Question 1

Lincoln Company sells 600 units of a product that has a one-year warranty on parts. The average cost of honoring one warranty contract is $50. During the year 30 contracts are honored at a cost of $1,500. It is estimated that 60 contracts will be honored in the following year. The adjusting entry at the end of the current year will include a

Accepted Answer

The adjusting entry at the end of the current year will include a credit to Estimated Warranty Liability for $3,000. This is because the company has incurred $1,500 in warranty costs during the year and estimates that it will incur an additional $4,500 in warranty costs in the following year. The total estimated warranty liability is therefore $6,000, which is credited to Estimated Warranty Liability at the end of the current year.

Question 2

Madden Electric began operations in 2010 and provides a one year warranty on the products it sells. They estimate that 10,000 of the 200,000 units sold in 2010 will be returned for repairs and that these repairs will cost $6 per unit. The cost of repairing 8,000 units presented for service in 2010 was $48,000. Madden should report

Accepted Answer

Madden should report a warranty expense of $60,000 for 2010, calculated as 10,000 units estimated to be returned multiplied by $6 per unit. This reflects the estimated cost of all repairs expected for the year.

Question 3

Current maturities of long-term debt

Accepted Answer

Current maturities of long-term debt represent the portion of long-term debt that must be paid within the next year, thus making it a current liability that can be properly classified during balance sheet preparation. No adjusting entry is required as it is already accounted for in the current portion of long-term debt.

Question 4

A contingent liability need only be disclosed in the financial statement notes when the likelihood of the contingency is

Accepted Answer

A contingent liability should be disclosed in the financial statement notes when the likelihood of the contingency is reasonably possible, which means that the chance of the contingency occurring is more than remote, but less than probable. If the contingency is probable or more likely, it should be recognized as a liability on the balance sheet. If the chance of the contingency is remote or unlikely, disclosure in the financial statement notes is not required.

Question 5

Shaw Company sells 2,000 units of its product 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 40 units for a total cost of $2,000. What amount should Shaw Company accrue on December 31 for estimated warranty costs?

Accepted Answer

Shaw Company expects 3% of 2,000 units (60 units) to be defective, with an average repair cost of $50 per unit, totaling $3,000. Since $2,000 has already been incurred, the company should accrue $1,000 more for estimated warranty costs.

Question 6

Current liabilities generally appear

Accepted Answer

The answer of Current liabilities generally appear
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Question 7

Disclosure of a contingent liability is usually made

Accepted Answer

Contingent liabilities are disclosed in the notes to the financial statements because they are not yet actual liabilities and are uncertain in nature. This disclosure provides information to readers of the financial statements about potential future liabilities that may impact the financial health of the company.

Question 8

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

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the revenue they generate. Therefore, estimated warranty costs should be recognized as an expense in the period in which the product was sold, as that is when the revenue was recognized.

Question 9

The total compensation earned by an employee is called

Accepted Answer

Gross earnings refers to the total compensation earned by an employee before any deductions or taxes are taken out. Take-home pay, net pay, and net earnings are all different ways of referring to an employee's pay after deductions and taxes are taken out.

Question 10

If a liability is dependent on a future event, it is called a

Accepted Answer

A contingent liability is a liability that may or may not occur depending on the outcome of a future event. It is dependent on a future event, and there is uncertainty about whether the liability will actually need to be paid. Potential liability and hypothetical liability are not widely used or recognized accounting terms, and probabilistic liability does not accurately describe the nature of a liability that is dependent on a future event.

Question 11

Assuming a FICA tax rate of 8% on the first $100,000 in wages, and a federal income tax rate of 20% on all wages, what would be an employee's net pay for the year if he earned $110,000 for the year?

Accepted Answer

The FICA tax is 8% on the first $100,000, which is $8,000. The federal income tax is 20% on the entire $110,000, which is $22,000. The total tax is $8,000 + $22,000 = $30,000. Therefore, the net pay is $110,000 - $30,000 = $80,000.

Question 12

Ann Ellis's regular rate of pay is $12 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were

Accepted Answer

For the first 40 hours, Ann earns her regular rate of $12 per hour.

For the additional 8 hours, she earns one and one-half times her regular rate, which is $12 x 1.5 = $18 per hour.

So, her gross wages for the week would be:

$12 x 40 = $480 (for the first 40 hours)
$18 x 8 = $144 (for the additional 8 hours)
Total gross wages = $480 + $144 = $624

Therefore, the answer is choice C, $624.

Question 13

A contingency that is remote

Accepted Answer

A remote contingency is a contingency that is unlikely to occur. As per accounting standards, remote contingencies do not need to be disclosed in the financial statements or recorded as a contingent liability because it is not probable that the contingency will result in a loss. Only probable contingencies that can be estimated should be recorded as contingent liabilities in the financial statements.

Question 14

Which of the following employees would likely receive a salary instead of wages?

Accepted Answer

Employees who hold management positions, such as a sales manager, are likely to receive a salary instead of wages. Salaried employees usually have a set annual pay rate and are not paid by the hour. The other options, store clerk, factory employee, and manual laborer are typically paid hourly wages.

Question 15

Shaw Company sells 2,000 units of its product 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 40 units for a total cost of $2,000. What amount will be reported on Shaw Company's balance sheet as Estimated Warranty Liability on December 31, 2010?

Accepted Answer

To determine the estimated warranty liability on December 31, 2010, we need to calculate the expected cost of repairs for defective units that will be honored under warranty after the date of sale.

Number of defective units = 2,000 x 3% = 60
Expected repair cost per unit = $50
Expected total repair cost = 60 x $50 = $3,000

Since $2,000 was already spent on repairs in the year of sale, the remaining estimated warranty liability on December 31, 2010 would be $3,000 - $2,000 = $1,000. Therefore, the correct answer is option C).

Question 16

If a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, the contingent liability

Accepted Answer

When a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, it should be disclosed in the notes accompanying the financial statements. This provides users of the financial statements with information about potential future obligations without requiring the company to recognize a liability that may not materialize. Recording it in the accounts or paying the estimated amount is not required unless it is probable and the amount can be reasonably estimated.

Question 17

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

Accepted Answer

A financial statement footnote disclosing a contingent liability would typically provide information on the nature of the item, the expected outcome of the future event, and the amount of the contingency, if known. However, it would not typically provide a numerical probability of the expected loss, as such estimates can be highly subjective and uncertain.

Question 18

The accounting for warranty costs is based on the

Accepted Answer

The matching principle states that expenses should be recognized in the same period as the revenue they generate. Warranty costs are considered an expense associated with the sale of a product, and therefore should be recognized in the same period as the sale of the product. This is why the accounting for warranty costs is based on the matching principle.

Question 19

Which one of the following payroll taxes does not result in a payroll tax expense for the employer?

Accepted Answer

Federal income tax is not a payroll tax that results in a payroll tax expense for the employer. It is deducted from the employee's wages and is paid directly to the federal government by the employee. The other payroll taxes (FICA tax, federal unemployment tax, and state unemployment tax) all result in a payroll tax expense for the employer.

Question 20

Warranty expenses are reported on the income statement as

Accepted Answer

The answer of Warranty expenses are reported on the income...

Quiz 11: Current Liabilities and Payroll Accounting