Deck 10: Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies

Question 1

Short-term notes payable typically arise because

A)the firm temporarily requires cash for operations.
B)cash is received from customers prior to the rendering of services or delivery of products.
C)the board of directors have declared a dividend that will be paid at a later date.
D)cash is received as a security deposit.

Answer 1

A

Question 2

If the current ratio is currently greater than 1.0, which one of the following events would increase the current ratio?

A)Purchase of inventory on account
B)Receipt of money from a customer prior to the performance of service
C)Accrual of warranty expense
D)Sale of plant asset at a gain

Answer 2

D

Question 3

Dividends payable typically arise because

A)creditors want a return on funds loaned to a company.
B)cash is paid for dividends previously declared in another accounting period.
C)the board of directors declare a dividend that will be paid at a later date.
D)bond investors demand a return.

Answer 3

C

Question 4

Accruing warranty expense will

A)increase the debt/equity ratio.
B)increase the current ratio.
C)reduce uncollectible accounts during the period.
D)increase inventory turnover.

Question 5

An employee of Susann Inc. failed two drug tests. The employee has sued and Susann Inc.'s. lawyers appropriately believe that, at best, it is only reasonably possible that Susann Inc. will lose the court case. The proper accounting treatment of the lawsuit will

A)increase earnings per share.
B)increase the debt/asset ratio.
C)decrease the current ratio.
D)not affect the debt/equity ratio.

Question 6

One of Tonic Corp's employees invented a revolutionary coffee lid that cools coffee as you drink it in order to prevent burns. Two children ordered coffee and burned their mouths after failing to properly secure the lids. The children's parents sued. Tonic Corp's. lawyers believe that it is highly probable that judgment will be rendered against Tonic Corp and it is likely a payment in excess of $2 million will be incurred. The proper accounting treatment of the lawsuit will

A)decrease total liabilities.
B)increase total liabilities.
C)increase the current ratio.
D)require accountants to wait until the suit is settled to account for the event.

Question 7

A liability for a deposit may arise because

A)cash deposits are received from customers for layaways.
B)cash is paid as a security deposit that will be refunded in the future.
C)the company deposits sales receipts too early.
D)merchandise is delivered to customers prior to payment.

Question 8

If a contingent loss which is expected to be paid next year is accrued, this would:

A)decrease the debt/equity ratio.
B)decrease the debt/asset ratio.
C)decrease the current ratio.
D)have no effect on the quick ratio.

Question 9

Which one of the following events decreases the debt/asset ratio?

A)Bonds are retired with a gain.
B)Warranty expense is accrued.
C)Some of the long-term debt matures next year.
D)The board of directors declares a cash dividend to be paid next month.

Question 10

Accounts payable typically arise because

A)cash is received from a customer that will be paid back in the future.
B)cash is received from customers prior to the rendering of services or delivery of products.
C)the firm temporarily borrows cash for operations.
D)amounts are owed to others for goods, supplies, and services purchased on open account.

Question 11

Collecting sales taxes from customers always

A)decreases net income.
B)increases the debt/equity ratio.
C)increases the current ratio.
D)decreases net worth.

Question 12

Net worth is

A)assets plus liabilities.
B)total income since the company began operations.
C)total shareholders' equity.
D)another name for net income.

Question 13

The recognition of a deferred tax liability that results from the use of straight-line depreciation on financial statements and double-declining balance on tax returns will

A)increase the current ratio.
B)increase the debt/equity ratio.
C)increase the quick ratio.
D)decrease the debt/asset ratio.

Question 14

If a loss contingency related to a lawsuit against a firm is deemed to have a reasonable probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will

A)require note disclosure.
B)decrease the debt/asset ratio.
C)increase the accounts payable/sales ratio.
D)decrease the debt/equity ratio.

Question 15

Which one of the following is the result of the amortization of a discount on a short-term note payable?

A)Increases assets and decreases liabilities
B)Decreases assets and increases liabilities
C)Increases liabilities and decreases shareholders' equity
D)Decreases liabilities and owners' equity

Question 16

Which one of the following events increases working capital?

A)Purchase of inventory on credit
B)Payment of an installment of notes payable
C)Payment of sales taxes for the state
D)Selling merchandise on credit at a profit

Question 17

If the quick ratio is currently greater than 1.0, which one of the following events would increase the quick ratio?

A)Warranty expense is accrued.
B)A cash dividend previously declared is paid.
C)Long-term debt is paid off.
D)Inventory is purchased on account.

Question 18

Which one of the following transactions decreases a company's quick assets?

A)The board of directors declares a cash dividend to be paid next month.
B)Salary expense is accrued.
C)Depreciation expense is recorded.
D)A payment is made for next year's insurance.

Question 19

Which one of the following events does not have any impact on total working capital?

A)A cash dividend to be paid next month is declared.
B)Warranty expense is accrued.
C)Salaries previously accrued are paid.
D)Debt which was previously long-term matures next year.

Question 20

Unearned revenue typically arises because

A)cash is received as a security deposit.
B)cash is received from customers prior to the rendering of services or delivery of products.
C)a company temporarily requires cash for operations.
D)merchandise is sold to customers prior to payment.

Question 21

Liabilities are

A)sometimes credit and other times debit balances.
B)deferred amounts which will be recognized on the balance sheet when the actual due date arrives.
C)obligations arising from past transactions and payable in assets or services in the future.
D)obligations to transfer ownership of one company to other entities.

Question 22

If a loss contingency related to a lawsuit against a firm is deemed to have a high probability of requiring ultimate payment and can be reasonably estimated, then the proper accounting treatment of the loss contingency will

A)decrease the debt/equity ratio.
B)decrease the debt/asset ratio.
C)decrease earnings per share.
D)increase net income.

Question 23

Ranch Company estimates warranty expense as 5% of sales. On January 1, warranties payable was $13,000. During the year Ranch paid $5,000 to meet its warranty obligations and recorded sales of $120,000. The December 31 liability for the warranty is

A)$10,000.
B)$12,000.
C)$6,000.
D)$14,000.

Question 24

Contingent liabilities whose ultimate payment is reasonably probable should be

A)recorded in the body of the balance sheet.
B)disclosed in the footnotes to the financial statements.
C)ignored.
D)disclosed in the auditor's report.

Question 25

Which one of the following would increase the bonus for a CEO who is paid a bonus equal to a percentage of current GAAP net income?

A)Recording a decrease in the company's self-insured worker's compensation expense
B)Decreasing the estimated life of plant and equipment by an average of 8 years
C)Increasing wages for the warehouse employees
D)Collecting payments in advance from customers

Question 26

A suit for breach of contract seeking damages of $3,000,000 was filed against Clark Corporation on March 1, 2017. Clark's legal counsel believes that a negative outcome is highly probable. A reasonable estimate of the court's award to the plaintiff is $600,000. Settlement is expected to occur during the latter part of 2017. What accounting is necessary for the year ending June 30, 2017?

A)Note disclosure only
B)Accrue a contingent liability of $3,000,000 and provide note disclosure explaining the contingency
C)Accrue a contingent liability of $600,000 and provide note disclosure explaining the contingency
D)No disclosure or accrual necessary

Question 27

Use the information from Cen, Inc. to answer questions
Cen, Inc. reported the following on its December 31, 2017, balance sheet:
$\begin{array}{lrr}\text { Current liabilities: }&2017&2016\\\hline \text { One-year short-term notes payable, net of discount of } & \$ 9,800 & \$ 6,400 \\\quad \$ 300 \text { and } \$ 400 \text {, respectively } & & \\\text { Accrued interest on notes payable } & 340 & 280 \\\text { Current portion of long-term debt } & 1,250 & 2,340 \\\text { Trade accounts pavable } & 500 & 700\end{array}$


-How much is the maturity value of the one-year note payable that is outstanding at the end of 2017?

A)$9,500
B)$9,800
C)$10,100
D)$10,400

Question 28

A contingent liability

A)is definite in existence, but its amount and due date are not yet known.
B)has the same requirements as a contingent gain.
C)must be accrued even when it is not reasonably estimable.
D)is disclosed only in the financial statement notes if highly probable and the amount can be estimated.

Question 29

Which one of the following would most likely be reported as a current liability?

A)Frequent flyer program miles accumulated by airline travelers
B)Self-insurance risks on anticipated losses
C)Customers merchandise returns exchanged for different merchandise
D)The CEO's stock option package for the current year

Question 30

An income tax accrual at yearend will most likely

A)decrease earnings per share.
B)decrease the debt/asset ratio.
C)decrease the debt/equity ratio.
D)be a contingency.

