9) Warranty expense would be included in the operating expense section of the income statement.
10) A certain contingent liability was evaluated at year-end, and considered to have a remote possibility of becoming an actual liability. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.
11) A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility of becoming an actual liability. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.
12) A certain contingent liability was evaluated at year-end; the company felt it was probable that it would become an actual liability, and the amount could be reasonably estimated. If the accountant decided NOT to report it on the balance sheet or in the notes to the financial statement, this could be considered unethical behavior.
13) Which of the following principles requires that warranty expense be recorded in the period that revenue is recorded?
A) Consistency principle
B) Matching principle
C) Revenue principle
D) Materiality concept
14) A company has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit. The company's lawyers believe it is more than remote, but less than probable, that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company's management?
A) The liability should be estimated and recorded as an expense.
B) The situation should be described in a note to the financial statements.
C) The possible liability should be ignored.
D) Management should consider resigning.
15) A restaurant has been sued because a customer claims to have found a bug in her chili. The company's lawyers believe there is only a remote possibility that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company's management?
A) The situation should be described in a note to the financial statements.
B) The possible liability should be ignored.
C) The liability should be estimated and recorded as an expense.
D) Management should consider resigning.
16) Which of the following is TRUE of a contingent liability?
A) It is a potential liability that depends on a future event.
B) It is an actual liability that is difficult to estimate.
C) It is an actual liability that depends on a past event.
D) It is a liability resulting from a lawsuit settled in court.
17) Ace Appliances sells dishwashers with a 3-year warranty. In 2013, there are $90,000 of sales revenues for dishwashers. The company estimates warranty expense at 3% of revenues. What is the total estimated warranty payable for Ace regarding the sales in 2013?
A) $2,700
B) $600
C) $1,400
D) $3,000
18) Ace Appliances sells dishwashers with a 3-year warranty. In 2013, there are $90,000 of sales revenues for dishwashers. The company estimates warranty expense at 3% of revenues. What is the 2013 warranty expense?
A) $2,700
B) $800
C) $0
D) $3,000