Reference no: EM132832241

Problem 1: Brief Respite, Inc., sold underwear made from a fabric that gave many of its customers a serious rash. The customers are suing the company in a class action suit and Brief Respite's attorneys think it is probable that the case will cost the company $2 million, although the verdict is not yet in. The company should:

a. record a liability and a gain for $2 million.

b. none of the above

c. only explain the situation in the notes to the financial statements.

d. not include this information in its annual report

e. record a liability and a loss for $2 million.

Problem 2: When the effective interest method of amortization is used, what happens to the amount of discount or premium amortized as a bond moves toward maturity?

a. The amount of discount or premium amortized each period decreases for bonds sold a discount but increases for bonds sold at a premium.

b. The amount of discount or premium amortized each period increases for bonds sold at a discount but decreases for bonds sold at a premium.

c. The amount of discount or premium amortized each period decreases.

d. None of the above

e. The amount of discount or premium amortized each period increases.