51. At the beginning of 2012, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2012 were $180 million. Five percent of the units sold were returned in 2012 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel’s 2012 income statement is:
A. $5.3 million.
B. $7.2 million.
C. $9.0 million.
D. $27.0 million.
52. Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers’ goals are faulty and will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the Warranty Liability at the end of the year?
A. $0.
B. $16,000.
C. $7,000.
D. $6,750.
53. Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2012 have been returned to them yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders’ equity in 2012?
A. A decrease in assets and decrease in stockholders’ equity.
B. No journal entry is necessary until products under warranty are returned.
C. An increase in stockholders’ equity and a decrease in liabilities.
D. A decrease in stockholders’ equity and an increase in liabilities.
54. Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2012, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2012. What amount of warranty liability should be reported at December 31, 2012?
A. $2,250.
B. $3,375.
C. $5,625.
D. None, all expected returns from warranties have been received.
55. Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?
A. $44,000.
B. $80,000.
C. $36,000.
D. $480,000.
56. Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:
A. Only if the amount is known.
B. Only if the amount is known or reasonably estimable.
C. Unless the amount is not reasonably estimable.
D. Even if the amount is not reasonably estimable.
57. Gain contingencies usually are recognized in a company’s income statement when:
A. The gain is certain.
B. The amount can be reasonably estimated.
C. The gain is reasonably possible and the amount can be reasonable estimated.
D. The gain is probable and the amount can be reasonably estimated.
58. A contingent liability should be accrued on a company’s financial statements only if the likelihood of a loss occurring is:
A. At least remotely possible and the amount of the loss is known.
B. At least reasonably possible and the amount of the loss is known.
C. At least reasonably possible and the amount of the loss can be reasonably estimated.
D. Probable and the amount of the loss can be reasonably estimated.
59. When a gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:
A. Reported in the income statement and disclosed.
B. Offset against stockholders’ equity.
C. Disclosed, but not recognized in the income statement.
D. Reported in the income statement, but not disclosed.
60. A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:
A. The likelihood of a loss is remote.
B. The incurrence of a loss is reasonably possible.
C. The incurrence of a loss is probable.
D. The likelihood of a loss is eighty percent.
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