Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021,

Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021?

A) $2,250.

B) $3,375.

C) $5,625.

D) None, all expected returns from warranties have been received.

Answer: B

In 2021, a company estimates that warranty costs in the following year will be $25,000. Actual warranty costs in 2022 are only $20,000. What is the effect on the accounting equation when recording actual warranty costs in 2022?

A) Stockholders' equity decreases.

B) Stockholders' equity increases.

C) Liabilities increase.

D) Liabilities decrease.

Answer: D

Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to:

A) Warranty Expense of $2,000.

B) Warranty Liability of $2,000.

C) Warranty Liability of $3,000.

D) Warranty Expense of $3,000.

Answer: D

Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2021 have been returned yet, based upon previous years, Bears Inc.

Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2021 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2021?

A) A decrease in assets and decrease in stockholders' equity.

B) No journal entry is necessary until products under warranty are returned.

C) An increase in stockholders' equity and a decrease in liabilities.

D) A decrease in stockholders' equity and an increase in liabilities.

Answer: D

Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year?

A) $0.

B) $16,000.

C) $7,000.

D) $9,000.

Answer: C

Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year?

A) $0.

B) $16,000.

C) $7,000.

D) $9,000.

Answer: B

At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales.

At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2021 were $180 million. Five percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense in Angel's 2021 income statement is:

A) $5.3 million.

B) $7.2 million.

C) $9.0 million.

D) $27.0 million.

Answer: B

The account "Warranty Liability":

A) is adjusted at the end of the year.

B) is closed at the end of the year.

C) has a year-end credit balance equal to the cost of warranty repairs made during the year.

D) is credited each time a warranty repair is made.

Answer: A

While providing services to Palmer Co., Raider Group caused damages of $125,000. As of the end of the year, both parties agree that it is probable that Raider will pay Palmer the full amount of the damages within the next two months. How would Raider and Palmer report the lawsuit at the end of the year?

A) Raider reports a loss Palmer reports nothing.

B) Raider reports nothing Palmer reports nothing.

C) Raider reports nothing Palmer reports a gain.

D) Raider reports a loss Palmer reports a gain.

Answer: A

Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount.

Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?

A) Amplify, Inc. would record a loss and contingent liability for $50,000.

B) Sound City would record a gain and lawsuit receivable for $50,000.

C) Sound City would record nothing.

D) Amplify, Inc. would record a loss and contingent liability for $50,000 Sound City would record nothing.

Answer: D

Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet?

A) Record decrease stockholders' equity and increase liabilities.

B) Record increase stockholders' equity and decrease liabilities.

C) Disclose no effect in the balance sheet.

D) Disclose decrease stockholders' equity and decrease liabilities.

Answer: C

A company has two active lawsuits at the end of the year. In Lawsuit 1, the company feels it is probable that it will win $10,000. In Lawsuit 2, the company feels that it is probable that it will lose $6,000. At the end of the year, the company should report a:

A) Net gain for $4,000.

B) Loss for $6,000.

C) Net Loss for $4,000.

D) Gain for $10,000.

Answer: B

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation?

A) As a receivable for $100,000 with disclosure of the range.

B) As a receivable for $150,000 with disclosure of the range.

C) As a receivable for $200,000 with disclosure of the range.

D) As a disclosure only. No receivable is reported.

Answer: D

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?

A) As a liability for $100,000 with disclosure of the range.

B) As a liability for $150,000 with disclosure of the range.

C) As a liability for $200,000 with disclosure of the range.

D) As a disclosure only. No liability is reported.

Answer: D

Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:

A) Remote and the amount is reasonably estimable.

B) Probable and the amount is reasonably estimable.

C) Reasonably possible and the amount is reasonably estimable.

D) Probable and the amount is not reasonably estimable.

Answer: B

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?

A) As a liability for $100,000 with disclosure of the range.

B) As a liability for $150,000 with disclosure of the range.

C) As a liability for $200,000 with disclosure of the range.

D) As a disclosure only. No liability is reported.

Answer: A

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be

A) Disclosed, but not reported as a liability.

B) Disclosed and reported as a liability.

C) Neither disclosed nor reported as a liability.

D) Reported as a liability, but not disclosed.

Answer: B

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be

A) Disclosed, but not reported as a liability.

B) Disclosed and reported as a liability.

C) Neither disclosed nor reported as a liability.

D) Reported as a liability, but not disclosed.

Answer: A

Region Jet has a $50 million liability at December 31, 2021, of which $10 million is payable in 2022. In its December 31, 2021 balance sheet,

Region Jet has a $50 million liability at December 31, 2021, of which $10 million is payable in 2022. In its December 31, 2021 balance sheet, the company reports the $50 million debt as a:

A) $50 million current liability in the balance sheet.

B) $50 million long-term liability in the balance sheet.

C) $10 million current liability and a $40 million long-term liability in the balance sheet.

D) $40 million current liability and a $10 million long-term liability in the balance sheet.

Answer: C

United Supply has a $5 million liability at December 31, 2021, of which $1 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a:

A) $5 million current liability.

B) $5 million long-term liability.

C) $1 million current liability and a $4 million long-term liability.

D) $4 million current liability and a $1 million long-term liability.

Answer: C

The current portion of long-term debt is:

A) The amount that will be paid within one year of the balance sheet date.

B) Reported as an asset.

C) Reported as a long-term liability.

D) None of the other answer choices is correct.

Answer: A