Appf

APPENDIX F
OTHER SIGNIFICANT LIABILITIES
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 K 3. 1 C 5. 2 K 7. 2 K 9. 3 K
2. 1 K 4. 1 K 6. 2 K 8. 3 K 10. 3 C
Multiple Choice Questions
11. 1 C 15. 1 K 19. 1 K 23. 2 K 27. 3 K
12. 1 K 16. 1 K 20. 1 K 24. 2 C 28. 3 C
13. 1 K 17. 1 AP 21. 2 K 25. 2 K 29. 3 AP
14. 1 K 18. 1 AP 22. 2 K 26. 2 K 30. 3 K
Exercises
31. 1 AP 33. 1 AP 35. 2 AP
32. 1,3 AP 34. 1,3 AP 36. 2 AP
Completion Statements
37. 1 K 38. 2 K
Matching
39. 1 K
Short-Answer Essay
40. 1 S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 4. TF 13. MC 16. MC 19. MC 32. Ex 37. C
2. TF 11. MC 14. MC 17. MC 20. MC 33. Ex 39. Ma
3. TF 12. MC 15. MC 18. MC 31. Ex 34. Ex 40. S-A
Study Objective 2
5. TF 7. TF 22. MC 24. MC 26. MC 36. Ex
6. TF 21. MC 23. MC 25. MC 35. Ex 38. C
Study Objective 3
8. TF 10. TF 28. MC 30. MC 34. Ex
9. TF 27. MC 29. MC 32. Ex
Note: TF = True-False C = Completion Ma = Matching

MC = Multiple Choice Ex = Exercise S-A = Short-Answer Essay
F-2 Test Bank for Financial Accounting: IFRS Edition
CHAPTER STUDY OBJECTIVES
1. Describe the accounting and disclosure requirements for provisions and contingent
liabilities. If it is probable that the obligation will require a cash outflow (if it is likely to occur)
and the amount can be reasonably estimabled, the liability should be recorded in the
accounts as a provision. If a cash outflow is only reasonably possible (it could occur), then it
should be disclosed only in the notes to the financial statements as a contingent liability. If the
possibility that the contingency will happen is remote (unlikely to occur), it need not be
recorded or disclosed.
2. Contrast the accounting for operating and finance leases. For an operating lease, lease
(or rental) payments are recorded as an expense by the lessee (renter). For a finance lease,
the lessee records the asset and related obligation at the present value of the future lease
payments.
3. Identify additional fringe benefits associated with employee compensation. Additional
fringe benefits associated with wages are paid absences (paid vacations, sick pay benefits,
and paid holidays), postretirement health care and life insurance, and pensions. The two most
common types of pension arrangements are a defined-contribution plan and a defined-benefit
plan.
TRUE-FALSE STATEMENTS
1. Contingent liabilities should be recorded in the accounts if there is a remote possibility that
the contingency will actually occur.
Answer: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis,
AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No
2. A provision is a liability of uncertain timing or amount.

Answer: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis,
AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
3. In concept, estimating Warranty Expense when products are sold with a warranty is
similar to estimating Bad Debts Expense based on credit sales.
Answer: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis,
4. Repair costs incurred in honoring warranty contracts should be debited to Estimated

Warranty Liability.
Answer: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
5. The renting of an apartment is an example of a finance lease.

Answer: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
6. An operating lease transfers substantially all the benefits and risks of ownership to the
lessee.
Answer: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis,
AICPA-PC: Problem Solving/Decision Making, IMA: Investment Decision, Sector: General, IFRS: No
Other Significant Liabilities F-3
7. A finance lease requires the lessee to record the lease as a purchase of an asset.
Answer: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
8. When vacation benefits are paid, Vacation Benefits Expense is debited.

Answer: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
9. Postretirement benefits are accounted for on a cash basis.

Answer: F, SO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN:
Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No
10. In a defined-contribution plan, an employer only recognizes pension expense for the
amount that the employer is required to contribute under the plan.
Answer: T, SO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 3. T 5. F 7. T 9. F
2. T 4. T 6. F 8. F 10. T
MULTIPLE CHOICE QUESTIONS

11. If an event makes it probable that a company will experience a cash outflow but it cannot
reasonably estimate the amount, the contingent liability
a. should be recorded in the accounts.
b. should be disclosed in the notes to the financial statements.
c. should not be recorded or disclosed in the notes until the contingency actually
happens.
d. must be paid for the amount estimated.
Answer: b, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN:
Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No
12. The accounting for warranty cost is based on the expense recognition principle, which
requires that the estimated cost of honoring warranty contracts should be recognized as
an expense
a. when the product is brought in for repairs.
b. in the period in which the product was sold.
c. at the end of the warranty period.
d. only if the repairs are expected to be made within one year.
Answer: b, SO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
13. If an event may become an actual liability in the future, it is called a

a. potential liability.
b. hypothetical liability.
c. probabilistic liability.
d. contingent liability.
Answer: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
14. A contingency liability that is remote

a. should be disclosed in the financial statements.
b. must be accrued as a loss.
c. does not need to be disclosed.
d. is recorded as a contingent liability.
Answer: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
15. The accounting for warranty costs is based on the

a. going concern principle.
b. expense recognition principle.
c. conservatism principle.
d. objectivity principle.
Answer: b, SO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
16. Warranty expenses are reported on the income statement as

a. administrative expenses.
b. part of cost of goods sold.
c. contra-revenues.
d. selling expenses.
Answer: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
17. Marin Company sells 4,000 units of its product in 2011 for $500 each. The selling price
includes a one-year warranty on parts. It is expected that 3% of the units will be defective
and that repair costs will average $50 per unit. In the year of sale, warranty contracts are
honored on 80 units for a total cost of $4,000.
What amount should Marin Company report as Warranty Expense in its 2011 income
statement?
a. $6,000.
b. $4,000.
c. $2,000.
d. $30,000.
Answer: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC:
Problem Solving/Decision Making, IMA: Reporting, Sector: Mfg, IFRS: No
18. Marin Company sells 4,000 units of its product in 2011 for $500 each. The selling price
includes a one-year warranty on parts. It is expected that 3% of the units will be defective
and that repair costs will average $50 per unit. In the year of sale, warranty contracts are
honored on 80 units for a total cost of $4,000.
What amount will be reported on Marin Company's statement of financial position as
Estimated Warranty Liability on December 31, 2011?
a. $4,000.
b. $6,000.
c. $2,000.
d. Cannot be determined.
Answer: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC:
Problem Solving/Decision Making, IMA: Reporting, Sector: Mfg, IFRS: No
19. Which of the following items would not be identified if a contingent liability were disclosed
in a financial statement note?
a. The nature of the item
b. The expected outcome of the future event
c. A numerical probability of the expected loss
d. The amount of the contingency, if known
Answer: c, SO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
20. Disclosure of a contingent liability is usually made

a. parenthetically, in the body of the statement of financial position.
b. parenthetically, in the body of the income statement.
c. in a note to the financial statements.
d. in the management discussion section of the financial statements.
21. A lease where the intent is temporary use of the property by the lessee with continued
ownership of the property by the lessor is called
a. off-balance sheet financing.
b. an operating lease.
c. a finance lease.
d. a purchase of property.
Answer: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
22. Which of the following is not a condition which would require the recording of a lease
contract as a finance lease?
a. The lease transfers ownership of the property to the lessee.
b. The lease contains a bargain purchase option.
c. The lease term is a minor portion of the economic life of the leased property.
d. The present value of the lease payments represents substantially all of the fair value
of the leased property.
Answer: c, SO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
23. In a lease contract,

a. the owner of the property is called the lessee.
b. the presence of a bargain purchase option indicates that it is a finance lease.
c. the renter of the property is called the lessor.
d. there is always a transfer of ownership at the end of the lease term.
Answer: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
24. Which of the following statements concerning leases is true?

a. Finance leases are favored by lessees.
b. The appearance of the account, Leased Asset, on the statement of financial position,
signifies an operating lease.
c. The portion of a lease liability expected to be paid in the next year is reported as a
current liability.
d. Present value is irrelevant in accounting for leases.
Answer: c, SO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
25. If the present value of lease payments represents substantially all of the fair value of the
leased property, the
a. conditions are met for the lease to be considered a finance lease.
b. lease is uneconomical and should not be entered into.
c. lease may be classified as an operating lease.
d. recording of a lease liability is optional—that is, the off-balance-sheet approach can be
elected.
Answer: a, SO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
26. In a finance lease, the amount capitalized is the

a. sum of the lease payments over the life of the lease.
b. fair value of the leased asset on the date the lease is signed.
c. present value of the lease payments.
d. future value of the asset as of the lease termination date.
27. Postretirement benefits consist of payments by employers to retired employees for

a. health care and life insurance only.
b. health care and pensions only.
c. life insurance and pensions only.
d. health care, life insurance, and pensions.
Answer: d, SO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis,
28. The paid absence that is most commonly accrued is

a. voting leave.
b. vacation time.
c. maternity leave.
d. disability leave.
Answer: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Reporting, AICPA-
PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
29. Larson Company has thirty employees who each earn $120 per day. If they accumulate
vacation time at the rate of 1.5 vacation days for each month worked, the amount of
vacation benefits that should be accrued at the end of the month is
a. $360.
b. $3,600.
c. $5,400.
d. $540.
Answer: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-
PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No
30. An employer's estimated cost for postretirement benefits for its employees should be
a. recognized as an expense when paid.
b. recognized as an expense during the employees' work years.
c. recognized as an expense during the employees' retirement years.
d. charged to the goodwill account because providing employees with benefits generates
employee goodwill.
Answer: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
Answers to Multiple Choice Questions
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
11. b 14. c 17. a 20. c 23. b 26. c 29. c
12. b 15. b 18. c 21. b 24. c 27. d 30. b
13. d 16. d 19. c 22. c 25. a 28. b
EXERCISES
Ex. 31
Sam Myers sells televisions with a 2-year warranty. Past experience indicates that 2% of the units
sold will be returned during the warranty period for repairs. The average cost of repairs under
warranty is estimated to be $50 per unit. During 2011, 12,000 units were sold at an average price
of $400. During the year, repairs were made on 70 units at a cost of $4,000.
Instructions
Prepare journal entries to record the repairs made under warranty and estimated warranty
expense for the year.
Answer: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
Solution 31 (5 min.)
Estimated Warranty Liability...................................................... 4,000
Repair Parts/Wages Payable............................................ 4,000
(To record cost of honoring 50 warranties)
Warranty Expense..................................................................... 12,000

Estimated Warranty Liability.............................................. 12,000
(To accrue estimated warranty costs on 240 warranty
contracts)
Number of units sold 12,000

Estimated rate of defective units × 2%
Total estimated defective units 240
Average warranty repair costs × $50
Estimated Warranty Expense $12,000
Ex. 32
Hutton Cape Company, which prepares annual financial statements, is preparing adjusting
entries on December 31. Analysis indicates the following:
1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of

damages. Legal counsel believes it is unlikely that the company will have to pay any
damages.
2. Employees are entitled to one day's vacation for each month worked. The company employs
50 people who earn $120 per day and 25 who earn $160 per day. All employees worked the
entire year.
3. The company is a defendant in a $500,000 product liability lawsuit. Legal counsel believes
that the company probably will have to pay the amount requested.
4. The company has a defined-benefit pension plan in which total pension expense for
December is $50,000. The company funds one half of the expense and records a liability or
the balance due.
Instructions
Prepare any adjusting entries necessary at the end of the year.
Answer: N/A, SO: 1,3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
1. No entry—loss is not probable.
2. Vacation Benefits Expense.................................................. 120,000

Vacation Benefits Payable ......................................... 120,000
[(50 × $120) + (25 × $160)] × 12
3. Estimated Loss from Lawsuit............................................... 500,000

Estimated Liability from Lawsuit.................................. 500,000
4. Pension Expense................................................................. 50,000

Pension Liability.......................................................... 25,000
Cash........................................................................... 25,000
Ex. 33
Sandra Sikes sells exercise machines for home use. The machines carry a 2-year warranty. Past
experience indicates that 5% of the units sold will be returned during the warranty period for
repairs. The average cost of repairs under warranty is $30 for labor and $50 for parts per unit.
During 2011, 5,000 exercise machines were sold at an average price of $800. During the year,
160 of the machines that were sold were repaired at the average price per unit.
Instructions
(a) Prepare the journal entry to record the repairs made under warranty.
(b) Prepare the journal entry to record the estimated warranty expense for the year.
AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: Retail, IFRS: No
(a) Labor on repaired units: $30 × 160 = $4,800
Parts on repaired units: $50 × 160 = $8,000
Estimated Warranty Liability.............................................. 12,800

Repair Parts............................................................. 8,000
Wages Payable........................................................ 4,800
(To record honoring of 160 warranty contracts)
(b) 5,000 units × 5% = 250 units

250 units × $80 = $20,000
Warranty Expense............................................................ 20,000
Estimated Warranty Liability.................................. 20,000
(To record estimated cost of honoring 250
warranty contracts)
The balance in Estimated Warranty Liability at year end is $7,200 ($20,000 – $12,800)
which equals the expected cost of honoring the 90 remaining expected warranty contracts.
Ex. 34
Roberts Company is preparing monthly adjusting entries at December 31. An analysis reveals the
following:
1. During December, Roberts Company sold 4,000 units of a product that carries a 60-day
warranty. The sales for this product totaled $100,000. The company expects 4% of the units
to need repair under the warranty and it estimates that the average repair cost per unit will be
$15.
2. The company has been sued by a disgruntled employee. Legal counsel believes that it is
possible that the company will have to pay $200,000 in damages.
3. The company has been named as one of several defendants in a $400,000 damage suit.
Legal counsel believes it is unlikely that the company will have to pay any damages.
4. Employees earn vacation pay at a rate of 1 day per month. During December, ten employees
qualify for vacation pay. Their average daily wage is $80 per employee.
Instructions
Prepare adjusting entries, if required, for each of the four items.
Answer: N/A, SO: 1,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
F - 10 Test Bank for Financial Accounting: IFRS Edition
1. 4,000 units × 4% = 160 units expected to be defective.
160 units × $15 = $2,400
Warranty Expense............................................................... 2,400
Estimated Warranty Liability..................................... 2,400
2. No entry is required unless the loss is probable. Disclosure of this contingent liability should
be made in the notes to the financial statements.
3. Contingent losses that are remote do not require accrual or disclosure. No entry is required.
4. 10 employees × $80 × 1 day = $800

Vacation Benefits Expense.................................................. 800
Vacation Benefits Payable....................................... 800
Ex. 35
Presented below are three different aircraft lease transactions that occurred for Western Airways
in 2011. All the leases start on January 1, 2011. In no case does Western receive title to the
aircraft during or at the end of the lease period; nor is there a bargain purchase option.
Lessor
Utah Insurance Laine Leasing Howard Leasing
Type of property 767 Aircraft 727 Aircraft L-1011 Aircraft
Yearly rental $8,272,293 $4,954,021 $2,851,861
Lease term 20 years 15 years 23 years
Estimated economic life 25 years 25 years 25 years
Fair value of
leased asset $77,000,000 $49,000,000 $32,000,000
Present value of lease
rental payments $73,000,000 $42,000,000 $28,000,000
Instructions
(a) Which of the above leases are operating leases and which are finance leases? Explain your
answer.
(b) How should the lease transaction with Utah Insurance be recorded in 2011?
(c) How should the lease transaction with Laine Leasing be recorded in 2011?
Other Significant Liabilities F - 11
Solution 35 (10 – 14 min.)

(a) The Utah Insurance lease is a finance lease, since it meets one of the four criteria; i.e., the
present value of the lease payments represents substantially all of the fair value of the
leased asset. The Howard Leasing lease is a finance lease, since the lease term, 23 years,
is a major portion of the estimated economic life of the leased asset. The Laine Leasing
lease is an operating lease, since it meets none of the criteria.
(b) Leased Asset.................................................................... 70,000,000

Lease Liability....................................................... 70,000,000
Lease Liability................................................................... 8,272,293

Cash...................................................................... 8,272,293
(c) Rental Expense................................................................ 4,954,021

Cash...................................................................... 4,954,021
Ex. 36
Ryan Corporation entered into the following transactions:
1. Hewitt Car Rental leased a car to Ryan Corporation for one year. Terms of the operating
lease call for monthly payments of $750.
2. On January 1, 2011, Ryan Corporation entered into an agreement to lease 20 machines from
Meeks Corporation. The terms of the lease agreement require an initial payment of $175,000
and then three annual rental payments of $210,000 beginning on December 31, 2011. The
present value of the three rental payments is $522,238. The lease is a capital lease.
Instructions
Prepare the appropriate journal entries to be made by Ryan Corporation in January related to the
lease transactions.
2008
Jan. 1 Car Rental Expense.................................................... 750
Cash................................................................... 750
Leased Equipment...................................................... 697,238

Lease Liability..................................................... 522,238
Cash................................................................... 175,000
F - 12 Test Bank for Financial Accounting: IFRS Edition
COMPLETION STATEMENTS
37. A ________________ liability that may become an actual liability in the future, is called a
________________ liability.
Answer: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
38. A lease may be classified as an ______________ lease or as a ____________ lease.

Answer: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
Answers to Completion Statements

37. potential, contingent
38. operating, finance
MATCHING
39. Match the items below by entering the appropriate code letter in the space provided.
A. Finance lease D. Provision

B. Contingent liability E. Defined-contribution plan
C. Operating lease
____ 1. A contractual arrangement that gives the lessee temporary use of property.
____ 2. The cash paid by the employer to the pension plan is defined.
____ 3. A contractual arrangement which is in effect a purchase of property.
____ 4. A liability of uncertain timing or amount.
____ 5. A potential liability that may become an actual liability in the future.
Answer: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting,
Answers to Matching
1. C
2. E
3. A
4. D
5. B
Other Significant Liabilities F - 13
SHORT-ANSWER ESSAY
S-A E 40
A company will incur product repair costs in the future if products that it sells currently under
warranty are brought in for repair during the warranty period. The company will also incur bad
debts expense in the future if customers who buy on credit currently are unable to pay their
accounts. Are the accounting procedures for these two contingent costs (warranty expense and
bad debts expense) related to or guided by the same accounting principle? Briefly explain.
Answer: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement,
Solution 40
The accounting procedures for both warranty expense and bad debts expense are guided by the
expense recognition principle. Accounting for warranty expense requires matching the expense
with the period in which the revenue is earned for the product under warranty. Similarly,
accounting for bad debts expense matches the bad debts expense resulting from credit sales with
the period when revenue from the credit sale is earned.
The accounting procedures for matching these costs with the related revenues are also similar
because the costs can be estimated based on prior experience. Matching is possible by basing
the expense on an estimate, using past data as a guide.

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APPENDIX F

OTHER SIGNIFICANT LIABILITIES

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion Ma = Matching

CHAPTER STUDY OBJECTIVES

2. A provision is a liability of uncertain timing or amount.

4. Repair costs incurred in honoring warranty contracts should be debited to Estimated

5. The renting of an apartment is an example of a finance lease.

8. When vacation benefits are paid, Vacation Benefits Expense is debited.

9. Postretirement benefits are accounted for on a cash basis.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

13. If an event may become an actual liability in the future, it is called a

14. A contingency liability that is remote

15. The accounting for warranty costs is based on the

16. Warranty expenses are reported on the income statement as

20. Disclosure of a contingent liability is usually made

23. In a lease contract,

24. Which of the following statements concerning leases is true?

26. In a finance lease, the amount capitalized is the

27. Postretirement benefits consist of payments by employers to retired employees for

28. The paid absence that is most commonly accrued is

Answers to Multiple Choice Questions

Warranty Expense..................................................................... 12,000

Number of units sold 12,000

1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of

2. Vacation Benefits Expense.................................................. 120,000

3. Estimated Loss from Lawsuit............................................... 500,000

4. Pension Expense................................................................. 50,000

Estimated Warranty Liability.............................................. 12,800

(b) 5,000 units × 5% = 250 units

4. 10 employees × $80 × 1 day = $800

Solution 35 (10 – 14 min.)

(b) Leased Asset.................................................................... 70,000,000

Lease Liability................................................................... 8,272,293

(c) Rental Expense................................................................ 4,954,021

Leased Equipment...................................................... 697,238

38. A lease may be classified as an ______________ lease or as a ____________ lease.

Answers to Completion Statements

A. Finance lease D. Provision

____ 3. A contractual arrangement which is in effect a purchase of property.

____ 4. A liability of uncertain timing or amount.

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38. A lease may be classified as an __ lease or as a lease.