Question

A contingent liability that is probable and can be reasonably estimated must be I. Disclosed. a. b. Not disclosed. Recorded. d. Paid. 2. Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between S1.5 and $2 million, with the most likely amount being S1.8 million. How much should Neuman record as a gain? a. $2.0 million. b. $1.8 million. $1.5 million. d. $0. 3. Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year? pxsl.-30, 0 pD Gd -,poo a. $30,000. 6 $25,000. c. $10,000. d. $5,000. 25,000

Answer 1

1. A contingent liability that is probable and can be reasonably estimated must be RECORDED in the financial statements (option C is correct).

2. No gain should be recorded. Hence the correct answer will be $0 (option d).

3.The correct answer is option a $30000

Notes

A contingent liability is one which the outcome of which is dependent on a future event.

Warranty expense for part 3 to be booked will be $600000*5% = $30000

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