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Question(s) / Instruction(s):

A company has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit. The companys lawyers believe it is probable that the lawsuit will result in an actual liability of approximately $100,000. Which of the following entries should be made?  

A) Loss on lawsuit            100,000

                Estimated lawsuit loss payable                   100,000 

B) Cash                 100,000

                Loss on lawsuit                  100,000 

C) Estimated lawsuit loss payable             100,000

                Cash                      100,000 

D) Loss on lawsuit            100,000

                Cash                      100,000 

 

 

42)          In which of the following periods should the expense for warranty costs be recorded?  

a.            The period when the product is sold  

b.            The period when the product is repaired or replaced  

c.             The period when cash is paid to repair or replace the product  

d.            The period when cash is collected for the sale of the product  

 

 

43)          Which of the following accounting principles requires that warranty expenses must be estimated and recognized in the same period as the related sales revenue is recognized?  

a.            The matching principle  

b.            The full disclosure principle  

c.             The revenue recognition principle  

d.            The conservatism principle  

 

 

44)          Booker Company reported sales revenue for 2007 of $800,000. The products were sold with a six-month warranty. Members of Bookers management estimate the cost of the warranty will be equal to 3% of sales revenue. Which of the following is included in the entry to record the repair of a product under warranty?  

a.            A debit to estimated warranty payable for $24,000  

b.            A credit to estimated warranty payable when the products are repaired or replaced  

c.             A debit to estimated warranty payable in 2007 for $24,000  

d.            A debit to warranty expense of $24,000  

 

 

45)          Which of the following is included in the entry to record warranty expense?  

a.            A debit to warranty expense  

b)            A credit to estimated warranty payable  

a.            A credit to warranty expense  

b.            A debit to estimated warranty payable  

 

 

46)          Which of the following is NOT a known liability?  

a.            FICA tax payable  

b.            Income tax payable  

c.             Warranty payable  

d.            Accounts payable  

 

 

47)          Which of the following is the proper response for a liability that exists but the exact amount of the liability is not known?  

a.            The liability should be treated as a contingent liability.  

b.            The amount of the liability should be estimated.  

c.             The liability should be ignored.  

d.            The liability should be reported in the notes to the financial statements.  

 

 

48)          In the current year, a company sells 1,000 units of a product for $100 each. Each product is sold with a one-year warranty. It is estimated that warranty costs will be 10% of the cost of the product. Historically, 60% of the warranty repairs are completed in the year of sale and 40% of the warranty repairs are completed in the year after the sale. What is the correct amount of warranty expense for the current year?  

a.            $10,000  

b.            $ 6,000  

c.             $ 4,000  

d.            $12,000  

 

 

49)          For which of the following taxes is there a ceiling on the amount of annual earnings subject to the tax?  

a.            Only the FICA tax and the federal unemployment  

b.            The FICA tax and the state and federal unemployment taxes  

c.             Only the state and federal unemployment taxes  

d.            Only the FICA tax  

 

 

50)          Which of the following is the total amount of employee compensation before deductions?  

a.            Gross pay  

b.            Net pay  

c.             Take-home pay  

d.            Compensation after withholdings  

 

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