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

A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is:

A) At least remotely possible and the amount of the loss is known.

B) At least reasonably possible and the amount of the loss is known.

C) At least reasonably possible and the amount of the loss is reasonably estimable.

D) Probable and the amount of the loss can be reasonably estimated.

Answer: D

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

A) Reported in the income statement and disclosed.

B) Offset against stockholders' equity.

C) Disclosed, but not recognized in the income statement.

D) Reported in the income statement, but not disclosed.

Answer: C

Gain contingencies usually are recognized in a company's income statement when:

A) The gain is certain.

B) The amount is reasonably estimable.

C) The gain is reasonably possible and the amount is reasonably estimable.

D) The gain is probable and the amount is reasonably estimable.

Answer: A

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?

A) $44,000.

B) $80,000.

C) $36,000.

D) $480,000.

Answer: C

Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?

A) The current ratio will always be equal to or larger than the acid-test ratio for a specific company.

B) The acid-test ratio will always be equal to or larger than the current ratio for a specific company.

C) Either the current ratio or the acid-test ratio could be larger for a specific company.

D) One ratio will always exceed 1.0, while the other will always be less than 1.0.

Answer: A

Note disclosure is required for material potential losses when the loss is at least reasonably possible:

A) Only if the amount is known.

B) Only if the amount is known or reasonably estimable.

C) Unless the amount is not reasonably estimable.

D) Even if the amount is not reasonably estimable.

Answer: D

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