Deck 15: Accounting and Financial Reporting for Contingent Liabilities and Leases

Question 1

An operating lease transfers substantially all the benefits and risks of ownership to the lessee.

Answer 1

False

Question 2

Repair costs incurred in honoring warranty contracts should be debited to Warranty Liability.

Answer 2

True

Question 3

A finance lease requires the lessee to record the lease as a purchase of an asset.

Answer 3

True

Question 4

Disclosure of a contingent liability is usually made

A) parenthetically, in the body of the statement of financial position.
B) parenthetically, in the body of the income statement.
C) in a note to the financial statements.
D) in the management discussion section of the financial statements.

Question 5

A contingency liability that is remote

A) should be disclosed in the financial statements.
B) must be accrued as a loss.
C) does not need to be disclosed.
D) is recorded as a contingent liability.

Question 6

The accounting for warranty costs is based on the

A) going concern assumption.
B) expense recognition principle.
C) economic entity principle.
D) fair value principle.

Question 7

If an event makes it probable that a company will experience a cash outflow but it cannot reasonably estimate the amount, the contingent liability

A) should be recorded in the accounts.
B) should be disclosed in the notes to the financial statements.
C) should not be recorded or disclosed in the notes until the contingency actually happens.
D) must be paid for the amount estimated.

Question 8

Marin Company sells 9,000 units of its product in 2014 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount will be reported on Marin Company's statement of financial position as Warranty Liability on December 31, 2014?

A) $9,000.
B) $13,500.
C) $4,500.
D) Cannot be determined.

Question 9

When vacation benefits are paid, Vacation Benefits Expense is debited.

Question 10

Which of the following items would not be identified if a contingent liability were disclosed in a financial statement note?

A) The nature of the item
B) The expected outcome of the future event
C) A numerical probability of the expected loss
D) The amount of the contingency, if known

Question 11

In concept, estimating Warranty Expense when products are sold with a warranty is similar to estimating Bad Debt Expense based on credit sales.

Question 12

The renting of an apartment is an example of a finance lease.

Question 13

Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.

Question 14

A provision is a liability of uncertain timing or amount.

Question 15

Postretirement benefits are accounted for on a cash basis.

Question 16

The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense

A) when the product is brought in for repairs.
B) in the period in which the product was sold.
C) at the end of the warranty period.
D) only if the repairs are expected to be made within one year.

Question 17

Warranty expenses are reported on the income statement as

A) administrative expenses.
B) part of cost of goods sold.
C) contra-revenues.
D) selling expenses.

Question 18

If an event may become an actual liability in the future, it is called a

A) potential liability.
B) hypothetical liability.
C) probabilistic liability.
D) contingent liability.

Question 19

Marin Company sells 9,000 units of its product in 2014 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount should Marin Company report as Warranty Expense in its 2014 income statement?

A) $13,500.
B) $9,000.
C) $4,500.
D) $67,500.

Question 20

In a defined-contribution plan, an employer only recognizes pension expense for the amount that the employer is required to contribute under the plan.

Question 21

A company will incur product repair costs in the future if products that it sells currently under warranty are brought in for repair during the warranty period. The company will also incur bad debt expense in the future if customers who buy on credit currently are unable to pay their accounts. Are the accounting procedures for these two contingent costs (warranty expense and bad debt expense) related to or guided by the same accounting principle? Briefly explain.

Question 22

A lease where the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor is called

A) off-balance-sheet financing.
B) an operating lease.
C) a finance lease.
D) a purchase of property.

Question 23

If the present value of lease payments represents substantially all of the fair value of the leased property, the

A) conditions are met for the lease to be considered a finance lease.
B) lease is uneconomical and should not be entered into.
C) lease may be classified as an operating lease.
D) recording of a lease liability is optional-that is, the off-balance-sheet approach can be elected.

Question 24

In a finance lease, the amount capitalized is the

A) sum of the lease payments over the life of the lease.
B) fair value of the leased asset on the date the lease is signed.
C) present value of the lease payments.
D) future value of the asset as of the lease termination date.

Question 25

Postretirement benefits consist of payments by employers to retired employees for

A) health care and life insurance only.
B) health care and pensions only.
C) life insurance and pensions only.
D) health care, life insurance, and pensions.

Question 26

The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.

Question 27

An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.

Question 28

Sandra Sikes sells exercise machines for home use. The machines carry a 2-year warranty. Past experience indicates that 5% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is $40 for labor and $50 for parts per unit. During 2014, 3,000 exercise machines were sold at an average price of $800. During the year, 95 of the machines that were sold were repaired at the average price per unit.
Instructions
(a) Prepare the journal entry to record the repairs made under warranty.
(b) Prepare the journal entry to record the warranty expense for the year.

Question 29

Which of the following is not a condition which would require the recording of a lease contract as a finance lease?

A) The lease transfers ownership of the property to the lessee.
B) The lease contains a bargain purchase option.
C) The lease term is a minor portion of the economic life of the leased property.
D) The present value of the lease payments represents substantially all of the fair value of the leased property.

Question 30

Roberts Company is preparing monthly adjusting entries at December 31. An analysis reveals the following:
1. During December, Roberts Company sold 3,000 units of a product that carries a 60-day warranty. The sales for this product totaled $100,000. The company expects 4% of the units to need repair under the warranty and it estimates that the average repair cost per unit will be $25.
2. The company has been sued by a disgruntled employee. Legal counsel believes that it is possible that the company will have to pay $200,000 in damages.
3. The company has been named as one of several defendants in a $400,000 damage suit. Legal counsel believes it is unlikely that the company will have to pay any damages.
4. Employees earn vacation pay at a rate of 1 day per month. During December, ten employees qualify for vacation pay. Their average daily wage is $80 per employee.
Instructions
Prepare adjusting entries, if required, for each of the four items.

Question 31

In a lease contract,

A) the owner of the property is called the lessee.
B) the presence of a bargain purchase option indicates that it is a finance lease.
C) the renter of the property is called the lessor.
D) there is always a transfer of ownership at the end of the lease term.

Question 32

The paid absence that is most commonly accrued is

A) voting leave.
B) vacation time.
C) maternity leave.
D) disability leave.

Question 33

Which of the following statements concerning leases is true?

A) Finance leases are favored by lessees.
B) The appearance of the account, Leased Asset, on the statement of financial position, signifies an operating lease.
C) The portion of a lease liability expected to be paid in the next year is reported as a current liability.
D) Present value is irrelevant in accounting for leases.

Question 34

Sam Myers sells televisions with a 2-year warranty. Past experience indicates that 2% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is estimated to be $75 per unit. During 2014, 9,000 units were sold at an average price of $400. During the year, repairs were made on 50 units at a cost of $3,900.
Instructions
Prepare journal entries to record the repairs made under warranty and estimated warranty expense for the year.

Question 35

Presented below are three different aircraft lease transactions that occurred for Western Airways in 2014. All the leases start on January 1, 2014. In no case does Western receive title to the aircraft during or at the end of the lease period; nor is there a bargain purchase option. Instructions
(a) Which of the above leases are operating leases and which are finance leases? Explain your answer.
(b) How should the lease transaction with Utah Insurance be recorded in 2014?
(c) How should the lease transaction with Laine Leasing be recorded in 2014?

Question 36

An employer's estimated cost for postretirement benefits for its employees should be

A) recognized as an expense when paid.
B) recognized as an expense during the employees' work years.
C) recognized as an expense during the employees' retirement years.
D) charged to the goodwill account because providing employees with benefits generates employee goodwill.

Question 37

A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.

Question 38

Larson Company has twenty employees who each earn $120 per day. If they accumulate vacation time at the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be accrued at the end of the month is

A) $240.
B) $2,400.
C) $3,600.
D) $360.

Question 39

Hutton Cape Company, which prepares annual financial statements, is preparing adjusting entries on December 31. Analysis indicates the following:
1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of damages. Legal counsel believes it is unlikely that the company will have to pay any damages.
2. Employees are entitled to one day's vacation for each month worked. The company employs 50 people who earn $120 per day and 30 who earn $160 per day. All employees worked the entire year.
3. The company is a defendant in a $500,000 product liability lawsuit. Legal counsel believes that the company probably will have to pay the amount requested.
4. The company has a defined-benefit pension plan in which total pension expense for December is $50,000. The company funds one half of the expense and records a liability or the balance due.
Instructions
Prepare any adjusting entries necessary at the end of the year.

Question 40

Ryan Corporation entered into the following transactions:
1. Hewitt Car Rental leased a car to Ryan Corporation for one year. Terms of the operating lease call for monthly payments of $750.
2. On January 1, 2014, Ryan Corporation entered into an agreement to lease 20 machines from Meeks Corporation. The terms of the lease agreement require an initial payment of $210,000 and then three annual rental payments of $210,000 beginning on December 31, 2014. The present value of the three rental payments is $522,238. The lease is a finance lease.
Instructions
Prepare the appropriate journal entries to be made by Ryan Corporation in January related to the lease transactions.

Question 41

Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.

Question 42

If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.

Question 43

Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.

Question 44

A subsidiary ledger frees the general ledger from details of

A) individual balances.
B) external transactions.
C) internal transactions.
D) the control account.

Question 45

A subsidiary ledger is

A) used in place of the general ledger if the general ledger is destroyed or stolen.
B) a group of accounts used by branches and subsidiaries of a corporate business.
C) a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger.
D) used to post excess transactions if a general ledger account becomes full during an accounting period.

