Contingencies - CPA Financial Accounting and Reporting (FAR)
Card 1 of 24
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
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The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
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Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
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In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
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Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
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When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
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Of the following costs, which is associated with exit and disposal activities?
Of the following costs, which is associated with exit and disposal activities?
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Relocation costs for employees are related with exit and disposal activities.
Relocation costs for employees are related with exit and disposal activities.
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Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
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An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
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Which terms indicate that a contingent liability likely should be recognized?
Which terms indicate that a contingent liability likely should be recognized?
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Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
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The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
Tap to reveal answer
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
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Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Tap to reveal answer
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
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Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
Tap to reveal answer
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
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Of the following costs, which is associated with exit and disposal activities?
Of the following costs, which is associated with exit and disposal activities?
Tap to reveal answer
Relocation costs for employees are related with exit and disposal activities.
Relocation costs for employees are related with exit and disposal activities.
← Didn't Know|Knew It →
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
Tap to reveal answer
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
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Which terms indicate that a contingent liability likely should be recognized?
Which terms indicate that a contingent liability likely should be recognized?
Tap to reveal answer
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
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The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
Tap to reveal answer
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
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Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Tap to reveal answer
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
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Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
Doe Corp has guaranteed the indebtedness of Rae Corp. Doe can reasonably estimate a loss on this debt ranging from $100,000 to $150,000. Which of the following statements is correct regarding the contingent liability recorded for this debt?
Tap to reveal answer
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
When recording contingent liabilities, a company should record the most likely loss amount. However, if no amount is more probable than any other, a company records the smallest possible loss.
← Didn't Know|Knew It →
Of the following costs, which is associated with exit and disposal activities?
Of the following costs, which is associated with exit and disposal activities?
Tap to reveal answer
Relocation costs for employees are related with exit and disposal activities.
Relocation costs for employees are related with exit and disposal activities.
← Didn't Know|Knew It →
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
Tap to reveal answer
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
← Didn't Know|Knew It →
Which terms indicate that a contingent liability likely should be recognized?
Which terms indicate that a contingent liability likely should be recognized?
Tap to reveal answer
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
← Didn't Know|Knew It →
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
Tap to reveal answer
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
← Didn't Know|Knew It →
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Company A has a contingent loss. At the end of Year 1, several possible losses and their probabilities are estimated, including a $130,000 loss (35% chance), $180,000 loss (55% chance), or $80,000 (10% chance). The company also believes it is reasonably possible that the loss could be as high as $230,000. In Year 2, the loss is settled for $172,000. What income statement effect will the company recognize in Year 2?
Tap to reveal answer
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
In Year 1, the company will record a contingent loss of $180K, because this is the most likely loss at a 55% chance. In Year 2, then company will need to adjust the liability to reflect the actual loss of $172K, recording an $8K recovery of cost.
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