Question 1

A certain contingent liability was evaluated at year-end, and considered to have a remote possibility of becoming an actual liability. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.

Accepted Answer

According to accounting standards, contingent liabilities that are considered to have a remote possibility of occurrence do not typically require disclosure in the financial statements or notes, as they are not expected to have a significant impact on the financial position or performance of the entity.

Question 2

Charter Services sells a service plan for commercial computer maintenance. The price is $1,200 per year, paid in advance. On December 1, 2013, Charter sells a service plan to a new customer for cash. Please provide the journal entry to record the adjustment needed on December 31, 2013.

Accepted Answer

The answer of Charter Services sells a service plan for...

Question 3

A contingent liability that will probably become an actual liability, and can be reasonably estimated, must be recorded as an expense.

Accepted Answer

According to accounting principles, a contingent liability that is likely to become a real liability and can be reasonably estimated must be recorded as an expense in the financial statements of a company.

Question 4

The entry to estimate warranty payable includes a credit to Warranty expense.

Accepted Answer

The entry to estimate warranty payable typically includes a debit to Warranty Expense and a credit to Warranty Liability (or Warranty Payable), not a credit to Warranty Expense.

Question 5

Warranties pose an accounting challenge because a company does not know which or how many products will have to be repaired.

Accepted Answer

Warranties are considered contingent liabilities because the obligation to repair or replace a product depends on a future event (i.e. the product breaking down). Since the company cannot predict how many products will need repairs, it is difficult to estimate the exact amount of warranty costs. This uncertainty makes it a challenge for companies to record and report warranty expenses accurately in their financial statements.

Question 6

Which of the following principles requires that warranty expense be recorded in the period that revenue is recorded?

Accepted Answer

The matching principle requires that expenses be recorded in the same period as the revenue they help to generate. Warranty expense is considered an expense that helps to generate revenue, so it should be matched to the period when that revenue is recorded.

Question 7

Warranty expense would be included in the liability section of the balance sheet.

Accepted Answer

Warranty expense is recorded as a liability when the expense is estimated, but the specific expense related to warranties is recognized in the income statement as an expense, not on the balance sheet. The estimated liability for future warranty claims is what appears in the liability section of the balance sheet.

Question 8

Ace Appliances sells dishwashers with a 3-year warranty. In 2013, there are $90,000 of sales revenues for dishwashers. The company estimates warranty expense at 3% of revenues. What is the 2013 warranty expense?

Accepted Answer

A) Calculation: $90,000 × 3% = $2,700

Question 9

A restaurant has been sued because a customer claims to have found a bug in her chili. The company's lawyers believe there is only a remote possibility that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company's management?

Accepted Answer

The answer of A restaurant has been sued because a...

Question 10

Estimated warranty payable would be included in the liability section of the balance sheet.

Accepted Answer

Estimated warranty payable is a liability that is expected to be paid in the future, and therefore it is included in the liability section of the balance sheet.

Question 11

Estimated warranty payable would be included in the operating expense section of the income statement.

Accepted Answer

Estimated warranty payable is recorded as a liability on the balance sheet, not as an operating expense on the income statement. However, the expense related to warranty costs is recognized in the income statement under operating expenses.

Question 12

A contingent liability that has a remote possibility of becoming an actual loss is included in a note to the financial statements.

Accepted Answer

The answer of A contingent liability that has a remote...

Question 13

A company has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit. The company's lawyers believe it is more than remote, but less than probable, that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company's management?

Accepted Answer

The situation should be described in a note to the financial statements to inform users that there is a potential liability. Ignoring the possible liability may result in misleading financial statements, and estimating and recording an expense may not be appropriate as the likelihood of the liability is uncertain. There is no indication that management should consider resigning, as this is a common risk faced by businesses.

Question 14

A certain contingent liability was evaluated at year-end; the company felt it was probable that it would become an actual liability, and the amount could be reasonably estimated. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.

Accepted Answer

Contingent liabilities that are probable and can be reasonably estimated should be disclosed in the financial statement notes or, if material, reported as a liability on the balance sheet. Failure to do so could be considered unethical behavior because it could potentially mislead investors and other stakeholders about the company's financial position.

Question 15

Ace Appliances sells dishwashers with a 3-year warranty. In 2013, there are $90,000 of sales revenues for dishwashers. The company estimates warranty expense at 3% of revenues. What is the total estimated warranty payable for Ace regarding the sales in 2013?

Accepted Answer

A) Calculation: $90,000 × 3% = $2,700

Question 16

Warranty expense would be included in the operating expense section of the income statement.

Accepted Answer

Warranty expense is a type of operating expense, which is a category of expense that is incurred in the normal course of business operations. Examples of operating expenses include salaries, supplies, rent, utilities, and maintenance costs, among others. The income statement is a financial statement that shows a company's revenues, expenses, and net income (or net loss) over a certain period of time. Operating expenses are typically listed near the top of the income statement, after revenue or sales, and before other types of expenses like interest or income taxes.

Question 17

When the likelihood of an actual loss is probable, and the amount can be estimated, it should be recorded as an expense and as a liability.

Accepted Answer

This is the concept of recognizing and recording provisions for potential losses, which is a fundamental principle of accrual accounting. When a loss is probable and can be estimated, it is necessary to recognize it immediately as an expense and report it as a liability in the financial statements. This ensures that the financial statements reflect the economic reality of the situation, even if the loss has not yet been paid or settled.

Question 18

A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility of becoming an actual liability. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.

Accepted Answer

According to GAAP, if a contingent liability has a reasonable possibility of becoming an actual liability, it should be disclosed either on the balance sheet or in the notes to the financial statements. Failing to report it could potentially mislead stakeholders and be considered unethical behavior.

Question 19

Contingent liabilities sometimes pose an ethical challenge because they are not real liabilities and are easy to overlook.

Accepted Answer

Contingent liabilities are potential liabilities that may or may not occur in the future. They are often disclosed in financial statements but may be easy to overlook as they are not yet actual liabilities. This can pose an ethical challenge as their potential impact on financial reports and decision-making should not be ignored.

Question 20

Which of the following is TRUE of a contingent liability?

Accepted Answer

A contingent liability is a potential liability that depends on a future event that may or may not occur. Examples include pending lawsuits or potential warranty claims. It is not an actual liability and therefore cannot be difficult to estimate or depend on past events.

Quiz 10: Current Liabilities and Payroll