PREMIUM AND WARRANTY LIABILITY

Question 1

1. The cost of customer premium offer should be charged to expense
   a. When the related product is sold.
   b. When the premium offer expires.
   c. Over the life cycle of the product.
   d. When the premium is claimed.

Answer 1

a. When the related product is sold.

Question 2

2. The accounting concept that requires recognition of a liability for customer premium offer is
   a. Time period
   b. Prudence
   c. Historical cost
   d. Matching principle

Answer 2

d. Matching principle

Question 3

3. Accounting for cost of incentive program for frequent customer purchases involves
   a. Recording an expense and a liability each period.
   b. Recording a liability and a reduction of revenue.
   c. Recording an expense and an asset reduction.
   d. Recording an expense and revenue each period.

Answer 3

a. Recording an expense and a liability each period.

Question 4

4. Accounting for cost of customer incentive program
   a. Requires probability estimation.
   b. Follows the matching principle.
   c. Is a loss contingency situation.
   d. All of these are correct.

Answer 4

d. All of these are correct.

Question 5

5. Providing a monetary rebate program
   a. Is accounted for similarly to a premium offer
   b. Creates an expense for the seller in the period of sale.
   c. Creates a liability for the seller at the time of sale.
   d. Is normally not recognized

Answer 5

c. Creates a liability for the seller at the time of sale.

Question 6

1. The accrual approach in accounting for warranty
   a. Is required for income tax reporting.
   b. Is frequently justified on the basis of expediency
   c. Finds the expense account being charged when the seller performs in compliance with the warranty.
   d. Should be used whenever the warranty is an integral and inseparable part of the sale.

Answer 6

d. Should be used whenever the warranty is an integral and inseparable part of the sale.

Question 7

2. Which of the following best describes the accrual approach of accounting for warranty cost?
   a. Expensed when paid
   b. Expensed when warranty claims are certain
   c. Expensed based on estimate in year of sale
   d. Expensed when incurred

Answer 7

c. Expensed based on estimate in year of sale

Question 8

3. Which of the following best describes the expense as incurred approach of accounting for warranty cost?
   a. Expensed based on estimate in year of sale
   b. Expensed when liability is accrued
   c. Expensed when warranty claims are certain
   d. Expensed when incurred

Answer 8

d. Expensed when incurred

Question 9

4. What is the classification of the estimated warranty liability in a three-year warranty?
   a. Noncurrent
   b. Current
   c. Partly current and partly noncurrent
   d. No need for disclosure

Answer 9

c. Partly current and partly noncurrent

Question 10

5. Which of the following is a characteristic of the accrual of warranty but not the sale of warranty?
   a. Warranty liability
   b. Warranty expense
   c. Unearned warranty revenue
   d. Warranty revenue

Answer 10

a. Warranty liability

Question 11

1. What is the accounting for the transaction price of a contract of sale with customer coupons for free product, discount or rebate?
   a. Entirely as product sales revenue
   b. Allocated to customer options equal to stand-alone selling and the balance to product sales
   c.Allocated between product sales revenue and coupons based on stand-alone selling price
   d. Entirely as coupon revenue

Answer 11

c.Allocated between product sales revenue and coupons based on stand-alone selling price

Question 12

2. What is the stand-alone selling price of free product coupons?
   a. Nothing
   b. Fair value less cost of disposal
   c. Selling price of free product
   d. Selling price of free product adjusted for expected redemption

Answer 12

d. Selling price of free product adjusted for expected redemption

Question 13

3. What is the stand-alone selling price of discount coupons?
   a. Discount on customer purchases during the year
   b. Discount on customer future purchases
   c. Discount on customer purchases during the year adjusted by expected redemption
   d. Discount on customer future purchases adjusted by expected redemption

Answer 13

d. Discount on customer future purchases adjusted by expected redemption

Question 14

4. What is the stand-alone selling price of rebate coupons?
   a. Discount on products sold during the current year
   b. Discount on products sold during the current year adjusted by expected redemption
   c. Cost of products sold
   d. Fair value of rebate coupons

Answer 14

b. Discount on products sold during the current year adjusted by expected redemption

Question 15

5. The nonredemption of gift certificates is called
   a. Breakage
   b. Forfeiture
   c. Rebate
   d. Waiver

Answer 15

a. Breakage