MGMT 200 Exam 3| 170 QUESTIONS
(WITH ANSWERS)| Purdue University
Woodcrest, Inc. borrowed $50,000 from a local bank and signed a promissory note. What entry
should Woodcrest record?
a) debit Cash, $50,000; credit Notes Receivable, $50,000
b) debit Notes Receivable, $50,000; credit Cash, $50,000
c) debit Cash, $50,000; credit Notes Payable, $50,000
d) debit Notes Payable, $50,000; credit Cash, $50,000 Correct Answer: debit Cash, $50,000;
credit Notes Payable, $50,000
We record interest expense in the period in which we pay it, rather than in the period we incur it.
a) true
b) false Correct Answer: false
(Interest expense is recorded in the period incurred, not in the period in which we pay it)
On November 1, 2018, Knomark, Inc. signed a $100,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2019. Knomark should
report interest payable at December 31, 2018, in the amount of
a) $0
b) $1,000
c) $2,000
d) $3,000 Correct Answer: $1,000
[($100,000 x 6%) x 2/12] = $1,000
On November 1, 2018, Boiler Bakery signed a $200,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2019. Boiler Bakery
records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash
will be needed to pay back the note payable plus any accrued interest on May 1, 2019?
a) $200,000
b) $202,000
c) $204,000
d) $206,000 Correct Answer: $206,000
$200,000 + ($200,000 x 6% x 6/12) = $206,000
A contingency is best described as a(n)
a) current liability
b) probable liability
c) potential liability
d) estimated liability Correct Answer: potential liability
If management can estimate the amount of loss that will occur due to litigation against the
company, and the likelihood of the loss is reasonably possible, a contingent liability should be
,a) disclosed, but not reported as a liability
b) disclosed and reported as a liability
c) neither disclosed or reported as a liability
d) reported as a liability, but not disclosed Correct Answer: disclosed, but not reported as a
liability
(must be probable)
Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins'
legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount
in the range of $100,000 to $200,000, with all amounts in the range considered equally likely.
How should Higgins report this litigation?
a) As a liability for $100,000 with disclosure of the range
b) As a liability for $150,000 with disclosure of the range
c) As a liability for $200,000 with disclosure of the range
d) As a disclosure only, no liability is reported Correct Answer: As a liability for $100,000 with
disclosure of the range
(When no amount within a range of potential losses appears more likely than others, the liability
is recorded at the minimum amount in the range)
Away Travel filed suit against West Coast Travel seeking damages for copyright violations.
West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will
settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts
in the range considered equally likely. How should West Coast Travel report this litigation?
a) As a liability for $100,000 with disclosure of the range
b) As a liability for $150,000 with disclosure of the range
c) As a liability for $200,000 with disclosure of the range
d) As a disclosure only, no liability is reported Correct Answer: As a disclosure only, no liability
is reported
(A contingent liability is not recorded if the likelihood of loss is only reasonably possible)
If management can estimate the amount of loss that will occur due to litigation against the
company, and the likelihood of the loss is probable, a contingent liability should be
a) disclosed, but not reported as a liability
b) disclosed and reported as a liability
c) neither disclosed nor reported as a liability
d) reported as a liability, but not disclosed Correct Answer: disclosed and reported as a liability
Footnote disclosure is required for material potential losses when the loss is at least reasonably
possible:
a) only if the amount is known
b) only if the amount is known or reasonably estimable
c) unless the amount is not reasonably estimable
d) even if the amount is not reasonably estimable Correct Answer: even if the amount is not
reasonably estimable
, Ford estimates engine warranty expense in the year a car is sold. This best follows which of the
following accounting principles?
a) historical cost
b) full disclosure
c) consistency
d) matching Correct Answer: matching
The balance in the Warranty Liability account is always equal to Warranty Expense.
a) true
b) false Correct Answer: false
(the Warranty Liability account is increased by warranty expense, but it is also reduced over time
by actual warranty expenditures)
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of
Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000
goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the
warranty expense for the year?
a) $0
b) $16,000
c) $7,000
d) $9,000 Correct Answer: $16,0000
(4,000 goals x 2%) x cost to repair = warranty expense
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of
Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000
goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the
warranty liability at the end of the year?
a) $0
b) $16,000
c) $7,000
d) $9,000 Correct Answer: $7,000
(4,000 x 0.02) - 45 x $200 = $7,000
We record gain contingencies when the gain is probable and the amount is reasonably estimable.
a) true
b) false Correct Answer: false
(we do not record gain contingencies until the gain is certain)
Which of the following is not a true statement?
a) companies that are believed to have high bankruptcy risk generally receive low credit ratings
and must pay a higher interest rate for borrowing
b) as a company's level of debt increases, the risk of bankruptcy increases
c) interest expense incurred when borrowing money, as well as dividends paid to stockholders,
are both tax-deductible
(WITH ANSWERS)| Purdue University
Woodcrest, Inc. borrowed $50,000 from a local bank and signed a promissory note. What entry
should Woodcrest record?
a) debit Cash, $50,000; credit Notes Receivable, $50,000
b) debit Notes Receivable, $50,000; credit Cash, $50,000
c) debit Cash, $50,000; credit Notes Payable, $50,000
d) debit Notes Payable, $50,000; credit Cash, $50,000 Correct Answer: debit Cash, $50,000;
credit Notes Payable, $50,000
We record interest expense in the period in which we pay it, rather than in the period we incur it.
a) true
b) false Correct Answer: false
(Interest expense is recorded in the period incurred, not in the period in which we pay it)
On November 1, 2018, Knomark, Inc. signed a $100,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2019. Knomark should
report interest payable at December 31, 2018, in the amount of
a) $0
b) $1,000
c) $2,000
d) $3,000 Correct Answer: $1,000
[($100,000 x 6%) x 2/12] = $1,000
On November 1, 2018, Boiler Bakery signed a $200,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2019. Boiler Bakery
records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash
will be needed to pay back the note payable plus any accrued interest on May 1, 2019?
a) $200,000
b) $202,000
c) $204,000
d) $206,000 Correct Answer: $206,000
$200,000 + ($200,000 x 6% x 6/12) = $206,000
A contingency is best described as a(n)
a) current liability
b) probable liability
c) potential liability
d) estimated liability Correct Answer: potential liability
If management can estimate the amount of loss that will occur due to litigation against the
company, and the likelihood of the loss is reasonably possible, a contingent liability should be
,a) disclosed, but not reported as a liability
b) disclosed and reported as a liability
c) neither disclosed or reported as a liability
d) reported as a liability, but not disclosed Correct Answer: disclosed, but not reported as a
liability
(must be probable)
Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins'
legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount
in the range of $100,000 to $200,000, with all amounts in the range considered equally likely.
How should Higgins report this litigation?
a) As a liability for $100,000 with disclosure of the range
b) As a liability for $150,000 with disclosure of the range
c) As a liability for $200,000 with disclosure of the range
d) As a disclosure only, no liability is reported Correct Answer: As a liability for $100,000 with
disclosure of the range
(When no amount within a range of potential losses appears more likely than others, the liability
is recorded at the minimum amount in the range)
Away Travel filed suit against West Coast Travel seeking damages for copyright violations.
West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will
settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts
in the range considered equally likely. How should West Coast Travel report this litigation?
a) As a liability for $100,000 with disclosure of the range
b) As a liability for $150,000 with disclosure of the range
c) As a liability for $200,000 with disclosure of the range
d) As a disclosure only, no liability is reported Correct Answer: As a disclosure only, no liability
is reported
(A contingent liability is not recorded if the likelihood of loss is only reasonably possible)
If management can estimate the amount of loss that will occur due to litigation against the
company, and the likelihood of the loss is probable, a contingent liability should be
a) disclosed, but not reported as a liability
b) disclosed and reported as a liability
c) neither disclosed nor reported as a liability
d) reported as a liability, but not disclosed Correct Answer: disclosed and reported as a liability
Footnote disclosure is required for material potential losses when the loss is at least reasonably
possible:
a) only if the amount is known
b) only if the amount is known or reasonably estimable
c) unless the amount is not reasonably estimable
d) even if the amount is not reasonably estimable Correct Answer: even if the amount is not
reasonably estimable
, Ford estimates engine warranty expense in the year a car is sold. This best follows which of the
following accounting principles?
a) historical cost
b) full disclosure
c) consistency
d) matching Correct Answer: matching
The balance in the Warranty Liability account is always equal to Warranty Expense.
a) true
b) false Correct Answer: false
(the Warranty Liability account is increased by warranty expense, but it is also reduced over time
by actual warranty expenditures)
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of
Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000
goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the
warranty expense for the year?
a) $0
b) $16,000
c) $7,000
d) $9,000 Correct Answer: $16,0000
(4,000 goals x 2%) x cost to repair = warranty expense
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of
Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000
goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the
warranty liability at the end of the year?
a) $0
b) $16,000
c) $7,000
d) $9,000 Correct Answer: $7,000
(4,000 x 0.02) - 45 x $200 = $7,000
We record gain contingencies when the gain is probable and the amount is reasonably estimable.
a) true
b) false Correct Answer: false
(we do not record gain contingencies until the gain is certain)
Which of the following is not a true statement?
a) companies that are believed to have high bankruptcy risk generally receive low credit ratings
and must pay a higher interest rate for borrowing
b) as a company's level of debt increases, the risk of bankruptcy increases
c) interest expense incurred when borrowing money, as well as dividends paid to stockholders,
are both tax-deductible
