.
D) Cannot be determined.

Accepted Answer

The total warranty expense is calculated as follows:

Expected cost of repairs = 3% x 9,000 units x $50 per unit = $13,500
Actual cost of repairs = $9,000
Estimated cost of repairs to be incurred in the future = $13,500 - $9,000 = $4,500

Therefore, the amount reported on Marin Company's statement of financial position as Warranty Liability on December 31, 2014 will be $4,500.

Question 2

Marin Company sells 9,000 units of its product in 2014 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount should Marin Company report as Warranty Expense in its 2014 income statement?
A) $13,500.
B) $9,000.
C) $4,500.
D) $67,500.

Accepted Answer

A

Question 3

Disclosure of a contingent liability is usually made
A) parenthetically, in the body of the statement of financial position.
B) parenthetically, in the body of the income statement.
C) in a note to the financial statements.
D) in the management discussion section of the financial statements.

Accepted Answer

Contingent liabilities cannot be recognized on the face of the financial statements as they are uncertain in nature. Therefore, they are disclosed in the notes to the financial statements.

Question 4

The renting of an apartment is an example of a finance lease.

Accepted Answer

The answer of The renting of an apartment is an...

Question 5

A finance lease requires the lessee to record the lease as a purchase of an asset.

Accepted Answer

In a finance lease, the lessee (the person leasing the asset) is required to record the lease as a purchase of an asset on their balance sheet. This is because the lessee has essentially taken ownership of the asset for a significant portion of its useful life.

Question 6

A contingency liability that is remote
A) should be disclosed in the financial statements.
B) must be accrued as a loss.
C) does not need to be disclosed.
D) is recorded as a contingent liability.

Accepted Answer

Contingent liabilities that are remote do not need to be disclosed in the financial statements as they are considered highly unlikely to occur. The disclosure of remote contingent liabilities would clutter the financial statements with immaterial information. Therefore, they are not accrued as a loss and do not have a separate entry in the financial statements.

Question 7

When vacation benefits are paid, Vacation Benefits Expense is debited.

Accepted Answer

The answer of When vacation benefits are paid, Vacation Benefits...

Question 8

The accounting for warranty costs is based on the
A) going concern assumption.
B) expense recognition principle.
C) economic entity principle.
D) fair value principle.

Accepted Answer

The expense recognition principle requires that companies recognize expenses in the accounting period in which they are incurred, rather than when payment is made. This principle applies to warranty costs, as companies must estimate and recognize the expected cost of honoring warranties in the same period that the related revenue is recognized.

Question 9

Postretirement benefits are accounted for on a cash basis.

Accepted Answer

Postretirement benefits, such as pensions and healthcare, are accounted for on an accrual basis, where expenses and obligations are recognized as they are earned or incurred, not when cash is paid.

Question 10

In a defined-contribution plan, an employer only recognizes pension expense for the amount that the employer is required to contribute under the plan.

Accepted Answer

In a defined-contribution plan, the employer's contribution is fixed or determined by the specified formula, so the employer only recognizes pension expense for the amount that they are required to contribute. The final benefit amount depends on the investment performance of the plan, and the risk falls on the employee.

Question 11

Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.

Accepted Answer

Contingent liabilities should only be recorded in the accounts if it is probable that the contingency will result in a liability and the amount of the liability can be reasonably estimated. If the likelihood of the contingency is considered remote, it should not be recorded but instead disclosed in the notes to the financial statements.

Question 12

If an event makes it probable that a company will experience a cash outflow but it cannot reasonably estimate the amount, the contingent liability
A) should be recorded in the accounts.
B) should be disclosed in the notes to the financial statements.
C) should not be recorded or disclosed in the notes until the contingency actually happens.
D) must be paid for the amount estimated.

Accepted Answer

When a contingent liability makes it probable that a company will experience a cash outflow but the amount cannot be reasonably estimated, the liability should be disclosed in the notes to the financial statements but not recorded in the accounts. This is in accordance with the Generally Accepted Accounting Principles (GAAP). The reason for not recording it is because there is no reliable estimate, and recognition of an amount that may not be accurate would misrepresent the financial statements.