Question 31

Contingent liabilities whose ultimate payment is remote should be

A)recorded in the body of the balance sheet.
B)disclosed in the footnotes to the financial statements.
C)disclosed in the auditor's report.
D)ignored.

Question 32

Abbott Co. has 5 employees who worked the entire year. Each employee earns 6 paid vacation days annually. Vacation days may be taken during December of 2016 and all of 2017. All unused vacation days are paid when the employee leaves the company. The daily wage in 2016 per employee is $100. This is an example of

A)a definite liability.
B)a third party liability.
C)a gain contingency.
D)unearned revenue.

Question 33

Sweeney, Inc. borrowed $30,000 from the bank by signing a 9-month note payable. The proper accounting treatment of recording the note will

A)increase assets and liabilities.
B)decrease assets and increase liabilities.
C)increase liabilities and owners' equity.
D)increase assets and decrease owners' equity.

Question 34

What business transaction must occur in order to reduce Estimated Warranty Payable?

A)Goods under warranty are repaired in the period after the sale
B)Warranty costs are accrued at the end of the accounting period
C)Sale of goods on account
D)Customers take advantage of cash discounts for early payment

Question 35

Use the information from Cen, Inc. to answer questions
Cen, Inc. reported the following on its December 31, 2017, balance sheet:
$\begin{array}{lrr}\text { Current liabilities: }&2017&2016\\\hline \text { One-year short-term notes payable, net of discount of } & \$ 9,800 & \$ 6,400 \\\quad \$ 300 \text { and } \$ 400 \text {, respectively } & & \\\text { Accrued interest on notes payable } & 340 & 280 \\\text { Current portion of long-term debt } & 1,250 & 2,340 \\\text { Trade accounts pavable } & 500 & 700\end{array}$


-Which statement is true concerning Cen's interest?

A)Cen paid a total of $60 interest during 2017.
B)Interest was incurred during the year on more than one note.
C)Interest of $3,200 was accrued and paid during 2017.
D)The 'accrued interest on notes payable' amount relates only to the one-year short-term notes payable.

Question 36

Which one of the following is a current liability?

A)Portions of notes payable due beyond the next accounting period
B)Sales taxes paid on new equipment acquired
C)Estimated costs of hurricanes which might develop in the Caribbean during next hurricane season
D)Football tickets sold to customers for games in the coming season

Question 37

An increase in a deferred tax liability is recognized when

A)the tax accountant omits taxable revenue from the tax returns.
B)net income measured under GAAP is greater than taxable income on tax returns because of temporary timing differences.
C)the amount of tax paid to the government is more than that calculated by the accountant on the company's tax return.
D)a tax audit by the IRS causes an increase in taxes due from a previous year's tax return.

Question 38

If a loss contingency related to a lawsuit against a firm is deemed to have a remote probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will

A)increase the debt/equity ratio.
B)increase the debt/asset ratio.
C)have no effect on earnings per share.
D)increase the quick ratio.

Question 39

Current liabilities include

A)amounts due from suppliers for credits on accounts due to returns
B)taxes withheld from employees' payroll checks which must be remitted to the IRS.
C)amounts paid for warranty repairs during the current year.
D)cash dividends to be declared by the board of directors during the next six months.

Question 40

Contingent liabilities whose ultimate payment is highly probable and can be reasonably estimated must be

A)ignored until actual payment is made.
B)disclosed only in the footnotes to the financial statements.
C)recorded in the body of the balance sheet.
D)disclosed in the auditor's report.

Question 41

Gain contingencies

A)should be accrued when probable and the amount can be reasonably estimated.
B)are reported as revenues on the income statement.
C)should be accrued for anticipated lottery winnings.
D)are almost never accrued and are rarely disclosed.

Question 42

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

A)2.94
B)3.24
C)2.06
D)0.83

Question 43

Two types of differences exist between computing income for tax purposes and computing income for financial accounting purposes. The differences are

A)defined benefit taxes and defined contribution taxes.
B)deferred tax assets and deferred tax liabilities.
C)revenues and expenses.
D)temporary and permanent.

Question 44

The economic essence of one of the following should not be reported in the balance sheet as a current liability. Which one is not reported?

A)Free sandwich offers printed on hockey ticket stubs
B)Amounts sued for damages associated with injuries from an allegedly defective weed eater
C)Mail-in rebates from software by software companies
D)Amounts payable to an employee for a recent expense report

Question 45

A defined benefit plan differs from a defined contribution plan in that a defined benefit plan

A)has a liability that must be actuarially computed.
B)is required by ERISA.
C)requires a corporation to make a series of payments of a specified amount to a pension fund.
D)requires journal entries, and the defined contribution plan does not.

Question 46

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

A)1.76
B)2.50
C)1.44
D)3.24

Question 47

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests the entire $100,000 of the borrowed funds in equipment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A)$146,667
B)$102,000
C)$80,000
D)$125,333

Question 48

A measure of the extent to which reported income is conservative is called

A)ERISA.
B)a gain contingency.
C)the conservatism ratio.
D)a line of credit.

Question 49

In addition to recognizing income tax expense, the accounting necessary to record income taxes requires

A)a credit to income tax payable based on net income times the tax rate.
B)a debit to the income tax expense account for the amount of cash that must be paid for taxes.
C)computations of the amounts to record in the deferred income tax account.
D)all companies to report taxable income on the income statement

Question 50

Alpine, Inc. sells baseball tickets for professional baseball games. Cash receipts for baseball tickets are credited to Unearned Ticket Revenue. During 2017, Alpine collected $30,000 for a September, 2017 baseball game and $42,000 for a March, 2018 baseball game. The September game was played as scheduled, although $2,000 of tickets was refunded to fans that canceled because they had been permanently kicked out of the stadium for disorderly conduct. How much should be reported as Unearned Ticket Revenue at December 31, 2017?

A)$0
B)$42,000
C)$72,000
D)$40,000

Question 51

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A)$93,333
B)$133,333
C)$146,667
D)$102,000

Question 52

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests the entire $100,000 of the borrowed funds in equipment, what would be its current ratio?

A)3.24
B)1.76
C)1.31
D)1.50

Question 53

Meadville Industries sells gift certificates that are redeemable in merchandise. During 2017, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2017. The journal entry recording the sale of the gift certificates will include:

A)a debit to Certificate Liability for $88,000
B)a debit to Unearned Revenue for $88,000
C)a credit to Sales for $88,000
D)a credit to Unearned Revenue for $88,000

Question 54

Warranties should be accrued if it is

A)probable that an expense has been incurred and the amount is reasonably estimable.
B)possible that an expense has been incurred regardless of whether the amount is estimable or not.
C)possible that an expense will be incurred and the amount is reasonably estimable.
D)remote that any expense has been incurred.

Question 55

Pension expense is

A)accrued each period as employees require payments.
B)recognized as a long-term deferred asset.
C)accrued as employees earn their rights to future benefits.
D)calculated by dividing an employee's annual salary into the number of years the employee is expected to require pension payments.

Question 56

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A)$45,333
B)$146,667
C)$125,333
D)$113,333

Question 57

Simpson Incorporated sells fishing lures and monofilament leader material. During June, Simpson distributed 6,000 coupons to receive a free lure to each customer who purchased a dozen spools of monofilament leader material. Through December 31, 2017, Simpson honored 1,200 coupons redeemed. Simpson expects a total of 5,200 total coupons to be redeemed. Simpson sells lures for $1.00 each. The cost of each lure to Simpson is 45 cents. How much should Simpson report as a liability at December 31, 2017?

A)$6,000
B)$1,800
C)$3,600
D)$2,340

Question 58

A company has a decreasing current ratio. Creditors should be concerned

A)with long-term solvency.
B)about the company's ability to pay current debts as they come due.
C)about the company's profitability.
D)about whether earnings per share is increasing or decreasing.

Question 59

Meadville Industries sells gift certificates that are redeemable in merchandise. During 2017, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2017. Assuming that Meadville uses the perpetual inventory method, the journal entry recording the redemption of the gift certificates during 2017 will include:

A)a credit to Cost of Goods Sold for $32,000
B)a debit to Unearned Revenue for $88,000
C)a credit to Sales for $52,000
D)a credit to Unearned Revenue for $52,000

Question 60

A pension is

A)a cost such as health insurance paid on behalf of a retired or disabled employee.
B)a contingent inflow of cash anticipated from assets earning interest.
C)required of all employers.
D)usually determined by the employees' years of service.

