Question 1

Which of the following is a contingent liability?

Accepted Answer

A contingent liability is a possible obligation that depends on the occurrence or non-occurrence of one or more future events that are beyond the control of the entity. A disputed additional tax assessment is a contingent liability because it represents a claim from a taxing authority that the company disputes and is uncertain whether it will need to pay or not. Choices A, B, and C are not contingent liabilities; unearned revenues are liabilities resulting from the prepayment for goods or services, excise tax payable is a liability associated with a specific tax, and payroll liabilities are obligations to pay employee wages and benefits.

Question 2

Of a company's employees,75 percent typically qualify to receive two weeks' paid vacation out of 50 working weeks per year.The entry to record the amount of estimated liability for vacation pay for a week in which the total payroll is $19,200 :

Accepted Answer

The estimated liability for vacation pay is calculated as 75% of the employees qualifying for 2 weeks of vacation out of 50 weeks, which is 3% (0.75 * 2/50) of the total payroll. Therefore, 3% of $19,200 is $576.

Question 3

Liabilities that might arise from which of the following probably would be disclosed only in the notes to the financial statements?

Accepted Answer

The answer of Liabilities that might arise from which of...

Question 4

When accounting for property taxes,which of the following accounts normally would not be credited?

Accepted Answer

Property Taxes Expense is the account that is debited when property taxes are recorded. Prepaid Property Taxes is credited when a payment is made in advance. Cash is credited when the payment is made, and Estimated Property Taxes Payable is credited when the estimated amount for property taxes is recorded.

Question 5

During March,Photo Mart sold 300 instant cameras for $200 each.Each camera had cost Photo Mart $138 to purchase and carried a one-year warranty.If 4 percent typically need to be replaced over the warranty period and two actually are replaced during March,the entry to record the Product Warranty Expense for the month is:

Accepted Answer

To calculate the Product Warranty Expense, we need to first estimate the number of cameras that will need to be replaced over the warranty period. In this case, 4% of the 300 cameras sold is 12 cameras.

Since only 2 cameras were replaced during March, we can assume that the remaining 10 replacements will happen over the next 12 months. Therefore, the estimated Product Warranty Liability is $138 x 10 = $1,380.

To record the Product Warranty Expense for the month of March, we need to recognize a portion of this liability. Since only 1/6th of the warranty period has passed (1 out of 12 months), we will recognize 1/6th of the liability:

$1,380 / 6 = $230

However, we already replaced 2 cameras during March, so we need to subtract the cost of those replacements from the expense:

$230 - ($138 x 2) = $230 - $276 = -$46

Since this is a negative expense, it means we actually received more revenue than expected from warranty replacements. To record this, we will credit the Estimated Product Warranty Liability account:

Product Warranty Expense: $1,656 (debit)
Estimated Product Warranty Liability: $1,656 (credit)

Therefore, the best choice is D.

Question 6

A contingent liability is best described as a(n)

Accepted Answer

A contingent liability is a potential liability that depends on a future event that may or may not occur. It is not yet a current liability, as the event has not yet happened, and it is not yet a probable liability as the likelihood of the event occurring is uncertain. The estimated amount of the liability also cannot be determined until the event occurs.

Question 7

The adjusting entry that would be made at the year-end accruing the interest expense of $100 on a note is:

Accepted Answer

The adjusting entry required to accrue the interest expense of $100 on a note at year-end is to record the interest expense and an equal amount of interest payable. Therefore, option C "Interest Expense 100, Interest Payable 100" is the correct choice. Option A is incorrect because it only records the interest expense, ignoring the corresponding interest payable. Option B is also incorrect because it only recognizes the interest payable and ignores the interest expense. Option D is incorrect because it records interest expense and notes payable, but fails to recognize the corresponding interest payable.

Question 8

Which of the following is an example of a commitment?

Accepted Answer

A lease is a contractual agreement in which a lessee agrees to pay a lessor for the use of property for a specific period of time. This is an example of a commitment because the lessee is legally obligated to make these payments for the length of the lease. In contrast, income taxes payable, sales taxes payable, and dividends payable are all examples of liabilities, but they do not involve a contractual commitment to make payments over a specific period of time.

Question 9

Of a company's employees,50 percent typically qualify to receive two weeks' paid vacation a year in 50 working weeks.The entry to record the amount of estimated liability for vacation pay for a week in which the total payroll is $2,900

Accepted Answer

The question asks for the entry to record the estimated liability for vacation pay for a week in which the total payroll is $2,900. We know that 50% of the employees qualify for two weeks' paid vacation, which means they are entitled to 2/50 = 4% of their annual salary in vacation pay each week.

To calculate the estimated liability for vacation pay for a week, we need to multiply the total payroll for the week by 4%.

Estimated liability for vacation pay = Total payroll x 4% 
= $2,900 x 4%
= $116

Option A is incorrect because we cannot record a liability without an offsetting expense.

Option B is incorrect because it records the entire vacation pay expense for the week, rather than just the estimated liability.

Option D is incorrect because it only records the cash payment for the estimated liability, without accounting for the liability itself.

Option C, however, correctly records both the estimated liability for vacation pay and the corresponding expense.

The estimated liability for vacation pay is recorded as a liability, and the corresponding expense is recorded in the same entry.

Therefore, the correct answer is C.

Vacation Pay Expense 58
Estimated Liability for Vacation Pay 58

Question 10

Which of the following phrases is not descriptive of an ordinary annuity?

Accepted Answer

An ordinary annuity refers to a series of equal payments made at the end of equal periods of time. Therefore, payments made at the beginning of equal periods of time are not descriptive of an ordinary annuity.

