Deck 9: Current Liabilities

Question 1

Gift cards are an example of a contingent liability.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

A line of credit is always reflected under the current liabilities regardless of the size of the debt.

Answer 3

True

Question 4

Liabilities are the result of events or transactions that have already occurred.

Question 5

The balance for outstanding income taxes are reported as a current liability.

Question 6

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

A) accrued expenses.
B) unearned revenues.
C) interest payable.
D) prepaid expenses.

Question 7

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

Question 8

Bankers will often compare current assets to current liabilities to assess liquidity.

Question 9

The accounts payable turnover ratio measures the number of times per year that a company settles their trades payable.

Question 10

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

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

The amount owing on income taxes is recorded as deferred income taxes.

Question 13

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

Question 14

The accounts payable turnover ratio can be converted to days by using the accounts payable payment period formula.

Question 15

Given that most current liabilities will be settled with cash, it is important to identify and record these liabilities separately because it helps users to assess

A) solvency.
B) cash position.
C) net income.
D) liquidity.

Question 16

Accounting standards require that liabilities be recorded at their present value.

Question 17

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

Question 18

The difference between the face value of a liability and its present value is due to the time value of money.

Question 19

Accounts payable are recorded on the books at their

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

Question 20

All current liabilities are settled with cash.

Question 21

During 2020 Lockport Appliances sold 400 appliances worth $2,000,000. Each appliance comes with a one-year assurance-type warranty, which Lockport estimates will cost $75 each. During the year Lockport spent $12,500 on warranty costs for the appliances sold in 2020. At the end of the 2020 the warranty provision and the warranty expense related to these sales would be closest to

Question 22

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

A) Prepaid Rent.
B) Rent Revenue.
C) Unearned Revenue.
D) Accounts Payable.

Question 23

Non-current liabilities are recorded in the books at their

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

Question 24

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 25

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 26

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 27

Bank indebtedness includes all of the following, except for

A) bank overdraft.
B) line of credit.
C) revolving credit facilities.
D) current portion of long-term debt.

Question 28

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

A) Wages Payable
B) Unearned Revenue
C) Warranty Provision
D) Accounts Payable

Question 29

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 30

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 31

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 a(n)

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

Question 32

The term breakage refers to

A) unearned gift card revenues.
B) the portion of a gift card that will never be used by its owners.
C) the amount of gift card revenue that cannot be recognized.
D) expenses related to damaged credit cards.

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 has an outstanding performance obligation under the contract.

Question 34

A customer loyalty provision specifically refers to

A) points that a customer has redeemed in the past.
B) the liability related to the unused loyalty points or credits.
C) the revenues earned from the use of points.
D) the cash received from the use of points.

Question 35

When business owners offer programs that enable customers to accumulate points or other credit when making purchases, this results in

A) customer loyalty revenues.
B) performance obligations.
C) prepaid services.
D) an assurance warranty.

Question 36

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 37

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 38

A company has $5,000,000 in long-term debt outstanding. It expects to repay the loan evenly over the next four years. Which of the following represents how it will be shown on the year-end statement of financial position?

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 39

On July 31, 2020, Able Co. has a $500,000 15-year mortgage outstanding. Over the next year the company 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 July 31, 2020 statement of financial position?

Question 40

Time value of money

A) is generally used for valuing all liabilities.
B) reflects the difference between the value of a dollar today versus a dollar paid in the future.
C) is not used for financial reporting purposes.
D) is immaterial.

Question 41

Canadian Health Care Inc. provides a two-year assurance warranty on its products. Estimates are that warranty costs will be 3% of sales in the year of sale and 5% the following year. Sales and actual warranty costs for Canadian Health Care's first two years of operations were Instructions
a) Determine the warranty expense and warranty provision as at year end for 2020.
b) Determine the warranty expense and warranty provision liability as at year end for 2021.
c) Prepare all relevant journal entries assuming that all actual warranty claims are settled at year end.

Question 42

In September 2020, EastWest Airlines sells all of its available seats for travel from Calgary to Ixtapa, Mexico during the months of December, 2020 and January and February, 2021. Total airfare collected by EastWest for the sale of these airline tickets is $2,400,000. There are an equal number of flights to Ixtapa each month. EastWests' estimated Cost of Sales (fuel, salaries, etc.) is 60%.
Instructions
a) Prepare all of the necessary journal entries for 2020.
b) What liabilities, if any, will need to be reflected on the December 2020 statement of financial position?

Question 43

Listed below are several ways to classify liabilities followed by a series of situations. Match the classifications to the situations by placing the appropriate letter in the space provided.

