Question Details

Disclosure of a contingent liability



1.	Warranty expenses are reported on the income statement as
		a.	administrative expenses.
		b.	part of cost of goods sold.
		c.	contra-revenues.
		d.	selling expenses.


	2.	Marin Company sells 4,000 units of its product in 2011 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000.
What amount should Marin Company report as Warranty Expense in its 2011 income statement?
		a.	$6,000.
		b.	$4,000.
		c.	$2,000.
		d.	$30,000.



	3.	Marin Company sells 4,000 units of its product in 2011 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000.
What amount will be reported on Marin Company's statement of financial position as Estimated Warranty Liability on December 31, 2011?
		a.	$4,000.
		b.	$6,000.
		c.	$2,000.
		d.	Cannot be determined.



4.	Which of the following items would not be identified if a contingent liability were disclosed in a financial statement note?
		a.	The nature of the item
		b.	The expected outcome of the future event
		c.	A numerical probability of the expected loss
		d.	The amount of the contingency, if known


	5.	Disclosure of a contingent liability is usually made
		a.	parenthetically, in the body of the statement of financial position.
		b.	parenthetically, in the body of the income statement.
		c.	in a note to the financial statements.
		d.	in the management discussion section of the financial statements.







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