Chapter 9: Current Liabilities and Contingencies
52. Jennifer Cakes places a coupon in each box of its product. Customers may send in five coupons and $3, and the
company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes
of product were sold in 2016. It was estimated that 6% of the coupons would be redeemed. During 2016, 8,000
coupons were redeemed. Which entry should be made at December 31, 2016?
a.
Premium Expense 6,400
Estimated Premium Claims Outstanding 6,400
b.
Premium Expense 16,000
Estimated Premium Claims Outstanding 16,000
c.
Premium Expense 6,400
Inventory of Premiums 6,400
d.
Premium Expense 9,600
Estimated Premium Claims Outstanding 9,600
a
Moderate
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
53. American Business Services introduced a new machine on January 1, 2016. The machine carried a two-year warranty
against defects. The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year
after sale. Additional information follows:
Actual Warranty
Year
Sales
Expenditures
2016
$50,000
$ 900
2017
80,000
4,200
If American Business Services considers these warranties to be assurance-type and accounts for them by accruing the
expense (and the related liability) in the year of the sale, what amount relating to warranties should be reflected on the
December 31, 2017, balance sheet?
a.
b.
c.
d.
a
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
54. Which of the following journal entries would probably be made if the modified cash basis of accounting for warranties
is in use for a sale made in 2016?
a.
2016
Warranty Expense XX
Estimated Liability under Warranties XX
b.
2017
Estimated Liability under Warranties XX
Cash XX
c.
2016
Cash XX
Sales XX
Unearned Warranty Revenue XX
d.
2017
Warranty Expense XX
Cash XX
d
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
55. Concerning accounting for warranties, which of the following statements is true?
a.
Federal income tax regulations require companies to accrue warranty expense in the year of the sale.
b.
The modified cash basis method is required for tax reporting.
c.
The modified cash basis method uses a percentage of completion approach to warranty revenue recognition.
d.
The modified cash basis recognizes warranty expense when cash is received on the sale.
b
1
Moderate
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
56. King Sales sells a certain product for $20,000. Included in this price is an implied service-type warranty of $600. Fifty
machines were sold in 2016. Warranty expense incurred during 2016 amounted to $35,000. Which of the following
entries would King Sales probably not make in 2016?
a.
Unearned Warranty Revenue 35,000
Warranty Revenue 35,000
b.
Cash 1,000,000
Sales 970,000
Unearned Warranty Revenue 30,000
c.
Cash 30,000
Warranty Revenue 30,000
d.
Warranty Expense 35,000
Cash (or other assets) 35,000
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Exhibit 9-1
The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are
entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In
2016, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.
57. Refer to Exhibit 9-1. What is Happy’s estimated liability for unredeemed premiums on December 31, 2016?
a.
$125,000
b.
$187,500
c.
$225,000
d.
$337,500
a
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – OH – Default City – AICPA: FN-Measurement
58. Refer to Exhibit 9-1. What is Happy’s premium expense for 2016?
a.
$125,000
b.
$187,500
c.
$225,000
d.
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
$337,500
Exhibit 9-2
In 2015, the Magtag Company sold 16,000 ovens. Magtag estimated that 14% of the machines would require repairs
under the two-year assurance-type warranty at an average cost of $60. During 2015, Magtag had an actual outlay of
$62,000 for repairs under warranty. Magtag uses the GAAP approach of accruing warranty expense (and the related
liability) in the year of the sale.
59. Refer to Exhibit 9-2. At what amount should the company record warranty expense for 2015?
a.
$42,000
b.
$62,000
c.
$134,400
d.
$116,000
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
60. Refer to Exhibit 9-2. What amount should the company report for estimated liability under warranties at the end of
2015?
a.
$72,400
b.
$62,000
c.
$48,000
d.
a
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
$84,000
Exhibit 9-3
John Company includes three coupons in each package of cookies it sells. In exchange for 20 coupons, a customer will
receive a cookie sheet. John estimates that 30% of the coupons will be redeemed. In 2016, John sold 4,000,000 boxes of
cookies and purchased 150,000 Cookie sheets at $2.50 each. During the year, 970,000 coupons were redeemed.
61. Refer to Exhibit 9-3. What amount should John record as premium expense for 2016?
a.
$121,250
b.
$450,000
c.
$375,000
d.
$500,000
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
62. Refer to Exhibit 9-3. What amount should John report as estimated premium claims outstanding at December 31,
2016?
a.
$121,250
b.
$328,750
c.
$450,000
d.
$500,000
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
63. Barlo Lunch Snacks places a coupon in each box of its cracker product. Customers may send in five coupons and $3,
and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of
500,000 boxes of product were sold in 2016. It was estimated that 4% of the coupons would be redeemed. During
2016, 9,000 coupons were redeemed. What is Barlo’s premium expense for 2016?
a.
$4,400
b.
$8,000
c.
$20,000
d.
$40,000
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
64. Albert Corp. introduced a new machine on January 1, 2016. The machine carried a two-year assurance-type warranty
against defects. The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year
after sale. Additional information follows:
Actual Warranty
Year
Sales
Expenditures
2016
$40,000
$ 600
2017
60,000
2,200
If the company uses the GAAP approach of accruing warranty expense (and the related liability) in the year of the
sale, what amount relating to warranty expense should be reflected on the December 31, 2017 income statement?
a.
b.
c.
d.
