Ch 13 Liabilities

Which of the following statements relating to subsequent events that occur between the end of the fiscal period and the issuance of the financial statements is correct?

Any material event should be disclosed in the financial statement notes.

Best Equipment Inc. sells its products with a 3-year limited warranty. During 2017, Best Equipment recognizes $550,000 in sales revenue. Based on past experience, some of its products will need repair during the warranty period. What is the appropriate accounting treatment for Best Equipment's product warranty? Multiple choice question. Best should estimate the contingent liability and accrue it in 2017. Best should ignore the potential liability and hope that none of the products will become defective. Best should wait until products are returned for repair, but disclose the estimated contingent liability.

Best should estimate the contingent liability and accrue it in 2017.

If a company judges the likelihood that an unasserted claim will be asserted at a future date, it is probable the outcome will be unfavorable, and the related amount can be estimated, the company should:

accrue a contingent liability

Expenses already incurred, but not yet paid are referred to as Multiple choice question. accrued receivables. accrued liabilities. a line of credit. commercial paper.

accrued liabilities

Events occurring between the end of the fiscal year and the date the financial statements are issued or available to be issued should be

considered to clarify financial statement elements at the reporting date.

The dollar amount of a potential loss when reporting a ----- ------- can be classified as known, reasonably estimable, or not reasonably estimable.

contingent liability

When some doubt exists about whether or not a loss will occur in the future we refer to it as a(n) Multiple choice question. probable liability contingent liability contingent asset probable asset

contingent liability

When it is uncertain whether an obligation really exists, we may recognize what is referred to as a Multiple choice question. contingent loss. deferred revenue. deferred asset.

contingent loss

Unredeemed cash rebates related to current year sales should be estimated and the amount treated as a(n): (Select all that apply.)

liability reduction in revenue

An otherwise successful company may fail to exist, if it experiences serious _____ problems.

liquidity

Current liabilities are those obligations that are payable within ______ or the operating cycle whichever is ____.

one year; longer

Costs incurred to satisfy customer claims under an extended warranty period are recorded during the same period as the related---------

revenue

What is one feature that distinguishes contingencies from other types of liabilities?

uncertainty that a loss will occur

Identify the most common loss contingency that does not result in the recognition of a liability. Multiple choice question. Warranty-related claims Uncollectible receivables Product liability suits

uncollectible receivables

What does an unearned revenue represent?

unearned revenue or also deferred revenue represents liabilities until the related product or service is provided.

Revenue associated with the sale of gift cards normally is recognized Multiple choice question. when the gift cards are purchased evenly over the life of the gift card. when the gift cards are redeemed

when the gift cards are redeemed

Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for accrual but are at least reasonably possible? (Select all that apply.) Multiple select question. A disclosure must describe the contingency. The contingency should not be accrued nor disclosed. An estimate of the potential loss should be made (if possible) and disclosed.

A disclosure must describe the contingency. An estimate of the potential loss should be made (if possible) and disclosed.

Which of the following transactions will increase a company's working capital? Multiple choice question. Purchase of inventory on account Payment of an accounts payable Receipt of cash on a short-term note Receipt of cash on a long-term note Collection of an accounts receivable balance

Receipt of cash on a long-term note

Which of the following transactions will increase a company's working capital? Multiple choice question. Receipt of cash on a long-term note Receipt of cash on a short-term note Payment of an accounts payable Purchase of inventory on account Collection of an accounts receivable balance

Receipt of cash on a long-term note

On December 1, 2017, Kathryn Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. Interest is payable when the loan matures. What entry should Kathryn make on December 31 relating to its note? Multiple choice question. Recognize interest expense and interest payable of $1,000. Recognize interest expense and interest payable of $6,000. No entry is necessary on December 31.

Recognize interest expense and interest payable of $1,000. (100,000*12%*1/12)

January 15, 2018, Munter Company learned of a judgment against the company in a lawsuit brought by a client relating to services provided by Munter during the 2017 fiscal period. The 2017 financial statements have not yet been issued. Munter should

accrue an estimated liability if a loss is probable and estimable.

