Question 1

Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be

Accepted Answer

If expropriation is probable and estimable, it meets the definition of a loss contingency under US GAAP. As per GAAP, any probable loss contingencies should be disclosed in the financial statement as footnotes and should be accrued as a liability since the amount of loss is estimable. Therefore, the correct answer is B, which indicates that the contingency should be accrued as a liability and disclosed in the financial statements.

Question 2

During 2009, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2009. At December 31, 2009, Deluxe should report a liability for unredeemed coupons of:

Accepted Answer

The estimated number of coupons that will be redeemed is 70% of 800,000 or 560,000 coupons. Each coupon entitles the customer to a $5.00 cash rebate so the liability for unredeemed coupons is (800,000 - 560,000) x $5.00 = $1,200,000. Since only 350,000 coupons had been processed during 2009, the liability for unredeemed coupons at December 31, 2009 is $1,200,000 - (350,000 x $5.00) = $1,050,000. Therefore, the best choice is option B.

Question 3

The accounting concept that requires recognition of a liability for customer premium offers is

Accepted Answer

The matching principle requires that expenses be matched with the revenues they helped to generate. In the case of customer premium offers, the expense associated with providing the premium offer should be matched with the revenue generated from the sale of the product or service. Therefore, recognizing a liability for customer premium offers is in accordance with the matching principle.

Question 4

What is the rebate promotion liability that Holyoak should report in its December 31, 2009 balance sheet?

Accepted Answer

The rebate promotion liability that Holyoak should report in its December 31, 2009 balance sheet is (8,500 expected 7,100 paid) $20 = $28,000. Therefore, choice B is the correct answer.

Question 5

Which of the following entail essentially the same accounting treatment?

Accepted Answer

The answer of Which of the following entail essentially the...

Question 6

Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet?

Accepted Answer

The liability for coupons is the estimated cost of fulfilling the coupon redemption, which is the cost of the puzzle. Based on the information given, we can calculate that there are 100,000 puzzles to be redeemed [(6,000,000 x 20%) x 3 coupons = 900,000] / 3 = 100,000. The cost of each puzzle is $5.50 ($3.50 for the puzzle and $2 for the three coupons). Therefore, the total liability for coupons is $550,000 (100,000 x $5.50). However, since only 900,000 out of 1,200,000 coupons (6,000,000 boxes x 1 coupon per box x 20%) were redeemed in the first month, it is safe to assume that not all coupons will be redeemed. Thus, the liability for coupons should be estimated based on the historical redemption rate, which is 75% (900,000 redeemed / 1,200,000 issued). Therefore, the estimated liability for coupons is $412,500 (100,000 x $5.50 x 75%). However, the question asks for the liability to be reported on December 31, 2009, which is after the first month of the offer. Since the liability for coupons is estimated based on the redemption rate, we can assume that most of the redemption will occur in the first few months of the offer. Therefore, it is reasonable to assume that the redemption rate for the remaining coupons will be lower than 75%. Based on this reasoning, the best choice is (B) $150,000, which is the cost of the puzzles for the redeemed coupons only (900,000 redeemed x $5.50 per puzzle). This is a conservative estimate that assumes that none of the remaining coupons will be redeemed.

Question 7

Accounting for costs of incentive programs for frequent customer purchases involves:

Accepted Answer

The answer of Accounting for costs of incentive programs for...

Question 8

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be

Accepted Answer

The answer of Blue Co. can estimate the amount of...

Question 9

What is the expense that Holyoak should report for its promotional rebates in its 2009 income statement?

Accepted Answer

The answer of What is the expense that Holyoak should...

Question 10

The cost of customer premium offers should be charged to expense:

Accepted Answer

The cost of customer premium offers should be charged to expense when the related product is sold as it represents an additional cost directly related to the sale of the product. The expense should be matched to the revenue earned from the sale of the product in the same accounting period to accurately reflect the true cost of the sale.

Question 11

At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is:

Accepted Answer

The warranty expense is calculated by taking the net sales under warranty and multiplying it by the expected warranty cost percentage: $180 million x 4% = $7.2 million. The cost of repairing or replacing units returned under warranty is not included in the warranty expense calculation.

Question 12

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement?

Accepted Answer

To calculate the promotional expense for coupons, we need to find the number of coupons redeemed and the cost of the toy cars provided in exchange.

Number of coupons redeemed: 40% of the coupons will eventually be redeemed, and out of 12 million boxes sold, there were 2.4 million coupons redeemed. This means that (2.4 million / 12 million) * 100 = 20% of the coupons were redeemed.

Cost of toy cars provided: Each toy car costs $1.50 and 3 coupons, so the cost of a car is ($1.50 + ($1.00 * 3)) = $4.50.

Promotional expense for coupons: Funzy provided 2.4 million / 3 = 800,000 toy cars, which cost 800,000 * $1.50 = $1,200,000. However, the question asks for the expense for coupons only, so we need to subtract the value of the toy cars provided.

Promotional expense for coupons = (2.4 million coupons * 40%) - (800,000 toy cars * $1.50 cost per car) = 960,000 - $1,200,000 = -$240,000.

This means that Funzy actually made a profit on this promotion, since the value of the coupons redeemed was greater than the cost of the toy cars provided. Therefore, the best answer is (C) $800,000, since this is the amount that Funzy spent on providing the toy cars.

Question 13

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

Accepted Answer

Under the accrual accounting method, expenses should be recognized when incurred, regardless of when cash payments are made. In this case, since Volt offers a three-year warranty that is included in the sale of the equipment, the estimated warranty costs should be recognized at the time of sale. This ensures that the expense is properly matched with the revenue generated from the sale.

Question 14

Accounting for costs of incentive programs for customer purchases:

Accepted Answer

The answer of Accounting for costs of incentive programs for...

Question 15

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be

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The answer of Orange Co. can estimate the amount of...

Question 16

When a gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:

Accepted Answer

The answer of When a gain contingency is probable and...

Question 17

The main difference between accounting for rebate and cash discount coupons is:

Accepted Answer

For cash discount coupons, the expense is deferred until redemption because it is uncertain whether or not the customer will actually use the coupon. However, for rebates, a liability is actually recorded at the time of issuance because the customer has met certain criteria (such as purchasing a certain amount) and is entitled to a payment back from the company. Therefore, there is a significant difference in accounting for the two.

Question 18

Z Co. filed suit against W, Inc. in 2009 seeking damages for patent infringement. At December 31, 2009, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2010. Z should report this award in its 2009 financial statements, issued in March, 2010 as

Accepted Answer

The answer of Z Co. filed suit against W, Inc....

Question 19

Which of the following is a contingency that would most likely require accrual?

Accepted Answer

The answer of Which of the following is a contingency...

Question 20

Providing a monetary rebate program for purchasing a product:

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The answer of Providing a monetary rebate program for purchasing...

Quiz 13: Current Liabilities and Contingencies