Deck 9: Reporting and Analyzing Liabilities

Question 1

Interest expense is reported under Other Expenses and Losses in the income statement.

Answer 1

True

Question 2

A current liability must be paid out of current earnings.

Answer 2

False

Question 3

If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability.

Answer 3

False

Question 4

Interest expense on a note payable is only recorded at maturity.

Question 5

Notes payable are often used instead of accounts payable.

Question 6

When a business sells an item and collects a state sales tax on it, a current liability arises.

Question 7

If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount of the sales tax is $9.52.

Question 8

Most notes are not interest bearing.

Question 9

Unearned revenues should be classified as Other Revenues and Gains on the income statement.

Question 10

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Question 11

A company whose current liabilities exceed its current assets may have a liquidity problem.

Question 12

The higher the sales tax rate, the more profit a retailer can earn.

Question 13

A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.

Question 14

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Question 15

Payroll taxes include the employer's share of Social Security taxes as well as state and federal unemployment taxes.

Question 16

Notes payable usually require the borrower to pay interest.

Question 17

During the month, a company sells goods for a total of $106,000, which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense.

Question 18

With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

Question 19

Unearned revenues are received before goods are delivered or services are rendered.

Question 20

A note payable must always be paid before an account payable.

Question 21

The board of directors may authorize more bonds than are issued.

Question 22

Convertible bonds are often called callable bonds.

Question 23

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

Question 24

The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Question 25

Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000.

Question 26

The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued.

Question 27

The carrying value of a bond is equal to the market price on the date of sale.

Question 28

If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60.

Question 29

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium.

Question 30

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Question 31

Bonds are a form of interest-bearing notes payable.

Question 32

The current market value of a bond is equal to the present value of all future cash payments promised by the bond.

Question 33

Neither corporate bond interest nor dividends are deductible for tax purposes.

Question 34

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Question 35

The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 36

An unsecured bond is one that is issued against the general credit of the borrower.

Question 37

A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375.

Question 38

Generally, convertible bonds do not pay interest.

Question 39

If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000.

Question 40

The face value is the amount of principal and interest due at the maturity date.

Question 41

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Question 42

The debt to assets ratio measures the percentage of the total assets provided by creditors.

Question 43

The times interest earned is computed by dividing net income by interest expense.

Question 44

Liabilities are classified on the balance sheet as current or

A)deferred.
B)unearned.
C)long-term.
D)accrued.

Question 45

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest.

Question 46

Material gains or losses on bond redemption are reported as an extraordinary item on the income statement.

Question 47

Current liabilities are due

A)but not receivable for more than one year.
B)but not payable for more than one year.
C)and receivable within one year.
D)and payable within one year.

Question 48

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

A)Dividends payable
B)Bonds payable in 5 years
C)Three-year notes payable
D)Mortgage payable as a single payment in 10 years

Question 49

If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid.

Question 50

The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company's liquidity.

Question 51

A current liability is a debt that can reasonably be expected to be paid

A)within one year, or the operating cycle, whichever is longer.
B)between 6 months and 18 months.
C)out of currently recognized revenues.
D)out of cash currently on hand.

Question 52

Failure to record a liability will probably

A)result in an overstated net income.
B)result in overstated total liabilities and owner's equity.
C)have no effect on net income.
D)result in understated total assets.

Question 53

Very often, failure to record a liability means failure to record a(n)

A)revenue.
B)asset conversion.
C)footnote.
D)expense.

Question 54

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 55

Most companies pay current liabilities

A)out of current assets.
B)by issuing interest-bearing notes payable.
C)by issuing stock.
D)by creating long-term liabilities.

Question 56

If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount.

Question 57

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Question 58

If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium.

Question 59

If $180,000, 6%, bonds are issued on January 1, and pay interest annually, the amount of interest paid will be $10,800.

Question 60

If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 61

The interest charged on a $90,000 note payable, at the rate of 6%, on a 90-day note would be

A)$5,400.
B)$2,700.
C)$1,350.
D)$900.

Question 62

The interest charged on a $90,000 note payable, at the rate of 6%, on a 60-day note would be

A)$5,400.
B)$2,700.
C)$1,350.
D)$900.

Question 63

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. What is the adjusting entry required if Sadowski Brick Company prepares financial statements on June 30?

Question 64

The interest charged on a $300,000 note payable, at the rate of 6%, on a 90-day note would be

A)$18,000.
B)$9,000.
C)$4,500.
D)$1,500.

Question 65

West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. The entry made by Drake Builders Company on January 1 to record the proceeds and issuance of the note is

Question 66

Which of the following is not a current liability on December 31, 2017?

A)A Note Payable due December 31, 2018
B)An Accounts Payable due January 31, 2018
C)A lawsuit judgment to be decided on January 10, 2018
D)Accrued salaries payable from 2017

Question 67

The interest charged on a $350,000 note payable, at the rate of 6%, for a year would be

A)$21,000.
B)$10,500.
C)$5,250.
D)$1,750.

Question 68

West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. What entry will Drake Builders Company make to pay off the note and interest at maturity assuming that interest has been accrued to June 30?

Question 69

On October 1, Sam's Painting Service borrows $150,000 from National Bank on a 3-month, $150,000, 4% note. The entry by Sam's Painting Service to record payment of the note and accrued interest on January 1 is

Question 70

Liabilities are classified as current or long-term based on their

A)description.
B)payment terms.
C)due date.
D)amount.

Question 71

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. What entry will Sadowski Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

Question 72

The interest charged on a $350,000 note payable, at the rate of 6%, on a 60-day note would be

A)$21,000.
B)$10,500.
C)$5,250.
D)$3,500.

Question 73

Sales taxes collected by a retailer are recorded by

A)crediting Sales Tax Revenue.
B)debiting Sales Tax Expense.
C)crediting Sales Taxes Payable.
D)debiting Sales Taxes Payable.

Question 74

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. The entry made by Sadowski Brick Company on January 1 to record the proceeds and issuance of the note is

Question 75

On October 1, Sam's Painting Service borrows $150,000 from National Bank on a 3-month, $150,000, 4% note. What entry must Sam's Painting Service make on December 31 before financial statements are prepared?

Question 76

West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. What is the adjusting entry required if Drake Builders Company prepares financial statements on March 30?

Question 77

Unearned Rent Revenue is

A)a contra account to Rent Revenue.
B)a revenue account.
C)reported as a current liability.
D)debited when rent is received in advance.

Question 78

With an interest-bearing note, the amount of assets received upon issuance of the note is generally

A)equal to the note's face value.
B)greater than the note's face value.
C)less than the note's face value.
D)equal to the note's maturity value.

Question 79

Interest expense on an interest-bearing note is

A)always equal to zero.
B)accrued over the life of the note.
C)only recorded at the time the note is issued.
D)only recorded at maturity when the note is paid.

Question 80

As interest is recorded on an interest-bearing note, the Interest Expense account is

A)increased; the Notes Payable account is increased.
B)increased; the Notes Payable account is decreased.
C)increased; the Interest Payable account is increased.
D)decreased; the Interest Payable account is increased.