Which of the following items represent loss contingencies? (Select all that apply.) Multiple select question. Accounts payable for inventory purchases Uncollectible receivables Legal liabilities Warranty liabilities Advanced payment from customers

Uncollectible receivables Legal liabilities Warranty liabilities

Grouper Company arranged for a line of credit with its local bank. The company can borrow up to $100,000 as needed. Grouper pays the bank a fee of $200 per year regardless of any specific borrowing under the arrangement. This is an example of

a committed line of credit.

Gunner Corp. has $2 million in bonds outstanding that mature during 2018. The company intends to refinance some of its obligation by issuing $1 million in 10-year bonds. On January 31, 2018, the new bond issue is sold. The funds will be utilized to pay part of the maturing bond obligation. The balance sheet at 12/31/2017 should show the following regarding the maturing bonds: (Select all that apply.) Multiple select question. a current bonds payable of $1 million. a long-term bonds payable of $2 million. a long-term bonds payable of $1 million. a current bonds payable of $2 million.

a current bonds payable of $1 million. a long-term bonds payable of $1 million.

Debt that is callable by the creditor in the upcoming year, but is not expected to be called, is reported as Multiple choice question. contributed capital a long-term liability a current liability

a current liability

Norbert Company's recently signed a 20-year mortgage that requires monthly payments of principal and interest. Norbert should report the mortgage principal payments due during the following accounting period as Multiple choice question. a current liability a long-term liability either a short-term or long-term liability

a current liability

Interest that has been incurred but not yet been paid is recognized as

accrued interest payable

Roberts Corp. sells its products with a 2-year warranty. Estimated total warranty cost relating to sales for the year ended December 31, 2017, is $210,000. One-third of these estimated costs are expected to be incurred during 2018 with two-thirds expected to be incurred during 2019. Indicate the amount and classification of the estimated warranty cost on the balance sheet at 12/31/2017. (Select all that apply.) Multiple select question.

Current liability of $70,000 long-term liability of $140,000

Supreme Inc. offers a 3-year extended warranty for all its products. On January 1, 2018, the company collects $45,000 relating to extended warranty contracts. What entry should Supreme make on January 1, 2018?

Debit cash and credit deferred revenue for $45,000.

Which of the following must employers by law withhold from their employees' pay? (Select all that apply.)

FICA contributions Federal taxes

On December 1, 2017, Katie Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. What accounts should be debited when the interest is paid on the maturity date and what are the amounts? Assume that no interest accruals were made during 2018 relating to this note. (Select all that apply.) Multiple select question. Interest expense: $5,000 Interest payable: $1,000 Interest expense: $6,000 Interest payable: $6,000 Interest payable: $5,000

Interest expense: $5,000 Interest payable: $1,000

Choose the statement that best reflects the nature of interest. Interest represents the return of investment to the lender. Interest is the "rent" paid by the borrower for using the lender's money. Interest is a fee that the lender charges for processing a loan agreement.

Interest is the "rent" paid by the borrower for using the lender's money.

On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on June 30 includes:

June 30 journal entries: debit interest expense ($100,000*10%*6/12=5,000) debit notes payable 100,000 credit cash (100,000+5,000=105,000)

The dollar amount of a potential loss from a contingent liability can be classified as (Select all that apply.) Multiple select question. Known Immaterial Material Reasonably estimable

Known Reasonably estimable

What type of costs relating to ongoing litigation are commonly recognized by companies?

Lawyer fees and other legal costs

Which of the following statements regarding noninterest-bearing notes is correct? (Select all that apply.) Multiple select question. Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes does not include interest. The face amount of noninterest-bearing notes includes interest. Noninterest-bearing notes do not include interest.

Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes includes interest.

On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on January 1 includes (Select all that apply.)

Notes payable January 1 journal entry: debit cash $100,000 credit notes payable $100,000

What are trade notes payable?

Obligations to suppliers of merchandise that bear interest and are for a longer term than open accounts are called trade notes payable.

Karin Company's loan is due on July 1, 2018. What conditions must Karin meet (at a minimum) so that the note can be classified as a long-term liability on the company's balance sheet at December 31, 2017? (Select all that apply.) Multiple select question. The company must intend to refinance the obligation on a long-term basis. The company must have demonstrated the ability to refinance the obligation on a long-term basis. The company must have entered into a long-term refinancing agreement.

The company must intend to refinance the obligation on a long-term basis. The company must have demonstrated the ability to refinance the obligation on a long-term basis.

Which of the following statements regarding commercial paper are correct? (Select all that apply.) They have minimum denominations of $25,000. They are unsecured notes. They are often purchased by other companies as investments. Their maturity periods range from 180-450 days. They are secured notes.

They have minimum denominations of $25,000. They are unsecured notes. They are often purchased by other companies as investments.

Which of the following statements is correct regarding short-term obligations? Multiple choice question. They must always be classified as short-term liabilities. They may be classified as long-term liabilities if they meet certain criteria. They can be classified as long-term liabilities if the company has a high credit rating.

They may be classified as long-term liabilities if they meet certain criteria.

loss contingencies

a condition that exists, at the end of the fiscal period, that gives rise to a possible loss to the company, the amount of which will be determined by a future event

An interest rate, unless otherwise specified, is typically a(n) ______ rate.

annual

Greene Company experienced a warehouse fire on January 28, 2018. The company estimates that the uninsured portion of its loss will be approximately $10,000. If the company's 2017 financial statements have not yet been issued, Greene should

disclose the estimated loss in its 2017 financial statements.

The costs of satisfying product-related warranties should be recorded as an expense Multiple choice question. when the related products are repaired or replaced. over the warranty period. during the year of sale.

during the year of sale.

The costs incurred to satisfy customer claims under an extended warranty period are recorded

in the same period as the warranty revenue

By law, employers must withhold security taxes and ____ from their employees' paychecks.

income taxes

In practice, the assets most commonly used to secure loans are (Select all that apply.)

inventory or accounts receivable

With respect to on-going litigation, companies typically recognize related ____, but not related _____.

legal fees; losses

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should recognize the following credits in its ledger (Select all that apply.) Multiple select question. sales revenue of $1,100. sales revenue of $1,000. sales taxes payable of $100.

sales revenue of $1,000. sales taxes payable of $100. debit to cash $1,100

examples of advances from customers

-gift certificates -magazine subscriptions -layaway deposits -special order deposits -airline tickets

Short-term bank loans:

1. are frequently used by large corporations as a significant component of capital structure. 2. usually have a lower interest rate than long-term debt.

3 essential characteristics of liabilities

1. probable future sacrifices of economic benefits 2. arising from present obligations to other entities 3. resulting from past transactions or events

Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 as follows: 2017: $10,000; 2018: $25,000; 2019: $15,000. Assume that actual warranty costs during 2017 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2017 income statement? Multiple choice question.

10,000+25,000+15,000=50,000

Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 are as follows: 2017: $10,000; 2018: $25,000; 2019: $15,000. Assume that actual warranty costs during 2017 were as estimated. What is the amount of the estimated warranty liability that Supreme should recognize on its 2017 balance sheet?

25,000 + $15,000 = $40,000. The warranty liability is reduced by the warranty costs paid during 2017.

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should accrue a contingent liability and loss of

250,000 because when no amount within the range appears more likely than others, we record the minimum amount.

Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should accrue a contingent liability and loss of Multiple choice question. $400,000. $350,000. $425,000. $500,000.

400,000

Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year? (Select all that apply.) Multiple select question. A noncurrent liability of $540,000 A current liability of $540,000 A current liability of $36,000 A noncurrent liability of $504,000

A current liability of $36,000 A noncurrent liability of $504,000

A contingent liability typically is accrued for product warranties because it meets which of the following criteria? (Select all that apply.) Multiple select question. A future loss is probable. A future loss is certain. The amount of the loss cannot be reasonably estimated. The amount of the future loss can be reasonably estimated. A future loss is uncertain.

A future loss is probable. The amount of the future loss can be reasonably estimated.

What practical reason may motivate companies to rarely accrue losses for ongoing litigation?

Accrual of a contingent loss may adversely affect the outcome of the company's legal case.

Which of the following is correct regarding accrued interest payable? Multiple choice question. Accrued interest payable relates to interest already incurred but not yet paid. Accrued interest payable relates to interest that was neither paid nor incurred. Accrued interest payable relates to interest that was prepaid but not yet incurred.