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
65. Concerning accounting for warranties, which of the following statements is false?
a.
The GAAP approach of accruing warranty expense (and the related liability) in the year of the sale is not an
acceptable method for federal income tax purposes.
b.
The modified cash basis is the most conceptually sound method for financial reporting.
c.
In accounting for service-type warranties, companies much report warranty expense in the period of sale.
d.
The modified cash basis recognizes warranty expense when cash is paid for the repairs to merchandise under
warranty.
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
66. The modified cash basis to determine warranty expense
a.
violates the matching concept.
b.
requires recognition in the period of sale of the estimated warranty expense and warranty liability.
c.
separates accounting for two components of the sales price: the price of the product and the price of the
warranty.
d.
records warranty expense when the merchandise under warranty is sold.
a
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Exhibit 9-4
During 2016, the Thomas Company began selling a new type of machine that carries a two-year assurance-type warranty
against all defects. Based on past industry and company experience, estimated warranty costs should total $2,000 per
machine sold. During 2016, sales and actual warranty expenditures were $4,000,000 (80 machines) and $44,000,
respectively. Thomas uses the GAAP approach of accruing warranty expense (and the related liability) in the year of the
sale.
67. Refer to Exhibit 9-4. What amount should Thomas report as its warranty expense for 2016?
a.
$0
b.
$ 44,000
c.
$160,000
d.
$320,000
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
68. Refer to Exhibit 9-4. What amount should Thomas report as its estimated warranty liability at December 31, 2016?
a.
$0
b.
$44,000
c.
$120,000
d.
$116,000
d
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Exhibit 9-5
Backhoe Company estimates its annual warranty costs to be 4% of annual net sales. Backhoe uses the GAAP approach of
accruing warranty expense (and the related liability) in the year of the sale. The following information relates to the
calendar year 2015:
Net sales
$3,000,000
Estimated liability under warranties:
January 1, 2015
100,000
December 31, 2015, after year-end adjustment
80,000
69. Refer to Exhibit 9-5. The amount of warranty expense for 2015 is
a.
$80,000.
b.
$120,000.
c.
$140,000.
d.
$240,000.
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
70. Refer to Exhibit 9-5. The amount of expenditures for warranty costs for 2015 is
a.
$80,000.
b.
$120,000.
c.
$140,000.
d.
$240,000.
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
71. The Salty Chip Company includes one coupon having no expiration date with its deluxe snack pack. Upon return of
10 coupons, Salty Chip will send a silver chip clip, which costs Salty Chip $1.50 each. Past experience indicates that
30% of coupons issued will be redeemed. Salty Chip began this promotion in 2015 and sold 1,000,000 deluxe snack
packs. During 2015, 90,000 coupons were received and 9,000 chip clips were distributed to customers. The December
31, 2015 balance sheet should include a liability for coupons outstanding of
a.
$18,000.
b.
$180,000.
c.
$31,500.
d.
$50,000.
c
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
72. The FASB established the use of the terms “probable,” “reasonably possible,” and “remote.” It adopted these terms
because
a.
the available statistical techniques are not exact enough.
b.
the likelihood of occurrence of future events can vary over a wide range.
c.
future gains are not easy to estimate.
d.
unnecessary estimates should not be recorded in the financial records.
b
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
73. Which of the following loss contingencies is not usually accrued?
a.
product warranty obligations
b.
premium offer obligations
c.
risk of loss from fire
d.
noncollectibility of receivables
c
1
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
74. The Park Company is affected by the following contingencies at the end of 2016:
1.
Expropriation of Park’s foreign assets, valued at $3,000,000, appears reasonably possible.
2.
Parks’ legal counsel has concluded that it is probable that the company will be required to
pay damages of $500,000 in a lawsuit.
3.
It appears remotely possible that a major customer will be unable to repay Parks on a note
receivable for $100,000.
4.
Parks’ controller estimates that $250,000 of the company’s pledged receivables are likely to
be uncollectible, and the lender will require Parks to honor the amounts.
What total amount should Parks accrue for loss contingencies in 2016?
a.
$750,000
b.
$850,000
c.
$3,500,000
d.
$3,850,000
a
1
Challenging
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
75. A probable loss contingency is reasonably estimated within a range of possible amounts. No amount within the range
is a better estimate than any other amount within the range. The amount that should be accrued should be
a.
zero.
b.
the lower amount of the range.
c.
the upper amount of the range.
d.
the average amount within the range.
b
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
76. Which of the following statements is true?
a.
No loss contingencies should be disclosed if there is just a reasonable possibility of a loss.
b.
Indirect guarantees should normally be accrued.
c.
In the case of loss contingencies, accrual can be made even if the exact payee and payment date are not
known.
d.
