MGMT 20000 Quiz: Chapter 8 practice problemsExam
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Chapter 8 practice problems
Monthly installment payments on a note payable include both an amount that represents interest
and an amount that represents a reduction of the outstanding loan balance.
A contingency is best described as a(n)
• legal liability.
• probable liability.
• potential liability.
• estimated liability.
Hillsborough, Inc. 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
• Disclosed and reported as a liability
• Neither disclosed nor reported as a liability
• Disclosed, but not reported as a liability
• Reported as a liability, but not disclosed
Kensal Green, Inc. is facing a class‐action lawsuit in the upcoming year. It is probable that the
corporation will have to pay a settlement of approximately $10,000,000 in the next twelve
months. How would this fact be reported, if financial statements are prepared at the end of the
• Report $10,000,000 as a current liability and describe the matter in the notes to the
• Report $10,000,000 as a long‐term liability and describe the matter in the notes to the
• Describe the potential liability in the notes to the financial statements.
• Reporting is not required for this matter.
Bampton Corporation filed suit against Cambridge, Inc., seeking damages for patent violations.
Cambridge‘s legal counsel believes it is probable that Cambridge will settle the lawsuit for an
estimated amount in the range of $500,000 to $1,000,000, with all amounts in the range
considered equally likely. How should Cambridge report this litigation?
• As a liability for $1,000,000 with disclosure of the range.
• As a liability for $750,000 with disclosure of the range.
• As a liability for $500,000 with disclosure of the range.
• As a disclosure only. No liability is reported.
Subaru estimates warranty parts & labor costs in the same year a vehicle is sold. This best
follows which of the following accounting principles?
• historical cost
Greenwich, Inc. sells deluxe grass mowers to customers over the internet. History has shown that
5% of Greenwich’s mowers will need repair under a warranty program. For the year, Greenwich
has sold 5,000 mowers and 150 have been repaired. If the estimated cost to repair a mower is
$100, what would be the warranty expense for the year?
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