Accrued interest payable relates to interest already incurred but not yet paid.

Supreme Inc. offers a 3-year extended warranty for all its products. On January 1, 2018, the company collects $45,000 relating to extended warranty contracts. What entry should Supreme make on December 31, 2018?

Debit deferred revenue for $15,000 and credit revenue—extended warranty for $15,000.

Which of the following are classified as current liabilities? (Select all that apply.) Multiple select question. Debt callable in the upcoming year, even when not expected to be called All long-term loans with debt covenants Notes payable due in two years that require monthly interest payments Current portion of long-term debt Long-term loans with violated debt covenants

Debt callable in the upcoming year, even when not expected to be called Current portion of long-term debt Long-term loans with violated debt covenants

Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss? Multiple choice question. Disclose the contingency and state that an estimate cannot be made. Do not disclose the contingency until an estimate can be made. Derive an estimate and accrue a loss.

Disclose the contingency and state that an estimate cannot be made, because it is possible but not probable. The contingent liability is only recorded if it's both probable and can be estimated.

Choose the correct formula for calculating interest. Face amount x annual interest rate x fraction of the year Face amount x rate per interest period Maturity amount x rate per interest period x time to maturity

Face amount*Annual rate*Time to maturity

Jingle Company signs a 6-month, $20,000 note. Stated annual interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as

I= 20000*8%*6/12=800

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the demise of a company that otherwise may have been successful.

Which liability is riskier?

Noncurrent liabilities are less risky because outsiders or lenders consider debt that is payable currently riskier than debt to be paid later. current payable requires the company to be able to access cash or assets relatively soon than non-current payable. Current payable - high risk Noncurrent payable - low risk

Which of the following statements regarding noninterest-bearing notes is correct? (Select all that apply.)

Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes includes interest.

Which of the following is a requirement for recognizing employee compensation for future absences? Multiple choice question. The amount of payment can be reasonably estimated. Payment is determined by future performance. The obligation is attributable to future services. The amount of payment is certain.

The amount of payment can be reasonably estimated.

A contingent liability is accrued if which conditions are met? (Select all that apply.) Multiple select question. The amount of the loss can be reasonably estimated. The amount of the loss is greater than 10% of revenue. It is possible that a future loss will occur. It is probable that a future loss will occur.

The amount of the loss can be reasonably estimated. It is probable that a future loss will occur. Need help? Review these concept resources.Read About the Concept Feedback Next QuestionReading

What conditions must be met to recognize employee compensation for future absences? (Select all that apply.) Multiple select question. The paid absences vest or the benefits can be accumulated over time. The amount can be reasonably estimated. The amount can be accurately determined. The obligation is attributable to employees' services already performed. Payment is probable.

The paid absences vest or the benefits can be accumulated over time. The amount can be reasonably estimated. The obligation is attributable to employees' services already performed. Payment is probable.

Which of the following is necessary for a loss contingency to exist? Multiple choice question. The loss must arise from a company's normal operations. The loss must arise from a legal dispute that is not yet resolved. The potential loss must arise from an event that occurred prior to the financial statement date.

The potential loss must arise from an event that occurred prior to the financial statement date.

Sally Company owes its employees $5,250 for the last 4 days of the year ended December 31. The company will pay this amount on January 7 as part of its regular payroll disbursements of $11,800. What, if anything, should Sally recognize on December 31?

accrued liability of $5,250

Gift certificates, magazine subscriptions, layaway deposits, special order deposits, and airline tickets all are examples of Multiple choice question. accrued liabilities revenues expenses secured loans advances from customers

advances from customers

What is a line of credit?

an agreement between a bank and a company that allows the company to borrow up to specified amount without completing additional paper work.

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The interest rate stated in the loan agreement most likely applies to

an entire year

Consistent with SFAC No. 7, long-term contingent liabilities should be measured using Multiple choice question. the recovery method. the estimated nominal amounts. an expected cash flow approach.

an expected cash flow approach.

