Question 1

How should a contingent liability that has a likely chance of occurring and can be reasonably estimated be disclosed? $\begin{array}{lll}&\text { Accrual}&\text {  Footnote }\\hline
\text { a. } & \text { No } & \text { No } \
\text { b. } & \text { Yes } & \text { No } \
\text { c. } & \text { No } & \text { Yes } \
\text { d. } & \text { Yes } & \text { Yes }
\end{array}$

Accepted Answer

The answer of How should a contingent liability that has...

Question 2

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } 
& \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \
2010 & \$ 3,500,000 & \$ 110,000 \
2011 & \$ 3,900,000 & \$ 195,000
\end{array}$$
-The warranty payable on the December 31, 2010 balance sheet was:

Accepted Answer

The answer of Use the following information for questions:
Melchor Inc.offers...

Question 3

When the occurrence of a liability is dependent on the outcome of some future event, the liability is referred to as an):

Accepted Answer

A liability that is dependent on a future event is classified as a contingent liability. This means that it may or may not become an actual liability, depending on the outcome of the event. Examples of contingent liabilities include pending lawsuits and warranties on products.

Question 4

The awarding of frequent flier miles by airline companies is accounted for in a manner similar to:

Accepted Answer

Frequent flier miles are accounted for similarly to warranty expenses because both represent future costs that the company is obligated to incur due to past transactions. Airlines estimate the cost of redeeming these miles in the future and record this as a liability, similar to how companies estimate and account for future warranty claims.

Question 5

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } 
& \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \
2010 & \$ 3,500,000 & \$ 110,000 \
2011 & \$ 3,900,000 & \$ 195,000
\end{array}$$
-The warranty expense for 2011 was:

Accepted Answer

The answer of Use the following information for questions:
Melchor Inc.offers...

Question 6

How should a contingent liability that has a likely chance of occurring but the amount of the loss cannot be reasonably estimated be disclosed? $\begin{array}{lll}&\text { Accrual}&\text {  Footnote }\\hline
\text { a. } & \text { No } & \text { No } \
\text { b. } & \text { Yes } & \text { Yes } \
\text { c. } & \text { Yes } & \text { No } \
\text { d. } & \text { No } & \text { Yes }
\end{array}$

Accepted Answer

The answer of How should a contingent liability that has...

Question 7

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } 
& \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \
2010 & \$ 3,500,000 & \$ 110,000 \
2011 & \$ 3,900,000 & \$ 195,000
\end{array}$$
-The warranty payable on the December 31, 2011 balance sheet was:

Accepted Answer

The answer of Use the following information for questions:
Melchor Inc.offers...

Question 8

Which of the following statements concerning purchase commitments is true?

Accepted Answer

According to accounting standards (IAS 37), footnote disclosure is required for purchase commitments if the contract has a material effect on the financial statements. Anticipated gains are not recognized, but anticipated losses are recognized and disclosed. While Canadian practice may require disclosure of all purchase commitments, this is not a general rule in accounting standards.

Question 9

When a company sells its receivables to another entity with recourse, the requirement to buy back uncollectible accounts is called an):

Accepted Answer

The requirement to buy back uncollectible accounts is a contingent liability because it is a potential obligation that will only arise if a specific event occurs (i.e. the account is uncollectible). With recourse means that the selling company is still responsible for the collectability of the receivables, making it a contingent liability.

Question 10

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
-The warranty liability as at the year-end 2010 was:

Accepted Answer

The answer of Use the following information for questions:
Direct Sales...

Question 11

Maynard Manufacturing has a two-week payroll of $8,200 for its eight employees.Income tax of $1,080 is deducted from the employees' cheques, as well as 5% for CPP and 2% for EI.Wages deposited in employees' bank accounts would be:

Accepted Answer

To find the wages deposited, subtract the deductions from the total payroll: $8,200 - $1,080 (income tax) - $410 (5% CPP) - $164 (2% EI) = $6,546.

Question 12

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
-The warranty liability as at the end of the 2011 year was:

Accepted Answer

To calculate the warranty liability at the end of 2011, we need to calculate the estimated liability for the sales made in 2010 and 2011 separately and then add the repair costs incurred in 2011.

For 2010 sales, the estimated liability would be 4% of $2,500,000 = $100,000. Since no warranty costs were incurred in 2010, the liability carried forward to 2011 would still be $100,000.

For 2011 sales, the estimated liability would be 6% of $2,800,000 = $168,000. In addition, the company spent $175,000 on repairs related to warranties from both 2010 and 2011. Therefore, the total liability for 2011 would be $168,000 + $175,000 = $343,000.

Adding the liabilities for 2010 and 2011, we get $100,000 + $343,000 = $443,000. However, since the liability is for a two-year period and we have already accounted for 2010 and 2011, we need to reduce the liability by the amount of sales made in 2009 (the first year of the two-year period). Let's assume for simplicity that the sales in 2009 were also $2,500,000. Then, the liability for 2009 sales would be 4% of $2,500,000 = $100,000. This liability would have been carried forward to 2010, and then to 2011, so we need to subtract it from the total liability we have calculated so far.

Therefore, the final liability for warranties at the end of 2011 would be $443,000 - $100,000 = $343,000.

Thus, the best choice is C, $355,000.

Question 13

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
-The warranty expense for 2010 was:

Accepted Answer

The answer of Use the following information for questions:
Direct Sales...

Question 14

How should a contingent liability that has an unlikely chance of occurring and is insignificant in size be disclosed? $\begin{array}{lll}&\text { Accrual}&\text {  Footnote }\\hline
\text { a. } & \text { No } & \text { Yes } \
\text { b. } & \text { No } & \text { No } \
\text { c. } & \text { Yes } & \text { No } \
\text { d. } & \text { Yes } & \text { Yes }
\end{array}$

Accepted Answer

The answer of How should a contingent liability that has...

Question 15

Which of the following contingent losses would require footnote disclosure only?

Accepted Answer

A likely loss with an amount that cannot be reasonably estimated is a contingent loss that would require footnote disclosure only. This is because the amount cannot be quantified or reliably estimated, so it cannot be recorded as a liability on the balance sheet. However, it is still important information that should be disclosed in the footnotes to the financial statements. Choices A and B would require recognition on the balance sheet and disclosure in the footnotes, while choice C is unlikely to have a material impact on the financial statements and therefore may not require disclosure.

Quiz 9: Short-Term Liabilities

When the occurrence of a liability is dependent on the outcome of some future event, the liability is referred to as an) :

The awarding of frequent flier miles by airline companies is accounted for in a manner similar to:

Which of the following statements concerning purchase commitments is true?

When a company sells its receivables to another entity with recourse, the requirement to buy back uncollectible accounts is called an) :

Maynard Manufacturing has a two-week payroll of $8,200 for its eight employees.Income tax of $1,080 is deducted from the employees' cheques, as well as 5% for CPP and 2% for EI.Wages deposited in employees' bank accounts would be:

Which of the following contingent losses would require footnote disclosure only?