Question 61

Porter Products recognizes expenses for wages and interest when cash payments are made. The following related cash payments were made during December 2017:
$\begin{array}{|l|l|}\hline \text { December } 5 \& 20 &\text { Wages in the amount of } \$ 15,000 \text { are paid on the } 5^{\text {th }} \text { and the } 20^{\text {th }} \text { of } \\&\text { each month for the fifteen days just ended. The next payment will } \\&\text { be on January } 5,2018 .\\\hline \text { December 15 } &\text { Paid a semi-annual } \$ 300 \text { interest payment on an outstanding note } \\&\text { payable with a face value of } \$ 10,000 \text { and a } 6 \text { percent annual } \\&\text { interest rate. }\\\hline \end{array}$
As of December 31, the current assets and current liabilities reported on Porter's balance sheet were $36,000 and $22,500, respectively. Porter's income statement reported net income of $11,250.
Required: Compute Porter's current ratio and net income if the company were to account for wages and interest on an accrual basis.

Question 62

On July 1, Gordon Company borrowed $10,000 in return for an eight-month note payable with a maturity value of $10,600. Calculate the amount of interest expense for the current year.

Question 63

On December 31, 2017, Roper Company had current assets (cash) of $15,000 and current liabilities (accounts payable) of $8,000, resulting in a current ratio of 1.88. The company needs to increase its current ratio to 2.75 by December 31, 2018. Calculate the amount of accounts payable that needs to be paid in order to boost the current ratio to 2.75.

Question 64

The following information was taken from the annual report of Leno Inc.
$$\begin{array} { | l | l | c | } \hline & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 6 } \\\hline \text { BALANCE SHEET } & & \\\hline \text { Deferred incame tax liability } & \mathbf { \$ 5 8 , 3 0 0 } & \mathbf { \$ 5 9 , 4 0 0 } \\\hline & & \\\hline \text { INCOME STATEMENT } & & \\\hline \text { Incame befare taxes } & \$ 109,000 & \\\hline \text { Incame tax expense } & ( 40,400 ) & \\\hline \text { Net incame } & \mathbf { \$ 6 7 , 6 0 0 } & \\\hline \text { Effective incame tax rate } 35 \% & & \\\hline\end{array}$$
Based on this information, what journal entry should Leno make in 2010 to record its income taxes?
a.
$\begin{array}{lrr} \text { Income Tax Expense} &40,400\\ \text {Deferred Income Tax } &58,300\\ \text {Deferred Income Tax } &&59,400\\ \text { Income Tax Payable } &&39,300\\\end{array}$

b.
$\begin{array}{lrr} \text { Income Tax Expense} &40,400\\ \text {Deferred Income Tax } &19,000\\ \text { Income Tax Payable } &&59,400\\\end{array}$

c.
$\begin{array}{lrr} \text { Income Tax Expense} &40,000\\ \text {Deferred Income Tax } &1,100\\ \text { Income Tax Payable } &&41,500\\\end{array}$

d.
$\begin{array}{lrr} \text { Income Tax Expense} &40,400\\ \text {Deferred Income Tax } &17,900\\ \text { Income Tax Payable } &&58,300\\\end{array}$

Question 65

Farley Incorporated instituted a defined benefit pension plan for its employees at the beginning of 2013. An actuarial method that is acceptable under GAAP indicates that the company should contribute $80,000 each year to the pension fund to cover the benefits that will be paid to the employees. Farley funded 80% in 2013 and 2014, 90% in 2015 and 2016, and 100 percent in 2017.
Required:
(1) Prepare the journal entries to accrue the pension liability and fund it for 2013 through 2017.
(2) Compute the balance in the pension liability account as of December 31, 2017.

Question 66

On December 31, 2017, Seminole Co. had current assets of $25,000 in cash and current liabilities of $8,000 in accounts payable, resulting in a current ratio of 3.13. The company estimates that warranty expense for 2017 is 6% of sales that totaled $200,000. Calculate Seminole's current ratio after warranty expense is recognized.

Question 67

On October 1, Accurate Company borrowed $2,000 in return for a nine-month note payable with a maturity value of $2,600. Calculate the amount of interest expense and the balance sheet value for the year ending December 31.

