Question 1

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

Accepted Answer

A numerical probability of the expected loss would not be identified if a contingent liability were disclosed in a financial statement note. This is because contingent liabilities typically involve uncertain future events, and it may be difficult to assign a specific probability to the expected loss. However, the financial statement note would typically disclose the nature of the item, the expected outcome of the future event, and the amount of the contingency, if known.

Question 2

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

Accepted Answer

A capital lease is recorded as if the lessee has purchased the leased asset, and therefore it is recorded as a purchase on the balance sheet of the lessee.

Question 3

A contingent liability is a liability that may occur if some future event takes place.

Accepted Answer

A contingent liability is a potential liability that may occur in the future, depending on the outcome of certain events. It is a possible obligation that may or may not be incurred, and it is usually disclosed in the financial statements as a note or footnote. Examples of contingent liabilities include pending lawsuits, warranty claims, and environmental liabilities.

Question 4

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

Accepted Answer

A finance lease typically involves the lessee gaining ownership-like rights and responsibilities over the asset, whereas renting an apartment is a short-term rental agreement without ownership transfer.

Question 5

Marin Company sells 9,000 units of its product in 2018 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 balance sheet as Warranty Liability on December 31, 2018?

Accepted Answer

The estimated warranty liability can be calculated as follows: 
Number of defective units = 9,000 x 3% = 270 
Cost of repairing each unit = $50 
Total estimated warranty liability = 270 x $50 = $13,500 
However, the company has already honored warranty contracts on 180 units, which cost $9,000. Therefore, the remaining estimated warranty liability would be $13,500 - $9,000 = $4,500, which is the amount that should be reported on the balance sheet.

Question 6

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

Accepted Answer

Repair costs incurred in honoring warranty contracts are a liability, and should be debited to the Warranty Liability account. This account represents the company's obligation to cover the costs of repairs or replacements under warranty agreements.

Question 7

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 obligation is to make contributions to the plan on behalf of the employees. Therefore, the employer only recognizes a pension expense for the amount of contributions that are required under the plan. The investment earnings or losses on those contributions are passed on to the employees as part of their individual account balances.

Question 8

An operating lease transfers substantial control of the asset to the lessee.

Accepted Answer

An operating lease does not transfer substantial control or ownership of the asset to the lessee; it is more like a rental agreement where the lessor retains ownership.

Question 9

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 actually occur and the amount can be estimated with reasonable accuracy. If the likelihood of occurrence is remote, the contingency should not be recorded but should be disclosed in the footnotes to the financial statements.

Question 10

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

Accepted Answer

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

Question 11

The accounting for warranty costs is based on the

Accepted Answer

The accounting for warranty costs follows the expense recognition principle, which states that expenses should be recognized in the period in which they are incurred, not necessarily in the period when payment for the expenses is made. Warranty costs are recognized as expenses in the period in which the sale is made, even though the actual cost of the repairs may occur in a later period. This ensures that the expenses of the sale are matched with the revenue earned.

Question 12

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

Accepted Answer

The expense recognition principle requires that expenses should be recognized in the period in which related revenues are recognized. Since warranty costs are directly related to the sale of a product, they should be recognized as an expense in the same period in which the related product revenue is recognized. This is typically at the time of sale, when the product is sold with an accompanying warranty.

Question 13

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

Accepted Answer

A contingent liability is a liability that is dependent on a future event that may or may not occur. It is a potential obligation that may be incurred depending on the outcome of a specific event. Examples of contingent liabilities include pending lawsuits, warranties, and guarantees.

Question 14

Postretirement benefits are accounted for on a cash basis.

Accepted Answer

Postretirement benefits are typically accounted for on an accrual basis, meaning that the costs and obligations are recognized and recorded as they are earned by employees during their working years, rather than when payments are made during retirement.

Question 15

Marin Company sells 9,000 units of its product in 2018 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 2018 income statement?

Accepted Answer

The expected number of defective units is 3% of 9,000, which is 270 units. The total cost of repairs for these units is expected to be 270 x $50 = $13,500. Since Marin Company honored warranty contracts on 180 units, the remaining warranty expense to be recognized is $13,500 - $9,000 = $4,500. Therefore, the amount that Marin Company should report as Warranty Expense in its 2018 income statement is $4,500.

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

A contingency that is remote

Accepted Answer

A remote contingency is defined as an event that is unlikely to occur. As per accounting standards, a remote contingency does not need to be disclosed in the financial statements nor recorded as a contingent liability. Accrual of loss is only required for probable or reasonably possible contingencies.

Question 18

Disclosure of a contingent liability is usually made

Accepted Answer

Contingent liabilities are uncertainties that might become actual liabilities in the future. They are disclosed in the notes to the financial statements, which provide additional information and disclosures beyond those presented on the face of the financial statements. This disclosure helps users of financial statements to understand the nature and extent of contingent liabilities and assess the potential risks and uncertainties that may affect the company's financial position and performance. Therefore, the most appropriate choice is option C.

Question 19

In concept, the estimating of Warranty Expense when products are sold under warranty is similar to the estimating of Bad Debts Expense based on credit sales.

Accepted Answer

Both warranty expense and bad debts expense require estimation based on historical experience and other relevant factors such as customer satisfaction, product quality, and economic conditions. Both expenses are recognized in the same period as the sale of the product, and both are considered as a percentage of the sales revenue.

Question 20

Warranty expenses are reported on the income statement as

Accepted Answer

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

Quiz 18: Specimen Financial Statements: Wal-Mart Stores, Inc