Losses may be accrued for unasserted claims and other potential unfiled lawsuits.
c
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
77. Which of the following contingencies is usually accrued?
a.
risk of loss from fire
b.
expected proceeds from insurance settlement
c.
bad debts
d.
discovery of possible mineral reserves on company property
c
1
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
78. A gain contingency that is reasonably possible and for which the amount can be reasonably estimated should be
a.
accrued.
b.
disclosed but not accrued.
c.
neither accrued nor disclosed.
d.
classified as an appropriation of retained earnings.
b
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
79. Gain contingencies should
a.
be accrued if they are probable and can be reasonably estimated.
b.
not be accrued in the accounts.
c.
be accrued only if they are the result of litigation or government appropriation.
d.
never be accrued or disclosed in the footnotes.
b
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
80. When a contingency must be accrued under IFRS, the charge is referred to as
a.
an endowment.
b.
a provision.
c.
an appropriation.
d.
a risk expense.
b
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
81. In considering contingencies, IFRS and GAAP define the term “probable” as
a.
IFRS – likely; GAAP – likely
b.
IFRS – likely; GAAP – more likely than not
c.
IFRS – more likely than not; GAAP – likely
d.
IFRS – more likely than not; GAAP – more likely than not
c
1
Easy
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
82. When selecting within a range of outcome estimates for probable contingencies, the requirements of IFRS and GAAP,
respectively, are to accrue what amount in the range?
IFRS
GAAP
I.
minimum
minimum
II.
midpoint
minimum
III.
minimum
midpoint
IV.
midpoint
midpoint
a.
I
b.
II
c.
III
d.
IV
b
1
Moderate
ACCT.WHAL.16.9.5 – LO: 9.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
83. Which of the following is the most appropriate way to display liabilities on the balance sheet?
a.
nearness to maturity
b.
relative likelihood of payment
c.
alphabetically by payee
d.
All of the above answer choices are correct.
a
1
Easy
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
84. Which of the following would not be an acceptable method of presenting current liabilities on the balance sheet?
a.
alphabetically
b.
in order of their average time to maturity
c.
in order of their liquidation preference
d.
in order of their amount (largest to smallest)
a
1
Easy
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Reporting
85. Conceptually, all liabilities should be reported on the balance sheet at
a.
the present value of the future outlays they require.
b.
their maturity value.
c.
face amount.
d.
their current cash equivalent amount.
a
1
Easy
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
86. Which of the following statements concerning contingencies is true?
a.
Contingent liabilities are always recorded in the body of the financial statements.
b.
Contingent liabilities are always disclosed in the footnotes to the financial statements.
c.
Contingent gains are sometimes recorded in the body of the financial statements.
d.
Contingent gains are sometimes disclosed in the footnotes to the financial statements.
d
1
Easy
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
87. Liabilities whose amounts must be estimated are disclosed in financial statements by
a.
including details in the footnotes.
b.
describing the estimated liabilities among the liabilities on the balance sheet but not including the amounts in
the liability totals.
c.
an appropriation of retained earnings.
d.
including the amounts in the liability totals.
d
1
Moderate
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
88. Existing claims related to product warranties and litigation as of December 31, 2016, indicate that it is probable that a
liability has been incurred. However, as of December 31, 2016, the amount of the obligation cannot be reasonably
estimated. Based on these facts, an estimated loss contingency should be
a.
accrued.
b.
disclosed but not accrued.
c.
neither accrued nor disclosed.
d.
classified as an appropriation of retained earnings.
b
1
Moderate
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
89. Which of the following statements is not true?
a.
Loss contingencies should be disclosed if there is just a reasonable possibility of a loss.
b.
Indirect guarantees should normally be disclosed by footnote, not by accrual.
c.
In the case of loss contingencies, accrual can be made even if the exact payee and payment date are not
known.
d.
Losses may be accrued for unasserted claims and other potential unfiled lawsuits.
d
1
Easy
ACCT.WHAL.16.9.6 – LO: 9.6
United States – OH – Default City – AICPA: FN-Measurement
90. Which of the following statements is true?
a.
GAAP requires that unconditional non-cancellable purchase obligations be accrued and reported as liabilities
on the balance sheet.
b.
Unearned revenues collected in advance should be classified as deferred credits on the balance sheet.
c.
GAAP requires that footnote disclosures of future payments resulting from off-balance-sheet financing
transactions be disclosed separately for only the next five years.
d.
1
ACCT.WHAL.16.9.6 – LO: 9.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
If a company sells goods and agrees to repurchase them at a specified price, both a sale and a current liability
should be recorded if the requirements of GAAP are to be met.
91. From the list of accounts below determine which ones are the following:
A) Contractual Amounts
B) Contingent Amounts
C) Amounts determined by operating activities
Required:
Write the appropriate letter for the accounts listed below.
______
1)
Premium Expense
______
2)
Dividends Payable
______
3)
Sales Tax Payable
______
4)
Accounts Payable
______
5)
Loss from Litigation
______
6)
Warranty Expense
______
7)
Property Taxes payable
______
8)
Notes Payable
______
9)
Federal Income Taxes Payable
______
10)
Accrued Expenses
1)
b
2)
a
3)
c
4)
a
5)
b
6)
b
7)
a
8)
a
9)
c
10)
c
1
Moderate
ACCT.WHAL.16.9.2 – LO: 9.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling