Chapter 8 Q&A

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty expense for the year?

$16,000

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty liability at the end of the year?

$7,000

Hayne Co. filed suit against Hillsborough, Inc., seeking damages for copyright violations. Hillsborough's legal counsel believes it is probable that Hillsborough will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Hillsborough report this litigation?

As a liability for $100,000 with disclosure of the range

On November 1, 2017, Kensal Green, Inc. signed a $200,000, 6%, six‐month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2018. What is the amount of the adjusting entry for interest expense on the note at December 31, 2017?

Debit $2,000

Burlingame, Inc. borrowed $10,000 from a local bank and signed a promissory note. What entry should Burlingame record?

Debit Cash, $10,000; Credit Notes Payable, $10,000.

Funston Corporation is facing a class‐action lawsuit in the upcoming year. It is possible, but not probable, that the corporation will have to pay a settlement of approximately $2,000,000 in the upcoming year. How would this fact be reported, if financial statements are prepared at the end of the current month.

Describe the potential liability in the notes to the financial statements.

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be:

Disclosed and reported as a liability

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be:

Disclosed, but not reported as a liability

We record gain contingencies when the gain is probable and the amount is reasonably estimable. True or False?

False

We record interest expense in the period in which we pay it, rather than in the period we incur it. True or False?

False

Ford estimates engine warranty expense in the year a car is sold. This best follows which of the following accounting principles?

matching

A contingency is best described as a:

potential liability