Deck 9: Short-Term Liabilities

Question 1

A contingent loss is a liability whose outcome is certain at the balance sheet date but the amount is uncertain.

Answer 1

False

Question 2

A line of credit helps a company deal with temporary cash shortages.

Answer 2

False

Question 3

A contingent liability must be recognized if it is likely that a firm will lose a lawsuit filed against it and the amount of the loss can be reasonably estimated.

Answer 3

True

Question 4

A company should record all of its obligations.
5.The difference between the gross amount of a liability and its net amount is due to the time value of money.

Question 5

All of the following are examples of current liabilities, except for:

A)Accrued expenses
B)Unearned revenues
C)Interest payable
D)Prepaid expenses

Question 6

Under IFRS all of the following liabilities are reflected under the current liabilities section of the balance sheet except for:

A)Warranty liability
B)Contingent liability
C)Deferred Revenues
D)Constructive obligations

Question 7

Canadian practice requires that liabilities be recorded at their present value.

Question 8

Which of the following would best describe a contingent liability?

A)An obligation to transfer services instead of cash to settle a liability.
B)An obligation where the costs will be covered by insurance.
C)An obligation with a high degree of uncertainty about the amount or timing of the payment.
D)An obligation with a low degree of uncertainty about the amount or timing of the payment

Question 9

All current liabilities have fixed due dates and fixed payment amounts.

Question 10

The calculation of future taxes is based on the permanent differences between book income and tax income.

Question 11

Which of the following is not a characteristic of a liability?

A)There is a probable future sacrifice of resources.
B)There is a fixed payment amount and payment date.
C)There is little discretion to avoid the obligation.
D)The event giving rise to the liability has already occurred.

Question 12

Accrued warranty expenses create temporary differences for the purpose of calculating future taxes.

Question 13

A company ordered inventory and made a $2,000 down payment.The inventory is to be received in two months.This is an example of an):

A)mutually unexecuted contract.
B)partially executed contract.
C)contingent liability.
D)a prepaid amount.

Question 14

All current liabilities are settled with cash.

Question 15

A permanent difference is a difference between tax and accounting income that will not reverse in a future period.

Question 16

Accounts receivable occur when a company buys goods or services on credit.

Question 17

Long-term debt that is due within one year is classified with other long-term debt.

Question 18

Unearned revenue is an example of a liability that is settled by the provision of services.

Question 19

Which of the following would not be recorded?

A)Partially executed contracts
B)Estimated warranty costs
C)Mutually unexecuted contracts
D)Future taxes

Question 20

A purchase commitment is an example of a mutually unexecuted contract.

Question 21

Which of the following liabilities requires the use of an estimate when it is initially recorded?

A)Wages payable
B)Unearned revenue
C)Warranty obligation
D)Accounts payable

Question 22

Which of the following liabilities is often referred to as "free debt" because it rarely carries any interest if paid within a specified period of time.

A)Line of credit.
B)Working capital loan.
C)Accounts payable.
D)None of the above-all current liabilities carry an interest rate.

Question 23

A short-term liability used by a company to finance the purchase of current assets and that is often secured by accounts receivable or inventory is referred to as an):

A)accounts payable.
B)current liability.
C)line of credit.
D)overdraft protection.

Question 24

The following information relates to Blinds R Us' payroll for the month of January: $$\begin{array} { l r } \text { Total wages } & \$ 15,000 \\\text { Income tax withheld } & 3,000 \\\text { Employees' CPP contributions } & 500 \\\text { Employees' El contributions } & 225 \\\text { Company contributions for CPP } & 500 \\\text { Company contributions for EI } & 315\end{array}$$
The total wage expense for Blinds R Us for the month of January is closest to:

A)$14,185
B)$15,000
C)$15,185
D)$18,815

Question 25

Which of the following liabilities results from amounts owed by both the employee and the employer?

A)Employee income tax payable
B)Wages payable
C)Employment insurance payable
D)Vacation pay payable

Question 26

Long-term liabilities are recorded in the books at their:

A)net present value.
B)net amount.
C)net realizable value.
D)gross amount.

Question 27

All of the following are ways that corporations can finance current cash shortages except a:

A)line of credit.
B)current portion of long-term debt.
C)short-term loan.
D)working capital loan.

