Quick check and quiz answers -- chapter eight

Quick check and quiz answers -- chapter eight - Chapter...

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Chapter Eight – Liabilties Quiz: 1. A The allowance for bad debts is a contra-asset account. It is used to reduce accounts receivable to the expected net realizable value. Since assets have debit balances, contra-assets have credit balances. 2. E The matching principle requires companies to recognize expenses in the same period as the associated revenues. This principle often results in estimated expenses occurring in one period and the establishment of a credit which is subsequently reduced when the actual expenditure occurs. For example: bad debt expense is accrued by a debit to bad debt expense and a credit to the allowance for bad debts. When the actual write- off occurs there is no expense, rather the allowance is reduced. With warranty expense in the period of sale warranty expense is debited and estimated warranty liability is credited. When the warranty expenditure occurs the estimated warranty liability account is debited. Here again the expense is estimated and when the actual expenditure occurs there is no expense. 3. C The company estimates warranty expense in the period of the sale by debiting warranty expense and crediting estimated warranty payable. The amount is 2.5% x Sales (2.5 x $200,000). 4. C The company is recognizing the expense and liability for the expected unit failure. (400 units x 5% x $40 = $800). The liability is reduced by the actual claims (6 units x $40 = $240). The balance in the estimated warranty liability account will be $560 ($800 - $240). 5. E Contingent liabilities should be recognized (recorded in the books) if the likelyhood of loss is probable. However, to be recognized the amount of loss must be estimatable. 6. E Unsecured bonds are called debenture bonds. Secured bonds are called mortgage bonds. 7. A Discount on Bonds payable is a contra account to bonds payable. If a company sells a bond for less than maturity the following entry will be made. Cash
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Quick check and quiz answers -- chapter eight - Chapter...

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