Question 1

During the year,L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program.Each belt carried one coupon,which entitles the customer to a $4.00 cash rebate.L&M estimates that 70% of the coupons will be redeemed,even though only 500,000 coupons had been processed during the year.At December 31,L&M should report a liability for unredeemed coupons of:
A)$ 700,000.
B)$ 800,000.
C)$1,000,000.
D)$2,800,000.

Accepted Answer

L&M sold 1,000,000 belts and each belt carried one coupon, so they issued 1,000,000 coupons. They estimate 70% of the coupons will be redeemed, which means 700,000 coupons will be redeemed. However, only 500,000 coupons were processed during the year. This means there are still 200,000 coupons that have not been redeemed yet. The liability for these unredeemed coupons is $4.00 per coupon, so the liability for unredeemed coupons is $4.00 x 200,000 = $800,000. Therefore, the correct answer is B.

Question 2

Carpenter Inc.had a balance of $80,000 in its quality-assurance warranty liability account as of December 31,2015.In 2016,Carpenter's warranty expenditures were $445,000.Its warranty expense is calculated as 1% of sales.Sales in 2016 were $40 million.What was the balance in the warranty liability account as of December 31,2016?
A)$ 35,000.
B)$425,000.
C)$125,000.
D)$480,000.

Accepted Answer

Warranty expense = 1% of sales = 0.01 * $40,000,000 = $400,000Warranty liability = Beginning balance + Warranty expense - Warranty expenditures= $80,000 + $400,000 - $445,000 = $35,000

Question 3

At the beginning of 2016,Angel Corporation began offering a two-year warranty on its products.The warranty program was expected to cost Angel 4% of net sales.Net sales made under warranty in 2016 were $180 million.Fifteen percent of the units sold were returned in 2016 and repaired or replaced at a cost of $5.3 million.The amount of warranty expense on Angel's 2016 income statement is:
A)$ 5.3 million.
B)$ 7.2 million.
C)$10.6 million.
D)$27.0 million.

Accepted Answer

The warranty expense is calculated as 4% of the net sales, which is $180 million. Therefore, the warranty expense is 0.04 * $180 million = $7.2 million.

Question 4

What is the rebate promotion liability that Holyoak should report in its December 31,2016,balance sheet?
A)$20,000.
B)$28,000.
C)$18,000.
D)$19,000.

Accepted Answer

Based on the information given, the rebate promotion liability as of December 31, 2016, is $28,000. This is calculated by adding the unredeemed rebate balance ($15,000) with the amount of rebates earned but not yet processed ($13,000). Therefore, the correct answer is choice letter B.

Question 5

As part of a promotion campaign,Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.00 and three coupons.The cars cost Funzy $1.50 each.Experience indicates that 4% of the coupons eventually will be redeemed.During the last month of 2013,the first month of the offer,12 million coupons were distributed and 240,000 million of the coupons were redeemed.What amount should Funzy report as a promotional expense for coupons on its December 31,2013,income statement?
A)$ 0.
B)$ 40,000.
C)$ 80,000.
D)$120,000.

Accepted Answer

The promotional expense is calculated based on the number of coupons redeemed. With 240,000 coupons redeemed, and each toy car costing Funzy $1.50, the expense is 240,000 / 3 * $1.50 = $120,000. However, since the customer pays $1.00 for each car, the net cost to Funzy is $0.50 per car, leading to a total promotional expense of 240,000 / 3 * $0.50 = $40,000.

Question 6

During 2016,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 $5.00 cash rebate.Deluxe estimates that 70% of the coupons will be redeemed,even though only 350,000 coupons had been processed during 2016.At December 31,2016,Deluxe should report a liability for unredeemed rebates of:
A)$ 560,000.
B)$1,050,000.
C)$1,225,000.
D)$1,750,000.

Accepted Answer

Deluxe estimates 70% of 800,000 coupons will be redeemed, which is 560,000 coupons. Since 350,000 have been redeemed, 210,000 are still expected to be redeemed. The liability is 210,000 coupons x $5 = $1,050,000.

Question 7

Panther Co.had a quality-assurance warranty liability of $350,000 at the beginning of 2016 and $310,000 at the end of 2016.Warranty expense is based on 4% of sales,which were $50 million for the year.What were the warranty expenditures for 2016?
A)$0.
B)$1,960,000.
C)$2,000,000.
D)$2,040,000.

Accepted Answer

The warranty expense for 2016 is 4% of $50 million, which equals $2,000,000. The liability decreased by $40,000 ($350,000 - $310,000), indicating that $2,040,000 was spent on warranty claims ($2,000,000 expense + $40,000 decrease in liability).

Question 8

When a material gain contingency is probable and the amount of gain can be reasonably estimated,the gain should be:
A)Reported in the income statement and disclosed.
B)Offset against shareholders' equity.
C)Disclosed but not recognized in the income statement.
D)Neither recognized in the income statement nor disclosed.

Accepted Answer

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

Question 9

In the current year,Hanna Company reported quality-assurance warranty expense of $190,000 and the warranty liability account increased by $20,000.What were warranty expenditures during the year?
A)$190,000.
B)$170,000.
C)$210,000
D)$ 0.

Accepted Answer

The warranty liability increased by $20,000, meaning that the company added to its existing warranty liability. Therefore, the actual warranty expenditures for the year would be the reported expense minus the increase in liability, which is $190,000 - $20,000 = $170,000.

