Question 1

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. Instead, the lessor (owner of the leased asset) retains ownership and is responsible for maintenance and repairs, and the lessee (user of the leased asset) has the right to use the asset for a limited period of time.

Question 2

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

Accepted Answer

Warranty liability represents the amount a company expects to pay for repairs or replacement of products under warranty. Therefore, the costs incurred in honoring warranty contracts should be debited to Warranty Liability.

Question 3

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

Accepted Answer

A finance lease is considered a purchase of an asset by the lessee and is recorded as such on their financial statements.

Question 4

Disclosure of a contingent liability is usually made

Accepted Answer

Disclosure of a contingent liability is typically made in a note to the financial statements. This note provides important information about potential future obligations or risks that may affect the company's financial health. It is important for investors and stakeholders to be aware of these contingencies in order to make well-informed decisions about the company.

Question 5

A contingency liability that is remote

Accepted Answer

A contingency liability that is remote does not need to be disclosed in the financial statements as it has a very low probability of occurring. It is not recorded as a contingent liability and does not need to be accrued as a loss.

Question 6

The accounting for warranty costs is based on the

Accepted Answer

The accounting for warranty costs is based on the expense recognition principle, which requires that expenses be recognized in the period in which they are incurred, rather than when payment is made. Warranty costs are typically estimated and recognized upfront when the sale is made, and any adjustments to the estimate are made in subsequent periods based on actual experience.

Question 7

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

Accepted Answer

If a contingency makes it likely that a company will experience a cash outflow but the amount cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements. This is done to inform users of the financial statements about the potential impact on the company's financial position and results of operations. However, it should not be recorded in the accounts until the contingency actually happens and the amount can be reasonably estimated.

Question 8

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?

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 9

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

Accepted Answer

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

Question 10

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 is not required to be disclosed for a contingent liability. The other options listed are typically included in the disclosure of a contingent liability.

Question 11

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 expenses and bad debt expenses are estimated using the percentage of sales method, which uses historical data to estimate future expenses.

Question 12

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 13

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 if it is probable that they will occur and the amount can be estimated with reasonable accuracy. If the possibility is remote, it does not need to be recorded but must be disclosed in the notes to the financial statements.

Question 14

A provision is a liability of uncertain timing or amount.

Accepted Answer

A provision is defined as a liability of uncertain timing or amount, as per accounting standards.

Question 15

Postretirement benefits are accounted for on a cash basis.

Accepted Answer

Postretirement benefits are typically accounted for on an accrual basis, meaning that the expenses are recognized as they are earned by the employee rather than when they are paid out.

Question 16

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 estimated cost of honoring warranty contracts should be recognized as an expense in the period when the product was sold, in accordance with the expense recognition principle. This allows for proper matching of expenses with revenue.

Question 17

Warranty expenses are reported on the income statement as

Accepted Answer

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

Question 18

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

Accepted Answer

A contingent liability is a liability that may arise in the future depending on the outcome of a certain event or condition. It is not yet a certain liability and still depends on certain conditions being met. Therefore, D is the best answer as it accurately describes a liability that is not yet certain but may become one in the future.

Question 19

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?

Accepted Answer

The expected warranty expense is calculated as 3% of 9,000 units, which is 270 units. At $50 per unit, the total expected warranty expense is $13,500.

Question 20

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 is only responsible for making the specified contributions to the plan, and does not guarantee a specific retirement benefit for employees. Therefore, the employer will only recognize pension expense for the amount they are required to contribute under the plan.

Quiz 15: Accounting and Financial Reporting for Contingent Liabilities and Leases