Question 11

During July,Audio City sold 200 radios for $50 each.Each radio had cost Audio City $30 to purchase and carried a two-year warranty.If 5 percent typically need to be replaced over the warranty period and one actually is replaced during July,the entry to record the Product Warranty Expense is:

Accepted Answer

The Product Warranty Expense is recorded when there is an expected expense related to warranty claims. In this case, the warranty expense is estimated based on the number of radios sold and the expected claims.

Based on the information provided, we know that:

- Audio City sold 200 radios for $50 each, making the total revenue $10,000
- Each radio had cost Audio City $30 to purchase, making the total cost $6,000 (200 radios x $30 each)
- Typically, 5% of radios need to be replaced over the warranty period, which would be 10 radios in this case (5% of 200)
- One radio was actually replaced during July, which means that 9 more are expected over the rest of the warranty period.

To calculate the estimated warranty liability, we need to multiply the expected number of claims (9) by the cost per radio ($30):

9 x $30 = $270

Therefore, the entry to record the Product Warranty Expense would be:

Product Warranty Expense $300
Estimated Product Warranty Liability $300

This entry recognizes the estimated cost of covering the warranty claims, based on the number of radios sold and the expected claims.

Question 12

A customer is injured using a company's product.The potential liability that may result is called a(n)

Accepted Answer

A customer being injured while using a company's product falls under the category of a contingent liability as the outcome and severity of the injury is unknown and the final liability cannot be determined until a legal verdict or settlement is reached.

Question 13

Purchase agreements are

Accepted Answer

Purchase agreements are legally binding commitments between the buyer and seller to complete a transaction for goods or services. They are not estimates, liabilities, or contingencies.

Question 14

Use this information to answer the following question.  The entry to record the payroll taxes expense would include a credit to

Accepted Answer

The entry to record payroll taxes expense would involve a debit to Payroll Taxes Expense and a credit to Social Security Tax Payable, as this is a liability account that represents the amount of Social Security tax owed by the company and not yet paid. The other options (Salaries Payable, Federal Income Taxes Payable, and Cash) are not relevant to the recording of payroll taxes expense.

Question 15

A contingent liability is recorded in the accounting records

Accepted Answer

A contingent liability is recorded in the accounting records if it probably will become an actual liability and the amount can be reasonably estimated. This is in accordance with the accounting principle of conservatism, where potential losses are recognized in the financial statements as soon as they become probable and can be estimated with reasonable accuracy.

Question 16

If product X cost $50 and had a 4 percent failure rate during the warranty period,the entry to record the estimated product warranty expense in a month when 1,000 units are sold would be

Accepted Answer

The estimated product warranty expense is calculated as the product of the cost per unit and the failure rate. In this case, the cost per unit is $50 and the failure rate is 4%, or 0.04. Therefore, the estimated product warranty expense is $50 x 0.04 = $2.00 per unit. Since 1,000 units are sold, the total estimated product warranty expense is $2.00 x 1,000 = $2,000. This expense is recorded as a debit to Product Warranty Expense and a credit to Estimated Product Warranty Liability.

Question 17

Total payroll for a given week is $24,000.If 70 percent of the company's employees typically qualify to receive two weeks' paid vacation per year,assuming 50 working weeks,the entry to record the estimated liability for vacation pay for the week is:

Accepted Answer

To determine the estimated liability for vacation pay for the week, we first need to calculate the total amount of vacation pay that would be earned by 70% of the employees who typically qualify for two weeks of paid vacation per year, assuming 50 working weeks.

Total payroll for the week = $24,000
Total annual payroll for these employees = $24,000 / (50 working weeks) x 52 weeks = $49,920

Total vacation pay earned per employee = (2 weeks / 50 working weeks) x $49,920 = $1,996.80
Total vacation pay earned by 70% of employees = 0.7 x $1,996.80 = $1,397.76

Therefore, the estimated liability for vacation pay for the week would be $1,397.76. This amount would be recorded with a debit to Vacation Pay Expense and a credit to Estimated Liability for Vacation Pay.

Choice C records this entry correctly.

Question 18

Meggie's Fitness center received $720 from a customer in advance for one year membership in the fitness center.The entry that would be made to record the fee receipt is:

Accepted Answer

When a customer pays in advance for a one-year membership, the cash received is considered a liability until the services are provided. Therefore, the best choice is to debit Cash and credit Unearned Revenue, as this accurately reflects the transaction and follows the accounting principle of revenue recognition. Option A is incorrect because it reverses the debit and credit accounts. Option C is incorrect because it prematurely recognizes revenue before the services are provided. Option D is incorrect because it does not recognize the liability created by the upfront payment.

Question 19

Holmes Company produces widgets that cost $120 each and have a 5 percent failure rate during the warranty period.If 500 widgets are sold,the entry to record the estimated product warranty expense would be

Accepted Answer

The estimated product warranty expense can be calculated by multiplying the number of units sold (500) by the cost per unit ($120) and the failure rate (5% or 0.05). 
Estimated product warranty expense = 500 x $120 x 0.05 = $3,000. 
Therefore, the entry to record the estimated product warranty expense would be: 
Debit Product Warranty Expense $3,000 
Credit Estimated Product Warranty Liability $3,000.

Question 20

Assume that a company received $2,400 in advance for one year membership fee in the fitness center.The entry that would be made to record the recognition of revenue at the end of first month is:

Accepted Answer

The best choice to record the recognition of revenue at the end of first month is option C (Unearned revenue 200; Revenue 200). The company received $2,400 in advance but the revenue is recognized gradually as the services are provided. At the end of the first month, one-twelfth of the revenue is recognized ($2,400/ 12 months = $200). This revenue was previously recorded as unearned revenue, so we need to debit the unearned revenue account to reduce the liability, and credit the revenue account to increase the equity. Therefore, option C is the best choice.

Quiz 9: Current Liabilities and Fair Value Accounting