Question Details

Eaton Co. introduced a new product carrying a two-year warranty 



1.	Roasten Corp.'s payroll for the pay period ended October 31, 2014 is summarized as follows:
	Federal		  Amount of Wages Subject
Department	Total	Income Tax	              to Payroll Taxes	
Payroll	  Wages 	   Withheld		 	F.I.C.A.	Unemployment
Factory	$  75,000	$  9,000	$70,000	$32,000
Sales	22,000	3,000	16,000	2,000
Office	    18,000	    2,000	    8,000	     —	
	$115,000	$14,000	$94,000	$34,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee		7%  each
Unemployment					3%
		What amount should Roasten accrue as its share of payroll taxes in its October 31, 2014 balance sheet?
a.	$21,600.
b.	$15,020.
c.	$14,180.
d.	$7,600.

	2.	Yurman Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, 2013 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2013. Outstanding service contracts at December 31, 2013 expire as follows:
During 2014		During 2015		During 2016
	$150,000	$240,000	$105,000
		What amount should be reported as unearned service contract revenues in Yurman's December 31, 2013 balance sheet?
a.	$540,000.
b.	$495,000.
c.	$360,000.
d.	$330,000.

3.	Core Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Core's past experience indicates that only 75% of the stamps sold to licensees will be redeemed. Core's liability for stamp redemptions was $5,000,000 at December 31, 2013. Additional information for 2014 is as follows:
Stamp service revenue from stamps sold to licensees	$4,000,000
Cost of redemptions	3,320,000
		If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $3,000,000. What amount should Core report as a liability for stamp redemptions at December 31, 2014?
a.	$8,320,000.
b.	$5,680,000.
c.	$3,930,000.
d.	$4,680,000.

	4.	Neer Co. has a probable loss that 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 loss accrual should be
a.	zero.
b.	the maximum of the range.
c.	the mean of the range.
d.	the minimum of the range.

	5.	During 2014, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 3% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2014 and 2015 are as follows:
		Actual Warranty
	    Sales		Expenditures
2014	$   800,000	$12,000
2015	  1,000,000	  35,000
	$1,800,000	$47,000
		At December 31, 2015, (assuming the accrual method) Eaton should report an estimated warranty liability of
a.	$0.
b.	$15,000.
c.	$35,000.
d.	$43,000.
6.	In March 2015, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2015, no claims had yet been asserted against Kirk. However, Kirk's management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk's December 31, 2014 financial statements, for which the auditor's fieldwork was completed in April 2015, how should this casualty be reported?
a.	As a note disclosing a possible liability of $4,000,000.
b.	As an accrued liability of $400,000.
c.	As a note disclosing a possible liability of $400,000.
d.	No note disclosure of accrual is required for 2014 because the event occurred in 2015.





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