Question 46

A cash payments journal should not be used to record transactions which require payment by check.

Question 47

An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.

Question 48

The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.

Question 49

The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.

Question 50

Using special journals can save time in posting because column totals are often posted rather than individual entries.

Question 51

The amounts appearing in the Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.

Question 52

A control account and subsidiary ledger can be established for inventory.

Question 53

A debit column for Sales Returns and Allowances may be found in the cash payments journal.

Question 54

A subsidiary ledger provides up-to-date information on specific account balances.

Question 55

A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.

Question 56

The balance of a control account in the general ledger

A) must always be zero.
B) must equal the amount of total assets.
C) is always greater than the composite balance of individual accounts in a related subsidiary ledger.
D) must equal the composite balance of individual accounts in a related subsidiary ledger.

Question 57

Control accounts are always located in the general ledger.

Question 58

Special journals are used to record unique transactions which do not occur very often.

Question 59

A single-column purchases journal is used to record purchases of merchandise on account.

Question 60

The reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.

Question 61

The one characteristic that all entries recorded in a cash receipts journal have in common is

A) a credit to the Cash account.
B) that they all represent collections from customers.
C) that they originate from the sales of merchandise.
D) a debit to the Cash account.

Question 62

Adjusting entries are recorded

A) only on the worksheet.
B) only in the general ledger.
C) in the general journal.
D) in the special journals.

Question 63

A single-column purchases journal indicates that

A) only purchases of merchandise on account can be recorded.
B) all purchases of merchandise can be recorded.
C) all acquisitions on account can be recorded.
D) another column must be added so that debits and credits can be recorded.

Question 64

A company uses a sales journal, cash receipts journal, purchases journal, cash pay- ments journal, and a general journal. A cash sales return would be recorded in the

A) sales journal.
B) cash receipts journal.
C) cash payments journal.
D) general journal.

Question 65

Postings are made daily to subsidiary ledgers so that

A) employees are kept busy.
B) debits equal credits.
C) individual account information is kept current.
D) the control account will balance to the subsidiary ledger.

Question 66

Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the

A) sales journal.
B) cash receipts journal.
C) purchases journal.
D) cash payments journal.

Question 67

Entries in a sales journal

A) are made from sales invoices.
B) will indicate the invoice number in the reference column of the sales journal.
C) will occupy two lines of the sales journal.
D) indicate either a cash debit or accounts receivable debit.

Question 68

A sales journal is used to record

A) only cash sales of merchandise.
B) sales of all assets on credit and for cash.
C) only credit sales of merchandise.
D) credit sales of merchandise, sales returns and allowances, and sales discounts.

Question 69

Which of the following is not a special journal?

A) Sales journal
B) Purchases journal
C) General journal
D) Cash receipts journal

Question 70

If a transaction cannot be recorded in a special journal, it is

A) not recorded.
B) a correcting entry.
C) recorded in the general journal.
D) an error.

Question 71

Correcting entries are journalized in

A) a special journal.
B) the general journal.
C) the general ledger.
D) a correcting journal.

Question 72

A company which uses special journals should record a transaction involving the purchase of merchandise for cash in a

A) single-column purchases journal.
B) multiple-column purchases journal.
C) cash payments journal.
D) general journal.

Question 73

A company would not likely use subsidiary ledgers for

A) inventory.
B) retained earnings.
C) equipment.
D) accounts receivable.

Question 74

If a company purchases merchandise for cash, the transaction should be recorded in the

A) purchases journal.
B) general journal.
C) cash payments journal.
D) sales journal.

Question 75

If a transaction cannot be recorded in a special journal

A) the company must refuse to enter into the transaction.
B) it is recorded in the general journal.
C) it is recorded directly in the accounts in the general ledger.
D) it is recorded as an adjustment on the work sheet.

Question 76

The entries in a sales journal will show

A) all sales of merchandise.
B) the cash sales of the company.
C) the credit sales of merchandise.
D) all sales of the company.

Question 77

Cash from sales of merchandise will be recorded in the

A) purchases journal.
B) sales journal.
C) cash receipts journal.
D) general journal.

Question 78

If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the

A) general journal.
B) cash receipts journal.
C) cash payments journal.
D) sales journal.

Question 79

The one characteristic that all entries recorded in a multiple-column purchases journal have in common is a

A) credit to the Cash account.
B) debit to the Cash account.
C) debit to the Accounts Payable account.
D) credit to the Accounts Payable account.

Question 80

Journalizing in a sales journal will not

A) require a debit to Accounts Receivable.
B) show a sales invoice number.
C) affect the reference column of the journal.
D) include a credit to the Sales Revenue account.