Question Details

How much liability for outstanding premiums should be recorded at the end of 2010 



1.	Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.  The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?
A)	Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
B)	No journal entry is required.
C)	Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
D)	Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.


2.	Recycle Exploration is involved with innovative approaches to finding energy reserves. Recycle recently built a facility to extract natural gas at a cost of $15 million. However, Recycle is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?
A)	No journal entry required.
B)	Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000
C)	Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.
D)	Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.

3.	Electronics4U manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $200 per unit sold and reported a liability for estimated warranty costs $6.5 million at the beginning of this year. If during the current year, the company sold 50,000 units for a total of $243 million and paid warranty claims of $7,500,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?
A)	$2,500,000.
B)	$3,500,000.
C)	$9,000,000.
D)	$10,000,000.


4.	Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1.00. The company estimates that 60% of the boxtops will be redeemed. In 2010, 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 $2.50 each, How much liability for outstanding premiums should be recorded at the end of 2010 ?
A)	$25,000
B)	$37,500
C)	$62,500
D)	$87,500



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