Question Details

Rao Co. introduced a new line of machines 




1.	Sawyer Company self-insures its property for fire and storm damage.  If the company were to obtain insurance on the property, it would cost them $1,500,000 per year.  The company estimates that on average it will incur losses of $1,200,000 per year.  During 2014, $525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sawyer Company for 2014?
a.	$525,000 in losses and no insurance expense
b.	$525,000 in losses and $675,000 in insurance expense
c.	$0 in losses and $1,200,000 in insurance expense
d.	$0 in losses and $1,500,000 in insurance expense

	2.	A company offers a cash rebate of $2 on each $6 package of batteries sold during 2014.  Historically, 10% of customers mail in the rebate form.  During 2014, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers.  What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?
a.	$1,200,000; $1,200,000
b.	$1,200,000; $780,000
c.	$780,000;    $780,000
d.	$420,000;    $780,000

	3.	A company buys an oil rig for $3,000,000 on January 1, 2014.  The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330).  10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?
a.	Depreciation expense of $360,000
b.	Depreciation expense of $300,000 and interest expense of $23,133
c.	Depreciation expense of $300,000 and interest expense of $60,000
d.	Depreciation expense of $323,133 and interest expense of $23,133

	4.	During 2013, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer- defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)
		Sales		Actual Warranty Expenditures
2013	$   1,600,000	$    39,000
2014	2,500,000	65,000
2015	  2,100,000	  135,000
	$6,200,000	$239,000
		What amount should Rao report as a liability at December 31, 2015?
a.	$0
b.	$134,000
c.	$105,000
d.	$381,000

5.	Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014?
a.	$270,000
b.	$50,000
c.	$75,000
d.	$138,000





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