Question 1

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

Accepted Answer

A)  $85,000 of expense 
B)  A benefit in its income statement of $15,000 
C)  An extra expense in its income statement of $15,000 
D)  Neither a benefit or an expense

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Which asset's valuation is least affected by uncertainty?

Accepted Answer

A)  Accounts receivable of a toy manufacturer 
B)  Inventory of a toy manufacturer 
C)  Cash 
D)  Land

Question 6

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

Accepted Answer

A)  Zero 
B)  300000 
C)  500000 
D)  800000

Question 7

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

Accepted Answer

A)  Neither disclose anything nor accrue a liability 
B)  Disclose the facts, and not accrue any liability 
C)  Accrue a $400,000 liability, but do not make a disclosure 
D)  Accrue a $400,000 liability and make a disclosure of the facts

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  Managers who are trying to take the company private by buying stock from the public 
B)  Bankers who have loaned to the company 
C)  Bankers who are considering lending money to the company 
D)  Employees who get bonuses based on profits

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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."

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  The FASB favors conservatism in both its conceptual framework and in all of its existing standards. 
B)  The FASB is against conservatism in its conceptual framework and in all of its existing standards. 
C)  The FASB is against conservatism all of its existing standards, but in its conceptual framework it favors conservative accounting. 
D)  The FASB is against conservatism in its conceptual framework, but some of the existing standards use a conservative approach.

Question 14

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

Accepted Answer

A)  Under-reporting of income in one period often leads to over-reporting income in future periods. 
B)  Bankers and creditors tend to be unhappy with conservative balance sheets. 
C)  This accounting generally forces companies to pay unduly high taxes. 
D)  This accounting tends to make income too volatile.

Question 15

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

Accepted Answer

A)  The allowance method gives a higher value of the company's accounts receivable asset. 
B)  The allowance method requires estimation. 
C)  The allowance method provides worse matching of revenues and expenses. 
D)  The allowance method provides users with less relevant information.

Question 16

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

Accepted Answer

A)  Restate its financial statements since the factory was bought, to reflect depreciation based on a 50-year life of the factory 
B)  Not restate any prior year statements, but adjust the opening balance for accumulated depreciation in 2016 to be what it should have been, using depreciation based on a 50-year estimated life, and use the 50-year life for future years 
C)  Reflect the change in estimate in 2016 and future years, without making any adjustment for using the 40-year estimate in the past 
D)  Make no adjustments, and continue to use the original 40-year estimate

Question 17

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?

Accepted Answer

A)  These criteria do not include any mention of the measurability of the item. 
B)  These criteria indicate that the item must be measurable in some way, even if the measurement has very low reliability. 
C)  These criteria indicate that the item must be measurable with sufficient reliability. 
D)  These criteria indicate that the item's measurement must be highly certain.

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  After two years are up, once it knows the full costs 
B)  As items break and it incurs costs 
C)  At the time of sale, based on its estimate of what the warranty costs will be 
D)  Either as items break or after two years are up are acceptable alternatives under GAAP

Question 20

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:

Accepted Answer

A)  Change the reported expenses for 2017, and re-issue its 2017 reports 
B)  Report a lower 2018 bad debt expense than it would have if its 2017 estimate had been accurate 
C)  Report a higher 2018 bad debt expense than it would have if its 2017 estimate had been accurate 
D)  Ignore the incorrect estimate from 2017, and include only the bad debts related to 2018 sales in the 2018 income statement

Exam 8: Reconciling Bank and Credit Card Statements

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?

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: