MGMT 200: exam 3
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1. Woodcrest, Inc. borrowed $50,000 from a local bank and signed a promis-
sory 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: C
2. We record interest expense in the period in which we pay it, rather than in
the period we incur it
A. true
B. false: B
Interest expense is recorded in the period incurred, not in the period in which we pay
it
3. On November 1, 2018, Knomarck, 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. Knomarck should report interest payable at Dec. 31, 2018 in
the amount of
A. $0
B. $1,000
C. $2,000
D. $3,000: B
[(100,000)x6%)x2/12] = $1,000
4. On Nov. 1, 2018, Boiler Bakery signed a $200,000, 6% six-month 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
Dec. 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: D
200,000+[200,000x6%x6/12] = 206,000
5. A contingency is best described as a(n)
A. current liability
B. probably liability
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C. potential liability
D. estimated liability: C
6. 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 nor reported as a liability
D. Reported as a liability, but not disclosed: A
7. 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 reported: A.
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
8. Away Travel filed suit against West Coast Travel seeking damages for copy-
right 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. 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 reported: D
A contingent liability is not recorded if the likelihood of loss is only reasonably
possible
9. 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
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C. neither disclosed nor reported as a liability
D. reported as a liability, but not disclosed: B
10. 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: D
11. For 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: D
12. The balance in the Warranty Liability account is always equal to Warranty
Expense
A. true
B. false: B
The warranty liability account is increased by warranty expense, but it is also reduced
over time by actual warranty expenditures
13. Striker, 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:
14. We record gain contingencies when the gain is probable and the amount
is reasonably estimable
A. true
B. false: B
we do not record gain until the gain is certain
15. 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
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1. Woodcrest, Inc. borrowed $50,000 from a local bank and signed a promis-
sory 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: C
2. We record interest expense in the period in which we pay it, rather than in
the period we incur it
A. true
B. false: B
Interest expense is recorded in the period incurred, not in the period in which we pay
it
3. On November 1, 2018, Knomarck, 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. Knomarck should report interest payable at Dec. 31, 2018 in
the amount of
A. $0
B. $1,000
C. $2,000
D. $3,000: B
[(100,000)x6%)x2/12] = $1,000
4. On Nov. 1, 2018, Boiler Bakery signed a $200,000, 6% six-month 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
Dec. 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: D
200,000+[200,000x6%x6/12] = 206,000
5. A contingency is best described as a(n)
A. current liability
B. probably liability
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C. potential liability
D. estimated liability: C
6. 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 nor reported as a liability
D. Reported as a liability, but not disclosed: A
7. 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 reported: A.
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
8. Away Travel filed suit against West Coast Travel seeking damages for copy-
right 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. 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 reported: D
A contingent liability is not recorded if the likelihood of loss is only reasonably
possible
9. 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
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C. neither disclosed nor reported as a liability
D. reported as a liability, but not disclosed: B
10. 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: D
11. For 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: D
12. The balance in the Warranty Liability account is always equal to Warranty
Expense
A. true
B. false: B
The warranty liability account is increased by warranty expense, but it is also reduced
over time by actual warranty expenditures
13. Striker, 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:
14. We record gain contingencies when the gain is probable and the amount
is reasonably estimable
A. true
B. false: B
we do not record gain until the gain is certain
15. 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