Accounts payable typically (Select all that apply.) are offered on open account. are noninterest-bearing. require a formal promissory note. bear interest.

are offered on open account are noninterest-bearing

A loss contingency is recognized only if the event that gave rise to it occurred Multiple choice question. within 60 days of the financial statement date. after the financial statement date. before the financial statement date.

before the financial statement date.

Unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 1 to 270 days are referred to as Multiple choice question. bonds payable. contingencies. commercial paper. trade notes payable.

commercial paper

Which of the following are common types of employee compensation? (Select all that apply.) Multiple select question. Employee loans Commissions Pensions Salaries

commissions pensions salaries

Mikel Company grants stock options and bonuses to its full-time employees. These benefits are considered employee ______. Multiple choice question. contingencies loans compensation

compensation

Which of the following concepts or principles is the primary reason why gain contingencies are not accrued, even if they are probable?

conservatism

Newman Company has both a contingent gain and a contingent loss that it judges to be highly probable to result in future cash flows, which it is able to reasonably estimate. Which of the following should the company accrue for the current accounting period?

contingent loss only

Norbert Company's recently signed a 20-year mortgage that requires monthly payments of principal and interest. Norbert should report the mortgage principal payments due during the following accounting period as Multiple choice question. a current liability a long-term liability either a short-term or long-term liability

current liability

nonfinancial performance measures:

customer satisfaction product/service quality

Glocken Company is trying to increase its share of the consumer electronics market. To stimulate sales, the company offers cash rebates ranging from $25-$50 on all of its products. At December 31, 2017, the company estimates that, during 2018, customers will redeem $2,550 in rebates relating to 2017 sales. On December 31, 2017, Glocken should

decrease revenue and recognize a liability for $2,550.

During December, Martin Department Stores sells $240,000 in gift cards. When it sells the gift cards, Martin should recognize Multiple choice question. a loss. a gain. sales revenue. deferred revenue.

deferred revenue

most common performance measures:

earnings per share; net income; operating income

An extended warranty contract (Select all that apply.) Multiple select question. is considered an integral part of the related product. essentially constitutes a separate performance obligation. provides protection beyond the manufacturer's original warranty.

essentially constitutes a separate performance obligation. provides protection beyond the manufacturer's original warranty.

Werner Inc. sells its products with a 2-year warranty. On December 31, 2017, Werner recognized estimated warranty-related costs of $54,000 for its 2017 sales. During 2018, Werner incurs repair costs of $21,000 related to products sold during 2017. The journal entry to record the cost of repairs would include a debit to:

estimated warranty liability

What is the most common way for a corporations to obtain temporary financing?

through short-term bank loans

For a loss contingency to be accrued, (Select all that apply.)

it is not necessary that the lawsuit was filed before the end of the accounting period. the cause of the lawsuit must have occurred before the end of the accounting period.

A liability is accrued for a contingent loss if (Select all that apply.) Multiple select question. it is remote that the confirming event will occur it is reasonably possible the confirming event will occur it is probable the confirming event will occur the amount is not reasonably estimable the amount can be reasonably estimated

it is probable the confirming event will occur the amount can be reasonably estimated

In practice, accrual of loss contingencies related to litigation claims are uncommon because (select all that apply) Multiple select question. it may adversely affect the outcome of the litigation. the outcome related to litigation is highly uncertain. it may positively affect the outcome of the litigation. outcome related to litigation is easily estimated.

it may adversely affect the outcome of the litigation. the outcome related to litigation is highly uncertain.

Amounts received that will be returned or remitted to others at a future date are recognized as: Multiple choice question. expenses assets liabilities losses

liabilities

Cash collected from customers as refundable deposits or as advance payments for products or services are recognized as Multiple choice question. liabilities. prepaid assets. revenues. deferred assets.

liabilities

Taxes collected for taxing authorities are recognized as Multiple choice question. revenue. liabilities. operating expenses. prepaid expenses.

liabilities

Unearned or deferred revenues are reported as Multiple choice question. liabilities revenues expenses assets

liabilities

Growler Commercial Cleaning Company collects a $1,000 deposit associated with the rental of industrial cleaning equipment. The deposit is refundable upon return of the equipment. When the customer returns the cleaning equipment, Growler should debit the following account Multiple choice question. liability—refundable deposits revenue—refundable deposits other income—refundable deposits

liability - refundable deposits

Growler Commercial Cleaning Company collects a $1,000 deposit associated with the rental of industrial cleaning equipment. The deposit is refundable when the customer returns the equipment. Upon receipt of the deposit, Growler should credit a Multiple choice question. liability—refundable deposits. revenue—refundable deposits. expense—refundable deposits. other income—refundable deposits.

liability—refundable deposits.

