Question 1

Businesses do not accrue contingent gains but do report actual gains.

Accepted Answer

Businesses do not recognize contingent gains in their financial statements because accounting standards require certainty before recognizing income. However, they do report actual gains that have been realized or are realizable.

Question 2

Sales for the current year amount to $900,000. The company estimates warranty expense to be 5% of sales. The journal entry to accrue the estimated warranty expense includes a debit to estimated warranty payable for $45,000.

Accepted Answer

The correct journal entry to accrue the estimated warranty expense includes a debit to Warranty Expense for $45,000 (5% of $900,000) and a credit to Estimated Warranty Liability for $45,000, not a debit to Estimated Warranty Payable.

Question 3

A contingent liability is an actual liability that is estimated when things go wrong.

Accepted Answer

A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event.

Question 4

All of the following are unearned revenues except:

Accepted Answer

Unearned revenues refer to money received by a company for goods or services yet to be provided. Accrued revenues, however, are revenues that have been earned (through the delivery of goods or services) but not yet received. Choices A, C, and D all describe unearned revenue, where the company has received payment but has not yet fulfilled its obligation to the customer.

Question 5

The entry to accrue interest on a note payable would include a:

Accepted Answer

The correct entry to accrue interest on a note payable includes a debit to Interest Expense, reflecting the cost of borrowing funds over the period.

Question 6

Corporations and individuals both pay income tax.

Accepted Answer

Both corporations and individuals are subject to income tax, although the rates and rules governing their taxation may differ.

Question 7

The law requires all employers to provide paid vacations to their employees.

Accepted Answer

The answer of The law requires all employers to provide...

Question 8

Liabilities that exist but whose exact amount is not known must be:

Accepted Answer

Liabilities that exist but whose exact amount is not known must be estimated to ensure that financial statements reflect a true and fair view of the company's financial position.

Question 9

Estimating a warranty expense in the same period as the sales revenue is recognized is an example of:

Accepted Answer

The matching objective in accounting requires that expenses be matched with the revenues they help to generate in the same period. Estimating a warranty expense in the same period as the sales revenue is recognized ensures that the costs associated with generating that revenue are recorded at the same time, adhering to the matching principle.

Question 10

A contingent liability is a potential liability that depends on a future event arising out of a past transaction.

Accepted Answer

A contingent liability is indeed a potential financial obligation that may arise in the future, depending on the outcome of a specific event, which stems from past transactions or events.

Question 11

Warranty expense is debited:

Accepted Answer

Warranty expense is recognized in the same period as the revenue from the sale of the product, following the matching principle of accounting. This principle dictates that expenses should be matched with the revenues they help to generate.

Question 12

What entry is required when a business estimates warranty payable each period based on sales revenue?

Accepted Answer

When a business estimates warranty payable based on sales revenue, it records an expense for the estimated cost of warranties (Warranty Expense) and creates a liability for the estimated amount to be paid in the future (Estimated Warranty Payable). This matches the expense with the revenue of the period in which the sales were made, adhering to the matching principle of accounting.

Question 13

Bachman Merchandising has ten employees who each earn $180 per day. If they accumulate vacation time at the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be accrued for the group at the end of the month is:

Accepted Answer

The answer of Bachman Merchandising has ten employees who each...

Question 14

Warranty expense is debited in the period that:

Accepted Answer

Warranty expense is recognized in the same period that the product is sold, following the matching principle of accounting, which states that expenses should be matched with the revenues they help to generate.

Question 15

The matching objective requires that companies record warranty expense at the time the repair is made.

Accepted Answer

The matching principle requires that companies match expenses with related revenues in the period in which the revenue was earned, which means warranty expense should be estimated and recorded in the same period the product is sold, not when the repair is actually made.

Question 16

Sales revenue for Booker Company for 2019 amounted to $800,000. The products sold carry a six-month warranty. Management estimates the cost of the warranty to be 3% of sales revenue. Booker should:

Accepted Answer

BAccording to the matching principle in accounting, expenses should be recognized in the period in which the related revenues are recognized. Therefore, Booker Company should recognize the warranty expense in 2019, the same year the sales were made. The estimated warranty expense ($800,000 sales * 3% = $24,000) should be debited to Warranty Expense to reflect the cost of the expected future repairs or replacements under the warranty. At the same time, Estimated Warranty Payable should be credited to recognize the liability for the future warranty claims. This approach ensures that the costs associated with the sales are matched with the revenues in the financial statements.

Question 17

A corporation's journal entry to accrue income tax owed at year end includes a debit to income tax payable.

Accepted Answer

The correct journal entry to accrue income tax owed at year end includes a debit to Income Tax Expense (reflecting the expense on the income statement) and a credit to Income Tax Payable (reflecting the liability on the balance sheet).

Question 18

Because contingent liabilities are not real liabilities, they are easy to overlook.

Accepted Answer

Contingent liabilities are potential liabilities that may occur depending on the outcome of a future event, making them less tangible and easier to overlook compared to actual liabilities.

Question 19

All of the following are estimated liabilities except:

Accepted Answer

Employee income tax payable is not an estimated liability because it is a specific amount that is withheld from employees' salaries and is therefore known, not estimated. The other options (A, B, and D) involve amounts that the company must estimate.

Question 20

The law requires most employers to provide a minimum number of weeks holiday per year.

Accepted Answer

Most countries have labor laws that mandate employers to provide a minimum number of paid holiday weeks per year to their employees.

Quiz 11: Current Liabilities and Payroll