Question 28

Accounts payable are recorded on the books at their:

A)net present value.
B)net amount.
C)net realizable value.
D)gross amount.

Question 29

Which of the following companies would usually not have an unearned revenue account?

A)Magazine publishing company
B)Property management company
C)Airline
D)Hardware Store

Question 30

Short-term notes payable:

A)have terms between six months and a year.
B)are the current portion of a long-term note.
C)may carry either implicit or explicit interest rates.
D)are not due within one year.

Question 31

Use the following information to answer questions
Mars Company signed a six-month note payable for $20,000 on December 1, 2010 with an interest rate of 6%.The first payment of $3,391.91 is due on January 1, 2011.
What would the journal entry for December 31, 2010 be?

A)dr.interest expense $100, dr.note payable $ 3,291.91, cr.Cash $ 3,391.91
B)dr.interest expense $600, dr.note payable $ 2,791.91, cr.Cash $ 3,391,91
C)dr.interest expense $100, cr.Interest payable $ 100
D)dr.interest expense $600, cr.Interest payable $ 600

Question 32

If a $6,000, one-year, non-interest-bearing note is issued by a borrower, how much cash is received by the borrower?

A)$6,000
B)Less than $6,000
C)More than $6,000
D)Notes cannot be issued without an interest rate

Question 33

All of the following situations contribute to the need for a company to recognize deferred revenues, except for:

A)Partially executed contracts between buyers and sellers
B)The requirement by sellers for the prepayment of goods and services
C)Mutually unexecuted contracts between buyers and sellers
D)The seller has collected a deposit but not yet met the criteria for revenue recognition

Question 34

Use the following information to answer questions
Mars Company signed a six-month note payable for $20,000 on December 1, 2010 with an interest rate of 6%.The first payment of $3,391.91 is due on January 1, 2011.
What are the liabilities related to this note on the December 31, 2010 balance sheet?

Question 35

Typically acquisition costs for inventory can be financed through the use of:

A)overdraft protection
B)accounts payable
C)working capital
D)notes payable

Question 36

Which of the following companies would be most likely to have an unearned revenue account?

A)Grocery store
B)Department store
C)Hotel Chain
D)Car dealership

Question 37

If a company issues $5,000, 8%, one-year note payable, the amount of cash they receive is closest to:

A)$5,400
B)$4,600
C)$4,630
D)$5,000

Question 38

When the original amount borrowed differs from the amount repaid, the note has:

A)an explicit interest rate.
B)no interest rate.
C)a specified interest rate.
D)an implicit interest rate.

Question 39

During 2011 Alcom Appliances sold 400 appliances worth $2,000,000.Each appliance comes with a one-year warranty, which Alcom estimates will cost $75 each.During the year Alcom spent $12,500 on warranty costs for the appliances sold in 2011.At the end of the 2011 the warranty liability and the warranty expense related to these sales would be closest to:

Question 40

For which of the following reasons would a user examine the current liabilities?

A)To determine how quickly accounts receivable are collected.
B)To determine how much cash will be required to meet obligations in the short-term.
C)To determine how much cash will be required to meet obligations in the long-term.
D)To evaluate company performance.

Question 41

Use the following information for questions:
Pluto Co.borrowed $25,000 on September 1, 2010 on a nine-month, 8% note.Interest and principal are due at maturity.
The entry to record the transaction on September 1, 2010 would include a:

A)Debit to cash for $23,148
B)Credit to short-term notes payable for $25,000
C)Debit to interest expense for $1,500
D)Credit to interest payable for $1,852

Question 42

Which of the following statements about accounts payable is not true?

A)They are usually due within 30 to 60 days.
B)They normally carry implicit interest charges.
C)There may be a penalty for late payment.
D)They are typically used to finance inventory purchases.

Question 43

In which of the following situations would a contingent loss be recognized?

Question 44

If a firm borrows $9,000 for one year from another entity using a non-interest-bearing note, what amount does the borrower repay on the due date?

A)More than $9,000
B)$9,000
C)Less than $9,000
D)Unable to determine without the implicit interest rate

Question 45

When a company signs a contract to pay for a specified quantity of goods at a specified price, whether they actually take that much from the supplier or not, is called an):

A)contingent liability.
B)inventory commitment.
C)take-or-pay contract.
D)a contingent pay contract.

Question 46

What is the purpose of a loan amortization table?

