Question Details

Information available prior to the issuance of the financial statements 


1.	Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs.  Any liability for the warranty
a.	should be reported as long-term.
b.	should be reported as current.
c.	should be reported as part current and part long-term.
d.	need not be disclosed.

	2.	Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2014. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
a.	No recognition
b.	Note disclosure only
c.	Operating expense of $800,000 and liability of $800,000
d.	Appropriation of retained earnings of $800,000

	3.	Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated.  Based on the above facts, an estimated loss contingency should be
a.	accrued.
b.	disclosed but not accrued.
c.	neither accrued nor disclosed.
d.	classified as an appropriation of retained earnings.

	4.	Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
a.	zero.
b.	the minimum of the range.
c.	the mean of the range.
d.	the maximum of the range.

	5.	Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
a.	the Darren Company admits guilt.
b.	the court will decide the case within one year.
c.	the damages appear to be material.
d.	the cause for action occurred during the accounting period covered by the financial statements.




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