Question

A typical provision is:

(a) bonds payable (c) a warranty liability

(2) cash (d) accounts payable

Short answer

The correct option is (c) a warranty liability.

Step-by-step solution

Meaning of provision

A provision can be defined as an amount that is usually set aside out of profit so as to incur all the anticipated expense or depreciation in the asset value although the exact amount is yet to be ascertained.

Explanation for the correct option

A warranty liability refers to the liability account in which the cost of replacement is recorded that it anticipates to incur for goods already shipped or services rendered. The liability amount is usually recorded when the sale takes place. The liability will be deducted from the actual expenditures incurred in repairing or replacing the product. Warranty liability is regarded as contingent liability that is probable and can be anticipated.

Therefore, a warranty liability is the correct answer.

Explanation for incorrect options

(Option a): Bonds payable refers to an obligation to repay a principal amount plus interest at a later date, normally on a half-yearly basis. These types of accounts are recorded within the long-term liabilities section of the balance sheet, because of the reason that these bonds are basically mature in more than one year.

(Option b): Cash is defined as the source which is used for the acquisition of goods and services. Cash is normally recorded at first in the balance sheet, in order of liquidity, and cash is regarded as most liquid asset. Cash is expected to be stated at its fair value.

(Option d): Accounts payable refers to the money owed to suppliers or creditors for goods and services supplied or rendered. The total of all outstanding amounts due to suppliers is listed as accounts payable balance on the balance sheet of a company.

Thus, options (a), (b) and (d) are incorrect.