49. 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 on the balance sheet?
50. 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?
51. At the beginning of 2012, 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 2012 were $180 million. Five percent of the units sold were returned in
2012 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on
Angel’s 2012 income statement is:
52. Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2%
of Strikers’ goals are faulty and 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?
53. Bears Inc. sells football helmets to local schools and warrants all of its products for one
year. While no helmets sold in 2012 have been returned to them 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 2012?
54. 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 2012, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December
31, 2012. What amount of warranty liability should be reported at December 31, 2012?
55. 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?
56. Footnote disclosure is required for material potential losses when the loss is at least
reasonably possible:
57. Gain contingencies usually are recognized in a company’s income statement when:
58. A contingent liability should be accrued on a company’s financial statements only if the
likelihood of a loss occurring is:
59. When a gain contingency is probable and the amount of gain can be reasonably estimated,
the gain should be:
60. A contingent liability should be disclosed in a note to the financial statements rather than
being recorded if:
61. 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:
62. Which of the following is a contingency that should be recorded?
63. Skypt Co. is involved in a lawsuit and sued by Quart Co. for $500,000. Skypt feels it is
probable that it will lose the lawsuit. What should Skypt Co. and Quart Co. record or disclose
concerning the lawsuit?
64. Which of the following statements regarding liquidity ratios is false?
65. Which of the following statements regarding liquidity ratios is true?
66. Which of the following is true regarding the relationship between the current ratio and the
acid-test ratio?
67. A company’s liquidity refers to its:
68. Working capital is
69. The current ratio is
70. The acid-test ratio is
71. Which of the following measures of liquidity does not control for the relative size of the
company?
72. Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of
inventory with cash affect each ratio?
73. Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of
cash by issuing a six-month note payable affect each ratio?
74. Delta, Northwest, and United Airlines have all, at one time, filed for bankruptcy.
75. In a classified balance sheet, we categorize all liabilities as current.
76. Commonly, current liabilities are payable within one year, and long-term liabilities are
payable more than one year from now.
77. Given a choice, most companies would prefer to report a liability as current rather than
long-term, because doing so may cause the firm to appear less risky.
78. When a company borrows cash from a bank promising to repay the amount borrowed plus
interest, the borrower reports its liability as notes payable.
79. Interest is stated in terms of a percentage rate to be applied to the face value of the loan.
80. We record interest expense in the period in which we pay it, rather than in the period we
incur it.
81. A line of credit is an informal agreement that permits a company to borrow up to a
prearranged limit without having to follow formal loan procedures and paperwork.
82. If a company borrows from another company rather than from a bank, the note is referred
to as commercial paper.
83. Accounts payable are amounts the company owes to suppliers of merchandise or services
that it has bought on credit.
84. Deductions from employee salaries in determining the amount of payroll checks include
withholdings for federal and state income taxes, FICA taxes, and the employee portion of
insurance and retirement contributions.
85. All states impose a state income tax.
86. Companies are required by law to withhold federal and state income taxes from
employees’ paychecks and remit these taxes to the government.
87. The employer records amounts deducted from employee payroll as liabilities until it pays
them to the appropriate organizations.
88. FICA taxes are paid only by the employee.
89. The employer is required to match the amount of FICA taxes withheld for each employee,
effectively doubling the amount paid into Social Security.
90. Additional employee benefits paid for by the employer are often referred to as fringe
benefits.
91. When a company receives cash in advance, it debits Cash and credits a revenue account
called Unearned Revenue.
92. Airlines do not record revenue when a ticket is sold, but wait to record revenue until the
actual flight occurs.
93. All states impose a general state sales tax, and many areas include an additional local sales
tax.
94. Companies selling products subject to sales taxes are responsible for collecting the sales
tax directly from customers and periodically remitting the sales taxes collected to the state and
local governments.
95. When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax
Payable.
96. Sales taxes collected from customers by the seller are not an expense, instead they
represent current liabilities payable to the government.
97. Long-term obligations such as notes, mortgages, and bonds are reported as long-term
liabilities when they become payable within the upcoming year.
98. Net income in the income statement is the same amount as taxable income reported to the
Internal Revenue Service (IRS).
99. Differences between financial accounting and tax accounting result in a company being
permitted to defer paying some of its income tax expense, in which case it will report a
deferred tax liability.
100. A contingent liability is an existing, uncertain situation that might result in a loss.
101. We record a contingent liability when the likelihood of the loss occurring is reasonably
possible and the amount can be reasonably estimated.
102. The journal entry to record a contingent liability requires a debit to a loss (or expense)
account and a credit to a liability.
103. Regarding a contingent liability, when no amount within a range of potential losses
appears more likely than others, we record the maximum amount in the range.
104. If the likelihood of a loss is reasonably possible rather than probable, we record no entry,
but make full disclosure in a footnote to the financial statements to describe the contingency.
105. If the likelihood of loss is remote, disclosure usually is not required.