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

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Definitions:

Promissory Note

A written promise to pay a specified sum of money to a designated party on demand or at a fixed or determinable future time.

Fictitious-Payee Rule

A legal principle that protects banks from liability when funds are withdrawn by a person not entitled to them, if the drawer's negligence contributed to the forgery.

Imposter Rule

A legal principle that addresses the liability for fraud when an impostor defrauds a third party.

Forged

Refers to the illegal modification or creation of a document, artwork, or object with the intent to deceive or defraud by passing it off as genuine.