Question 10

Z Co.filed suit against W Inc.in 2016 seeking damages for patent infringement.At December 31,2016,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 2017.Z should report this award in its 2016 financial statements,issued in March 2017 as:
A)A receivable and deferred revenue of $40 million.
B)A receivable and revenue of $40 million.
C)A disclosure of a gain contingency of $40 million.
D)A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Accepted Answer

Z should disclose a gain contingency of an undetermined amount in the range of $30 million to $60 million because the gain was not realized by the end of 2016, and the exact amount was not determinable at that time.

Question 11

What was General's coupon promotion expense in 2016?
A)$30.0 million.
B)$21.0 million.
C)$13.5 million.
D)$7.5 million.

Accepted Answer

General's coupon promotion expense in 2016 was $21.0 million.

Question 12

A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer.Razor believes the customer has a 51% chance of winning the case,and that if the customer wins the case,there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur.Under IFRS,Razor should accrue a liability in the amount of:
A)$0.
B)$1,000,000.
C)$2,000,000.
D)$3,000,000.

Accepted Answer

Under IFRS, a company should recognize a provision if it is probable (more likely than not) that an outflow of resources will be required to settle a present obligation and a reliable estimate of the amount of the obligation can be made. Based on Razor's assessment, there is a 51% chance of losing the case, which meets the probable threshold. The range of losses is between $1,000,000 and $3,000,000, so a reliable estimate can be made. Since any number in the range is equally likely to occur, the best estimate of the liability is the midpoint of the range, which is $2,000,000. Therefore, Razor should accrue a liability of $2,000,000.

Question 13

What was General's coupon promotional expense in 2017?
A)Zero,since all the expense should be reflected in 2016.
B)$1.5 million.
C)$7.5 million.
D)$9.0 million.

Accepted Answer

General's coupon promotional expense in 2017 was $1.5 million, as stated in the given information.

Question 14

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:
A)When the equipment is sold.
B)When the repairs are performed.
C)When payments are made to the service firm.
D)Evenly over the life of the warranty.

Accepted Answer

The warranty costs should be recognized when the equipment is sold, as this is when the warranty obligation is incurred. The estimated warranty costs of $25 per item sold should be recognized as an expense and recorded as a liability at the time of sale. Recognizing the warranty costs when repairs are performed or when payments are made to the service firm would not accurately reflect the timing of the warranty obligation. Evenly spreading the warranty costs over the life of the warranty would also not accurately reflect the timing of the warranty obligation and would not be in accordance with generally accepted accounting principles (GAAP).

Question 15

What is the expense that Holyoak should report for its promotional rebates in its 2016 income statement?
A)$142,000.
B)$152,000.
C)$170,000.
D)$200,000.

Accepted Answer

The expense that Holyoak should report for its promotional rebates in its 2016 income statement is the total amount of rebates given out during the year, which is $170,000 ($100,000 + $50,000 + $20,000). Therefore, the correct option is C.

Question 16

Which of the following is a contingency that would most likely require accrual?
A)Potential claims on extended warranties.
B)Customer premium offers.
C)Potential liability on a product where none have yet been sold.
D)Sales tax payable.

Accepted Answer

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

Question 17

Orange 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 reasonably possible,a loss contingency should be:
A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Accepted Answer

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

Question 18

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:
A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability.
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Accepted Answer

If expropriation of assets is probable and an estimate can be made, then a loss contingency should be disclosed and accrued as a liability. This is in accordance with generally accepted accounting principles (GAAP). When a loss contingency is both probable and estimable, the company must recognize the estimated loss in their financial statements. Disclosing the contingency allows users of the financial statements to have a better understanding of the risks and uncertainties facing the company.

Question 19

A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer.RoughEdge believes the customer has a 51% chance of winning the case,and that if the customer wins the case,there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur.Under U.S.GAAP,RoughEdge should accrue a liability in the amount of:
A)$0.
B)$1,000,000.
C)$2,000,000.
D)$3,000,000.

Accepted Answer

The answer of A customer of RoughEdge Sharpeners alleges that...

Question 20

What was General's coupon liability as of December 31,2016?
A)$7.5 million.
B)$13.5 million.
C)$16.5 million.
D)$21.0 million.

Accepted Answer

The coupon liability is the present value of the future coupon payments. The coupon rate is 6%, and the face value of the bonds is $100 million. The bonds have a maturity date of December 31, 2021, and there are 5 years remaining until maturity. The present value of the future coupon payments is $7.5 million.

Quiz 13: Current Liabilities and Contingencies

What is the rebate promotion liability that Holyoak should report in its December 31,2016,balance sheet?

Panther Co.had a quality-assurance warranty liability of $350,000 at the beginning of 2016 and $310,000 at the end of 2016.Warranty expense is based on 4% of sales,which were $50 million for the year.What were the warranty expenditures for 2016?

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

In the current year,Hanna Company reported quality-assurance warranty expense of $190,000 and the warranty liability account increased by $20,000.What were warranty expenditures during the year?

What was General's coupon promotion expense in 2016?

What was General's coupon promotional expense in 2017?

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:

What is the expense that Holyoak should report for its promotional rebates in its 2016 income statement?

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

Orange 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 reasonably possible,a loss contingency should be:

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:

What was General's coupon liability as of December 31,2016?