Deck 16: Other Significant Liabilities

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

B

Question 3

A provision is a liability of uncertain timing or amount.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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 8

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 9

The accounting for warranty costs is based on the

A)going concern principle.
B)expense recognition principle.
C)conservatism principle.
D)objectivity principle.

Question 10

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 11

Postretirement benefits are accounted for on a cash basis.

Question 12

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

Question 13

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 14

Marin Company sells 4,000 units of its product in 2011 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 80 units for a total cost of $4,000. What amount should Marin Company report as Warranty Expense in its 2011 income statement?

A)$6,000.
B)$4,000.
C)$2,000.
D)$30,000.

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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 20

Marin Company sells 4,000 units of its product in 2011 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 80 units for a total cost of $4,000. What amount will be reported on Marin Company's statement of financial position as Estimated Warranty Liability on December 31, 2011?

A)$4,000.
B)$6,000.
C)$2,000.
D)Cannot be determined.

Question 21

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 22

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 23

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 24

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 25

The paid absence that is most commonly accrued is

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

Question 26

Match the items below by entering the appropriate code letter in the space provided.

Question 27

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 28

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 29

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 30

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 31

Larson Company has thirty 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)$360.
B)$3,600.
C)$5,400.
D)$540.