Question 68

The following information was taken from the annual report of Jones Inc.
$$\begin{array} { | l | l | c | } \hline & 2017 & \mathbf { 2 0 1 6 } \\\hline \text { BALANCE SHEET } & & \\\hline \text { Deferred incame tax liability } & \$ 29,700 & \$ 28,300 \\\hline & & \\\hline \text { INCOME STATEMENT } & & \\\hline \text { Incame befare taxes } & \$ 89,000 & \\\hline \text { Incame tax expense } & \mathbf { (3 0 , 4 0 0 ) } & \\\hline \text { Net incame } & \$ 57,600 & \\\hline \text { Effective incame tax rate 40\% } & & \\\hline\end{array}$$
Based on this information, what journal entry should Jones make in 2017 to record its income taxes?
A
a.
$\begin{array}{lrr} \text { Income Tax Expense} &30,400\\ \text {Deferred Income Tax } &29,700\\ \text {Deferred Income Tax } &&28,300\\ \text { Income Tax Payable } &&31,800\\\end{array}$

b.
$\begin{array}{lrr} \text { Income Tax Expense} &30,400\\ \text {Deferred Income Tax } &29,700\\ \text { Income Tax Payable } &&700\\\end{array}$

c.
$\begin{array}{lrr} \text { Income Tax Expense} &31,800\\ \text {Deferred Income Tax } &1,400\\ \text { Income Tax Payable } &&30,400\\\end{array}$

d.
$\begin{array}{lrr} \text { Income Tax Expense} &30,400\\ \text {Deferred Income Tax } &1,400\\ \text { Income Tax Payable } &&29,000\\\end{array}$

Question 69

On January 1 and December 31, Warranty Liability is $6,000 and $4,000, respectively. During the current year, sales were $100,000, upon which 3% was estimated to be the amount required for future warranty payments. Calculate the amount paid for warranties during the current year.

Question 70

Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2017.
$$\begin{array} { | l | l | l | } \hline \text { Feb } & 4 & \text { Sold five cars. } \\\hline \text { Mar } & 23 & \text { Sold ten cars. } \\\hline \text { May } & 20 & \text { Incurred warranty costs of \$6,000 an four cars sold in 2016. } \\\hline \text { July } & 6& \text { Sold eight cars. } \\\hline \text { Sep } & 1 & \text { Incurred warranty costs of \$5,000 on five cars sold in 2016. } \\\hline \text { Nov } & 14 & \text { Incurred warranty costs of \$4,000 on one car sold in 2016. } \\\hline \text { Dec } &2 2& \text { Sold twelve cars. } \\\hline\end{array}$$
If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:

A)a debit to Warranty Liability for $28,700
B)a debit to Warranty Expense for $28,700
C)a credit to Parts for $17,220
D)a credit to Cash for $28,700

Question 71

The following information was taken from the annual report of Leno Inc.
$$\begin{array} { | l | l | c | } \hline & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 6 } \\\hline \text { BALANCE SHEET } & & \\\hline \text { Deferred incame tax liability } & \mathbf { \$ 5 8 , 3 0 0 } & \mathbf { \$ 5 9 , 4 0 0 } \\\hline & & \\\hline \text { INCOME STATEMENT } & & \\\hline \text { Incame befare taxes } & \$ 109,000 & \\\hline \text { Incame tax expense } & ( 40,400 ) & \\\hline \text { Net incame } & \mathbf { \$ 6 7 , 6 0 0 } & \\\hline \text { Effective incame tax rate } 35 \% & & \\\hline\end{array}$$
What is Leno's conservatism ratio?

A)0.63
B)0.91
C)0.69
D)0.86

Question 72

On October 1, 2017, Brooks Company borrowed $6,000 in return for a nine-month note payable with a maturity value of $6,600. Fill in the partial balance sheet that appears below as of December 31, 2017.
$\underline{\text { Current Liabilities} }$

Question 73

Bradley Incorporated owns a chain of retail stores. During December of 2017, a customer slipped in a doorway of its Missouri store and broke his ribs. He is suing Bradley for $200,000 for negligence. Bradley's legal counsel believes that it is only reasonably probable that Bradley will lose its defense of the lawsuit because, although the doorway was icy due to an ice storm that was occurring at the time of the fall, a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2017, before considering the effects of this lawsuit, Bradley's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate Bradley's debt/equity ratio on December 31, 2017.

