Question : 21) Franconia Sales offers warranties all their electronic goods.  Warranty : 1212481

 

21) Franconia Sales offers warranties on all their electronic goods.  Warranty expense is estimated at 2% of sales revenue.  In 2013, Franconia had $500,000 of sales.  In the same year, Franconia paid out $7,500 of warranty payments.  Which of the following is the entry needed to record the estimated warranty expense?

A)

Estimated warranty payable

7,500

 

       Cash

 

7,500

 

B)

Warranty expense

7,500

 

       Estimated warranty payable

 

7,500

 

C)

Warranty expense

10,000

 

       Estimated warranty payable

 

10,000

 

D)

Warranty expense

10,000

 

       Sales revenue

 

10,000

 

22) A contingent liability that is likely and can be reasonably estimated should be:

A) disclosed in a note to the financial statements.

B) accrued with a journal entry.

C) either disclosed in a note or accrued with a journal entry.

D) ignored until the liability materializes.

 

23) Franconia Sales offers warranties on all their electronic goods.  Warranty expense is estimated at 2% of sales revenue.  In 2013, Franconia had $500,000 of sales.  In the same year, Franconia paid out $7,500 of warranty payments.  Which of the following is the entry needed to record the disbursement of warranty payments?

A)

Estimated warranty payable

7,500

 

    Cash

 

7,500

 

B)

Warranty expense

7,500

 

    Estimated warranty payable

 

7,500

 

C)

Warranty expense

10,000

 

    Estimated warranty payable

 

10,000

 

D)

Warranty expense

10,000

 

    Sales revenue

 

10,000

 

 

24) A contingent liability that has a remote chance of occurrence and an uncertain amount should be:

A) disclosed in a note to the financial statements.

B) accrued with a journal entry.

C) either disclosed in a note or accrued with a journal entry.

D) ignored until the liability materializes.

25) A contingent gain that is likely and can be reasonably estimated should be:

A) disclosed in a note to the financial statements.

B) accrued with a journal entry.

C) either disclosed in a note or accrued with a journal entry.

D) ignored until the actual gain materializes.

 

Table 11-13

 

Arc Digital starts the year with balances in its Estimated warranty payable account and Warranty expense account as shown below.  During the year, there were $190,000 of sales and $3,200 of warranty repair payments.  Arc Digital estimates warranty expense at 1.5% of sales.

 

 

26) Refer to Table 11-13. At the end of the year, what was the balance in the warranty expense account?

A) $2,850 debit

B) $1,250 credit

C) $3,200 debit

D) $1,420 debit

 

27) Refer to Table 11-13. At the end of the year, what was the balance in the estimated warranty payable account?

A) $2,850 debit

B) $1,050 credit

C) $3,200 debit

D) $1,420 debit

Table 11-14

 

Tractor World offers warranties on all their tractors.  They estimate warranty expense at 2.4% of sales.  At the beginning of 2013, the estimated warranty payable account had a credit balance of $900.  During the year, Tractor World had $285,000 of sales, and had to pay out $5,100 in warranty payments. 

 

28) Refer to Table 11-14. At the end of the year, how much warranty expense was reported on the income statement?

A) $2,640

B) $5,100

C) $4,200

D) $6,840

 

29) Refer to Table 11-14. At the end of the year, what balance in estimated warranty payable would be included in the balance sheet?

A) $2,640

B) $5,100

C) $4,200

D) $6,840

 

Match the following.

 

A) warranty

 

30) Product guarantee against defects

 

31) Bill’s Bargain Vacuums warrants all of its products for one full year against any defect in manufacturing. Sales for 2013 and 2014 were $758,000 and $871,000, respectively. Bill’s Bargain Vacuums expects warranty claims to run 4.5% of annual sales. Bill’s paid $30,150 and $38,290, respectively, in 2013 and 2014 in warranty claims.

 

1)  Compute Bill’s warranty expense for 2013 and 2014.

2)  Compute the balance in estimated warranty payable on December 31, 2014, assuming the January 1, 2013, balance in the account was $2,980.

 

32) For each of the following contingent situations, state the proper accounting treatment.

 

a)Glendale Company is involved in several lawsuits at the end of the current year involving a defective product. Glendale’s legal counsel feels it is probable that Glendale will incur losses of $500,000.

b)Riverside Company is involved with Canada Revenue Agency in a tax dispute. Riverside’s legal counsel feels it is possible, but not likely that Riverside will incur losses of $200,000.

c)Daniels Company is involved in a lawsuit, which its legal counsel feels has no merit. Legal counsel advises Daniels the chances of incurring a loss are extremely remote.

d)Sparks Brothers is involved in a lawsuit against a supplier and is anticipating a cash settlement in its favour of $500,000. Legal counsel advises Sparks Brothers that the chances of winning the suit and being awarded the $500,000 are excellent.