A)To apply straight-line amortization to the loan.
B)To apply declining-balance amortization to the loan.
C)To show the breakdown of each loan payment into its interest and principal components.
D)To keep track of the balance of the loan outstanding if they do not record the loan on their books.

Question 47

An employee earns $1,500 a week and the deductions from that amount for her contributions to EI, CPP, and income taxes are $185.The company must contribute an additional $105 for EI and CPP.How much would the company record as salary expense for that week?

A)$1,420
B)$1,500
C)$1,605
D)$1,790

Question 48

A company has $5,000,000 in long-term debt outstanding.They expect to repay it evenly over the next four years.Which of the following represents how it will be shown on the year-end balance sheet?

A)Accounts payable: $1,250,000, Long-term debt: $3,750,000
B)Current portion of long-term debt: $1,250,000, Long-term debt: $3,750,000
C)Current portion of long-term debt: $2,500,000, Long-term debt: $2,500,000
D)Long-term debt: $5,000,000

Question 49

Venus Ltd.secured a $750,000, five year, 8% note payable on January 1.The loan will be repaid using blended monthly payments with a fixed monthly principal payment of $12,500.Which of the following represents how the loan will be reflected on the balance sheet at the end of the first year?

A)Long term Liabilities - note payable: $750,000
B)Current portion of long term debt: $150,000, Long term liabilities - note payable: $450,000
C)Current portion of long term debt: $300,000, Long term liabilities - note payable $ 450,000
D)Current portion of long term debt: $600,000

Question 50

Akman Management is a rental company that requires its tenants to pay rent one month in advance.Akman should record the cash received as:

A)prepaid rent.
B)rent revenue.
C)unearned revenue.
D)accounts payable.

Question 51

Which of the following statements concerning income taxes in Canada is not true?

A)Income taxes must often be estimated based on prior years' tax returns.
B)Income taxes are usually paid through instalment payments throughout the year.
C)The deadline for filing a corporate tax return and payment of any outstanding taxes is six months after the company's year-end.
D)Multinational companies located in Canada may be required to pay tax in Canada.

Question 52

Use the following information for questions:
Cartage Co.signed a $17,000, six-month note on October 1, 2011.Principal and interest are due at maturity.The interest rate is 6%.
How much cash did Cartage Co.receive on October 1?

A)$17,000
B)$17,510
C)$18,020
D)$15,980

Question 53

Use the following information for questions:
Anna's Day Spa sells $25,000 worth of gift certificates in November and December.25% of the gift certificates are redeemed in December prior to the December 31 year end.
The entry to record the sale of the gift certificates is:

A)Dr.Cash Cr.Gift card revenue
B)Dr.Gift Card Revenue Cr.Deferred gift card revenue
C)Dr.Prepaid Gift Cards Cr.Gift card revenue
D)Dr.Cash Cr.Deferred gift card revenue

Question 54

Use the following information for questions:
Anna's Day Spa sells $25,000 worth of gift certificates in November and December.25% of the gift certificates are redeemed in December prior to the December 31 year end.
The required year end adjusting entry is:

A)Dr.Revenues $6,250, Cr.Deferred gift card revenues $6,250
B)Dr.Revenues $18,750, Cr.Deferred gift card revenues $18,750
C)Dr.Deferred gift card revenues $6,250, Cr.Revenues $6,250
D)Dr.Gift card revenues $18,750, Cr.Revenues $18,750

Question 55

A $20,000 short-term note results in the borrowing company receiving proceeds of $18,400.The interest on this note is said to be:

A)implicit.
B)explicit.
C)estimated.
D)none, the note is interest free.

Question 56

TJ Co.signed an eight-month, non-interest-bearing note payable on May 1, 2011.The note requires that TJ repay $8,500 on December 31, 2011.A review of TJ's bank statement indicates that the company received $7,700 on May 1, 2011 relating to this note.For the year ended December 31, 2011 the amount TJ will record as interest expense will be:

A)-0-
B)$800
C)$1,200
D)$1,600.

Question 57

Use the following information for questions:
Cartage Co.signed a $17,000, six-month note on October 1, 2011.Principal and interest are due at maturity.The interest rate is 6%.
The total liability reflected on the December 31 balance sheet related to this note would be closest to?

A)$17,000
B)$17,085
C)$17,255
D)$18,020

Question 58

Use the following information for questions:
Pluto Co.borrowed $25,000 on September 1, 2010 on a nine-month, 8% note.Interest and principal are due at maturity.
The total liability reflected on the December 31, 2010 balance sheet concerning this note would be closest to:

A)$25,000
B)$25,667
C)$26,500
D)$27,000

Question 59

On December 31, 2011, a company has a $500,000 15-year mortgage outstanding.Over the next year they will make 12 monthly payments of $5,000 representing $33,500 of interest and $26,500 of principal repayment.Which of the following best represents how the mortgage will be reported on the December 31, 2011 balance sheet?

Question 60

Which of the following accounting principles governs the recognition of the liability for warranties?

A)Full disclosure
B)Materiality
C)Cost
D)Matching

Question 61

How should a contingent liability that has a likely chance of occurring and can be reasonably estimated be disclosed?

Question 62

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } & \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \\2010 & \$ 3,500,000 & \$ 110,000 \\2011 & \$ 3,900,000 & \$ 195,000\end{array}$$

-The warranty payable on the December 31, 2010 balance sheet was:

A)$47,500
B)$105,000
C)$110,000
D)$157,500

Question 63

When the occurrence of a liability is dependent on the outcome of some future event, the liability is referred to as an):

A)contingent liability.
B)commitment.
C)accrued liability.
D)accounts payable.

Question 64

The awarding of frequent flier miles by airline companies is accounted for in a manner similar to:

A)warranty expenses.
B)accounts payable.
C)contingent liabilities.
D)commitments.

Question 65

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } & \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \\2010 & \$ 3,500,000 & \$ 110,000 \\2011 & \$ 3,900,000 & \$ 195,000\end{array}$$

-The warranty expense for 2011 was:

A)$157,500
B)$175,500
C)$195,000
D)$305,000

Question 66

How should a contingent liability that has a likely chance of occurring but the amount of the loss cannot be reasonably estimated be disclosed?

Question 67

Use the following information for questions:
Melchor Inc.offers a two-year warranty against failure of its products.The estimated liability is 1.5% in the year of sale and 3% in the second year.Sales and actual warranty expense for 2010 and 2011 were: $$\begin{array} { c c c } & \text { Sales } & \text { Actual Warranty Costs Incurred During Year } \\2010 & \$ 3,500,000 & \$ 110,000 \\2011 & \$ 3,900,000 & \$ 195,000\end{array}$$

-The warranty payable on the December 31, 2011 balance sheet was:

A)$0
B)$28,000
C)$138,000
D)$175,500

Question 68

Which of the following statements concerning purchase commitments is true?

A)Canadian practice requires disclosure of all purchase commitments.
B)Only anticipated losses require disclosure.
C)Footnote disclosure is required if the contract has a material effect on the financial statements.
D)Anticipated gains are recognized, if permanent and material.

Question 69

When a company sells its receivables to another entity with recourse, the requirement to buy back uncollectible accounts is called an):

A)bad debt expense.
B)estimated liability.
C)commitment.
D)contingent liability.

Question 70

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
The warranty liability as at the year-end 2010 was:

A)$0
B)$100,000
C)$150,000
D)$250,000

Question 71

Maynard Manufacturing has a two-week payroll of $8,200 for its eight employees.Income tax of $1,080 is deducted from the employees' cheques, as well as 5% for CPP and 2% for EI.Wages deposited in employees' bank accounts would be:

A)$6,546
B)$7,120
C)$7,626
D)$8,200

Question 72

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
The warranty liability as at the end of the 2011 year was:

A)$75,000
B)$280,000
C)$355,000
D)$530,000

Question 73

Use the following information for questions:
Direct Sales Inc.offers a two-year warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2010 and 2011 were: $2,500,000 and $2,800,000, respectively.They incurred no warranty costs in 2010 but in 2011 they spent $175,000 on repairs related to the warranties from 2010 and 2011.
The warranty expense for 2010 was:

A)$80,000
B)$100,000
C)$150,000
D)$250,000

Question 74

How should a contingent liability that has an unlikely chance of occurring and is insignificant in size be disclosed?

Question 75

Which of the following contingent losses would require footnote disclosure only?

A)A likely loss with an amount that can be reasonably estimated
B)A likely loss of a known amount
C)An unlikely loss
D)A likely loss with an amount that cannot be reasonably estimated