Question 74

Pitts Incorporated owns a chain of retail stores. During December of 2017, a customer slipped in a doorway of its Nebraska store and broke his ribs. He is suing Pitts for $200,000 for negligence. The legal counsel of Pitts believes that it is remote that Pitts will lose its defense of the lawsuit because the doorway recently was rebuilt with all-weather traction stripping and a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2017, before considering the effects of this lawsuit, the company's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate the company's debt/equity ratio on December 31, 2017.

Question 75

Pacific Company estimates warranty expense as 10% of sales. On January 1, the warranty liability was $10,000. During the year, Pacific paid $8,000 to meet its warranty obligations and recorded sales of $300,000. Calculate the warranty liability on December 31.

Question 76

On December 31, 2017, Barton Incorporated had total liabilities of $60,000 and total shareholders' equity of $90,000, resulting in a debt/equity ratio of 0.67 before income tax expense is recognized. On December 31, 2017, Barton paid its 2017 income taxes of $6,000 while its income tax expense on its 2017 income statement was $8,000. This difference exists because Barton uses straight-line depreciation on its books and double-declining-balance depreciation on its tax returns. What is Barton's debt/equity ratio after the tax expense and deferred tax liability are recognized?

Question 77

Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The following activities occurred during 2017.
$$\begin{array} { | l | l | l | } \hline \text { Feb } & 4 & \text { Sold five cars. } \\\hline \text { Mar } & 23 & \text { Sold ten cars. } \\\hline \text { May } & 20 & \text { Incurred warranty costs of } \$ \mathbf { 6 , 0 0 0 } \text {on four cars sold in 2016. } \\\hline \text { July } & 6 & \text { Sold eight cars. } \\\hline \text { Sep } & 1 & \text { Incurred warranty costs of } \$ 5,000 \text { on five cars sold in 2016. } \\\hline \text { Noy } & 14 & \text { Incurred warranty costs of } \$ 4,000 \text { on one car sold in 2016. } \\\hline \text { Dec } & 22 & \text { Sold twelve cars. } \\\hline\end{array}$$
If the January 1, 2017 beginning balance in the warranty liability account was $2,500, what would be the year-end warranty liability balance?

A)$31,200
B)$16,200
C)$11,200
D)$13,700

Question 78

As a security analyst for Market Masters, Inc., you have chosen to invest in one high-tech firm. You have narrowed your choice between RamTech Company or Accutrex Industries, firms of similar size and direct competitors in the industry. The following information was taken from their 2017 annual reports:
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {RamTech}$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Accutrex}$
$\begin{array}{|l|r|r|r|r|}\hline&2017&2016&2017&2016\\\hline \text { Deferred income tax liability } & \$ 19,400 & \$ 15,600 & \$ 19,800 & \$ 21,800 \\\hline \text { Income before taxes } & 163,000 & & 158,500 & \\\hline \text { Income tax expense } & (50,000) & & (52,500) & \\\hline \text { Net income } & 113,000 & & 106,000 & \\\hline \text { Effective income tax rate } & 35 \% & & 35 \% &\\\hline\end{array}$

Question 79

Beacon Incorporated owns a chain of retail stores. During December of 2017, a customer slipped in a doorway of its Virginia store and broke his ribs. He is suing Beacon for $200,000 for negligence. Beacon's legal counsel believes that it is remote that Beacon will lose its defense of the lawsuit because the doorway recently was rebuilt with all-weather traction stripping and a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2017, before considering the effects of this lawsuit, Beacon's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate Beacon's debt/asset ratio on December 31, 2017.

Question 80

The following information was taken from the annual report of Jones Inc.
$$\begin{array} { | l | l | c | } \hline & 2017 & \mathbf { 2 0 1 6 } \\\hline \text { BALANCE SHEET } & & \\\hline \text { Deferred incame tax liability } & \$ 29,700 & \$ 28,300 \\\hline & & \\\hline \text { INCOME STATEMENT } & & \\\hline \text { Incame befare taxes } & \$ 89,000 & \\\hline \text { Incame tax expense } & \mathbf {( 3 0 , 4 0 0 ) } & \\\hline \text { Net incame } & \$ 57,600 & \\\hline \text { Effective incame tax rate 40\% } & & \\\hline\end{array}$$
What is Jones's conservatism ratio?

A)1.02
B)1.52
C)2.89
D)1.21