Exam 8: Reconciling Bank and Credit Card Statements

The Laramie Company recorded an estimated liability for warranty claims related to its 2016 sales of vacuum cleaners of $100,000 in its 2016 balance sheet. The warranty allows customers to get free repairs for two years. By the end of 2018, the company had paid $85,000 of claims. It had no further liability for repairs for the 2016 sales. In the 2018 income statement, the company should recognize

The FASB requires companies to record liabilities for contingencies as long as their likelihood is more than "remote."

The normal rule for accounting for research and development costs is to record these costs as assets.

One way companies deal with uncertainty is by using flexible budgets.

Which asset's valuation is least affected by uncertainty?

The Schnoll Company uses the allowance method of accounting for bad debts. In 2016, its first year of operations, the Schnoll Company had sales of $80 million on credit. Based on its historical experience, it expects that it will collect all but 1% of these amounts. Over the course of the year, it makes entries to record $800,000 of bad debt expense and to increase the allowance for doubtful accounts. During 2016, it became aware of $300,000 of amounts from specific customers that were not colle

The Argyle Corp. is the defendant in a lawsuit involving someone who was injured on its property in 2016. At the end of 2017, the company's attorneys tell the company that it is "reasonably possible" that the company will lose the suit, and the most likely amount it will have to pay is $400,000. This is a material number. The proper accounting is to

Under GAAP, the rule for whether a loss contingency is deemed "probable" is whether its probability is more than 50%.

In general, if a company makes an incorrect estimate of bad debt expense one year, this incorrect estimate will not affect any future years' income.

The financial statement users who are likely to object to very conservative methods of accounting are:

One way that managers deal with uncertainty about future events when they prepare budgets is to include some amounts for "miscellaneous expenses" or "contingencies."

The method of accounting for bad debts that recognizes an estimated expense in the period of the related sales, before the company knows which specific customers' are not going to pay, is the "allowance method."

The most accurate statement of the FASB's position on conservative accounting is:

One problem that the FASB has noted with overly conservative accounting is that:

A primary disadvantage of the allowance method of recording bad debts, compared to the direct write-off method, is that:

The Maple Corp. bought its factory building in 1990. At the time, it expected to use the factory for 40 years, so it depreciated it using a 40-year life. In 2016, it decided that the factory will last for 50 years. Under GAAP, Maple Corp. should

Which of the following statements best describes the FASB's general criteria for when an item should be recognized and recorded in the financial statements?

If a company does not know at the end of a year exactly how much of its accounts receivable will not be collected, it is not allowed under GAAP to estimate the bad debt expense.

The Furman Company sells products, with a warranty if they break within two years. It should record an expense for the warranty costs:

The Ditmas Corp. uses the allowance method of recording bad debt expense. In 2017, it overestimated the amount of bad debt expense, and recorded an allowance that was too large. At the end of 2018, when it learns that more customers are paying than it expected, it will: