Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt.

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a 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.

Answer: A

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:

A) The likelihood of a loss is remote.

B) The likelihood of a loss is reasonably possible.

C) The likelihood of a loss is probable.

D) The likelihood of a loss is eighty percent.

Answer: B

Which of the following is a contingency that should be recorded?

A) The company is being sued and a loss is reasonably possible and reasonably estimable.

B) The company deducts life insurance premiums from employees' paychecks.

C) The company offers a two-year warranty and the expenses can be reasonably estimated.

D) It is probable that the company will receive $100,000 in settlement of a lawsuit.

Answer: C