Existing Claims Related to Product Warranties and Litigation as of December

question 113

Multiple Choice

Existing claims related to product warranties and litigation as of December 31, 2014, indicate that it is probable that a liability has been incurred. However, as of December 31, 2014, the amount of the obligation cannot be reasonably estimated. Based on these facts, an estimated loss contingency should be

• A) accrued
• B) disclosed but not accrued
• C) neither accrued nor disclosed
• D) classified as an appropriation of retained earnings

---

Definitions:

Adjusting Entry

A journal entry made in accounting records to update the balances of accounts at the end of an accounting period.

Bad Debt Expense

An estimate of receivables that a company does not expect to collect, recognized as an expense in the income statement.

Open Account

A type of credit arrangement where goods and services are delivered with the understanding that payment will be made at a later date.

Interest-Bearing Note

A debt instrument in which the borrower promises to pay the lender a fixed amount of interest in addition to repaying the principal.