A Firm Is Required to Estimate a Liability for Repairs

question 148

Multiple Choice

A firm is required to estimate a liability for repairs for products sold with a warranty.If the firm's accountants later find that the estimated amount for repairs has been overstated,the correct accounting procedure is to

• A)make an adjusting entry to reduce the amount of estimate.
• B)make a correcting entry because the overstatement is an error.
• C)show the amount of overstatement on the income statement as a loss.
• D)do nothing for the year in question and modify the next year's estimate.

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Definitions:

Risk-Free Rate

The theoretical rate of return on an investment with zero risk, often represented by the yield on government securities.

Inflation Premium

The additional amount investors require on the return of an investment to compensate for the loss of purchasing power due to inflation.

Treasury Bill

Short-term government securities issued at a discount from the face value and maturing at par.

Yield Curve

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.