Question 13

If an event may become an actual liability in the future, it is called a
A) potential liability.
B) hypothetical liability.
C) probabilistic liability.
D) contingent liability.

Accepted Answer

A contingent liability is a potential liability that depends on the occurrence of one or more uncertain future events to confirm the obligation to pay. It is possible but not probable that a future event will occur which will result in the creation of an actual liability.

Question 14

In concept, estimating Warranty Expense when products are sold with a warranty is similar to estimating Bad Debt Expense based on credit sales.

Accepted Answer

Both Warranty Expense and Bad Debt Expense require estimating the future costs of an obligation based on past sales or transactions. In the case of Warranty Expense, we estimate the future costs of fulfilling a warranty based on past sales of products with warranties. In the case of Bad Debt Expense, we estimate the future costs of non-payment based on past credit sales.

Question 15

A provision is a liability of uncertain timing or amount.

Accepted Answer

A provision is a liability that is recognized when a business has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, but the amount or timing of the outflow is uncertain.

Question 16

Warranty expenses are reported on the income statement as
A) administrative expenses.
B) part of cost of goods sold.
C) contra-revenues.
D) selling expenses.

Accepted Answer

Warranty expenses are typically considered a selling expense since they are related to the cost of selling and marketing a product. They are not considered part of cost of goods sold, as that typically only includes directly tied expenses to producing or acquiring inventory, and they are not a contra-revenue since revenues are not being reduced by the warranty expense. Administrative expenses are also typically separate from warranty expenses.

Question 17

An operating lease transfers substantially all the benefits and risks of ownership to the lessee.

Accepted Answer

An operating lease does not transfer substantially all the benefits and risks of ownership to the lessee. The lessor retains most of the risks and benefits, and the lease is often structured to be shorter term and less expensive than a finance lease.

Question 18

The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense
A) when the product is brought in for repairs.
B) in the period in which the product was sold.
C) at the end of the warranty period.
D) only if the repairs are expected to be made within one year.

Accepted Answer

Under the expense recognition principle, the estimated cost of honoring warranty contracts should be recognized as an expense in the period in which the product was sold, as this is when the warranty obligation was incurred. This matches with choice B.

Question 19

Which of the following items would not be identified if a contingent liability were disclosed in a financial statement note?
A) The nature of the item
B) The expected outcome of the future event
C) A numerical probability of the expected loss
D) The amount of the contingency, if known

Accepted Answer

A numerical probability of the expected loss is typically not disclosed in the financial statement note. This is because contingencies are uncertain by nature and cannot be accurately measured in terms of probabilities. The other items listed (nature of the item, expected outcome, and amount of the contingency, if known) are typically disclosed in the note.

Question 20

Repair costs incurred in honoring warranty contracts should be debited to Warranty Liability.

Accepted Answer

Repair costs incurred in honoring warranty contracts are an expense that reduces the Warranty Liability. Therefore, they should be debited to the Warranty Liability account.

Quiz 15: Accounting Principles and Contingent Liabilities in Business Operations

Disclosure of a contingent liability is usually made

The renting of an apartment is an example of a finance lease.

A finance lease requires the lessee to record the lease as a purchase of an asset.

A contingency liability that is remote

When vacation benefits are paid, Vacation Benefits Expense is debited.

The accounting for warranty costs is based on the

Postretirement benefits are accounted for on a cash basis.

In a defined-contribution plan, an employer only recognizes pension expense for the amount that the employer is required to contribute under the plan.

Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.

If an event makes it probable that a company will experience a cash outflow but it cannot reasonably estimate the amount, the contingent liability

If an event may become an actual liability in the future, it is called a

In concept, estimating Warranty Expense when products are sold with a warranty is similar to estimating Bad Debt Expense based on credit sales.

A provision is a liability of uncertain timing or amount.

Warranty expenses are reported on the income statement as

An operating lease transfers substantially all the benefits and risks of ownership to the lessee.

The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense

Which of the following items would not be identified if a contingent liability were disclosed in a financial statement note?

Repair costs incurred in honoring warranty contracts should be debited to Warranty Liability.