A company's cash position, its overall ability to obtain cash in the normal course of business, and to satisfy its current obligations reflects the company's

liquidity.

The expected cash flow approach is the appropriate method for estimating - contingent liabilities.

long-term

Recognition of costs related to manufacturers' quality assurance warranty during the same period that the related revenue is recognized is consistent with the Multiple choice question. cost principle full disclosure principle revenue recognition principle going concern concept matching principle

matching principle

Material events giving rise to a contingency that occur after the end of the fiscal period but before the financial statements are issued

must be disclosed in a subsequent events disclosure note.

Jones Company signs a $15,000, 12-month note and receives $14,250 from the bank. Jones probably signed a(n) ______.

noninterest-bearing note

Revenue related to extended warranty contracts typically is recognized

over time

Classifying liabilities as current or noncurrent depends on when the contingent liability is expected to be --------

paid

Which of the following are commonly used nonfinancial performance measures for annual bonuses? (Select all that apply.) Multiple select question. earnings-per-share Reason: a commonly used financial performance measure sales revenue Reason: a financial performance measure product or service quality customer satisfaction

product or service quality customer satisfaction

formal credit instrument for an Trade Notes Payable

promissory notes

Seine Company, a trucking company, accidentally spilled a load of ice cream across an open field. The owner of the field has not yet demanded clean-up of the spill. Seine's expert source predicts that it is probable that the owner will file a claim and that Seine will probably have to pay for the clean-up cost of approximately $29,000. Upon determining these facts, Seine should

recognize a contingent liability of $29,000.

Superior Printer Company sells a new model with a $30.00 mail-in rebate. At the end of the accounting period, the company estimates that 25% of the 2,000 rebates associated with sales during December will still be returned by customers. On December 31, Superior Printer should

recognize an expense and estimated liability of $15,000.

Premiums that obligate the company to provide noncash items are

recorded as deferred revenue until the premium is delivered. treated as separate performance obligations.

Which of the following are used to categorize the likelihood of the occurrence of a future loss? (Select all that apply.) Multiple select question. remote uncertain certain reasonably possible probable

remote reasonably possible probable

If a borrower pledges specific assets as collateral for a loan, the loan is considered secured restricted encumbered risk free

secured

Information relative to a loss contingency that becomes available after the fiscal year ends, but before the financial statement date (select all that apply)

should be considered in estimating the amount of the loss. should be considered in determining the probability of a loss contingency.

formal credit instrument for an Accounts Payable (AP)

supplier's invoice

Revenue related to extended warranty contracts typically is recognized over time because Multiple choice question.

the warranty provides coverage over time.

Which of the following is correct regarding gain contingencies?

they are not accrued

Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000 (20%) and $20,000 (80%); Year 2: $15,000 (50%); $25,000 (50%).The company's effective interest rate is 4%. Assuming the warranty costs are settled at the end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.

year 1: (10,000*0.2)+(20,000*0.8)=18,000 (15,000*0.5)+(25,000*0.5)=20,000 Present value of $1, n=1, i=4% 18,000*0.96154=17,307.72 Present value of $1, n=2, i=4% 20,000*0.92456=18,491.20 35,798.92

Greenbaum Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $20,000 (40%) and $30,000 (60%); Year 2: $30,000 (70%); $20,000 (30%).The company's effective interest rate is 5%. Calculate the estimated warranty liability using the expected cash flow method.

year 1: 20,000*0.4=8,000 30,000*0.6=18,000 8000+18000=26000*0.95238=24,761.88 year2: 30,000*0.7=21,000 20,000*0.3=6,000 21000+6000=27000*0.90703=24,489.81 24,761.88+24,489.81=49,251.69