Question 44

When the board declares dividends, the correct journal will be

A) Dividends Expense Dividends Payable
B) Dividend Declared Cash
C) Dividends Declared Dividends Payable
D) Dividends Receivable Dividends Revenue

Question 45

The following information relates to KC Enterprises payroll for the month of July: The total wage expense for KC Enterprises for the month of July is

A) $14,107.50.
B) $16,078.50.
C) $9,285.
D) $16,024.50.

Question 46

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 47

The following instalment payment schedule is for a long-term mortgage payable for Melrose Enterprises:
In addition to the mortgage payable, Melrose also has balances in the following select accounts on December 31, 2022:
Accounts Payable $25,000
Bank overdraft $12,500
Income Tax Payable $11,500
Interest Expense $2,750
Unearned Revenues $1,250
Instructions
a) Prepare the necessary entry to update the current portion of long-term debt account for December 31, 2022.
b) Prepare the liabilities section of the statement of financial position for December 31, 2022, for Melrose Enterprises.

Question 48

During the current month, the employees of a company have earned wages of $120,000 and the following source deductions were withheld:
$\bullet$ Income tax $30,000
$\bullet$ CPP premiums $5,940
$\bullet$ EI Premiums $1,920
On the 15^th of the following month the employer paid all required remittances.
Instructions
Prepare all the necessary payroll journal entries, including the necessary remittance.

Question 49

Miller 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 4.95% for CPP and 1.6% for EI. Wages deposited in employees' bank accounts would be

A) $6,583.
B) $7,120.
C) $7,663.
D) $8,200.

Question 50

In order for an item to be classified as a liability, what three characteristics must it have?

Question 51

Juliana Limited has an October 31 year end. On October 1, 2020 Juliana had the following current liabilities listed on its books: During October 2020 Juliana engaged in the following transactions:
Oct 1 Negotiated a $50,000 line of credit with their bank to replace the bank overdraft.
Oct 5 Sold goods worth $30,000 on which they had previously received a $12,000 deposit. The balance is due in 30 days.
Oct 12 Bought $20,000 of inventory on credit, terms of 30 days.
Oct 15 Paid amounts due the Government of Canada for the payroll amounts outstanding from September 30.
Oct 20 Paid $87,000 owing to a supplier.
Oct 21 Received $5,000 from a client for work that will be performed in January 2018.
Oct 21 Sold $56,000 of goods half for cash, half on credit.
Oct 22 Made a $10,000 payment on the line of credit.
Oct 30 Paid the monthly payroll amounts to employees. The gross payroll was $16,200. Amounts withheld from the employees' cheques were as follows: At this time, the company also recorded their liability for amounts due to the government for CPP and EI.
Oct 31 Declared $5,000 of dividends payable next year.
Instructions
a) Prepare all of the journal entries required as a result of the above transactions.
b) Prepare the current liabilities section of the statement of financial position at October 31, 2020.

Question 52

Dividends Payable is the most common type of liability the corporation has to

A) the government.
B) the employees.
C) the shareholders.
D) the board of directors.

Question 53

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 54

Spring Water Corporation has the following selected accounts at March 31, 2020 after posting adjusting entries: Instructions
a) Prepare the current liability section of Spring Water Corporation's statement of financial position, assuming $19,500 of the mortgage is payable next year.
b) Calculate the A/P turnover, day's turnover and working capital. Comment on Spring Water's liquidity, assuming total current assets are $575,000 and supplier terms are net 30.

Question 55

Below is the financial data pertaining to Printcraft Inc.: Instructions
Compute the accounts payable turnover ratio and the accounts payable payment period for 2021 and 2022.

Question 56

You have just started your new position at Entity Investments as the financial statement analyst. Your boss is concerned about the value of liabilities reported on the financial statements. The non-current liabilities are recorded using the discounted present values and the currently liabilities are recorded using the face value.
Instructions
Explain to your boss why current liabilities and non- current liabilities are valued differently.

Question 57

Outstanding balances for service-type warranties are

A) expensed against revenues in the current period.
B) not considered separate performance obligations.
C) reported the same way as unearned revenues.
D) all of the above are true.

Question 58

An increase in A/P turnover year over year

A) is due to increased payments to suppliers.
B) increases the number of days accounts payable are outstanding.
C) increases expenses.
D) is meaningless without comparative data.

Question 59

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) Income taxes payable is reported as a current liability.

Question 60

The accounts payable turnover ratio measures

A) number of times the company settles its trade payable.
B) average accounts payable balance.
C) the average number of times the industry settles their trade payable.
D) the average balance of accounts payable to current assets.

Question 61

You have just recently been hired to oversee Kid's R Us' accounts payable department. You have been asked to review the department's "free debt" policy. Currently payables are never paid early even though there are significant early payment discounts available.
What is "free debt"? Provide a rationale both for and against such a policy.

Question 62

Explain what a line of credit is and why a company might need one and how a company would use it. Provide examples. How does this differ from a working capital loan?

Question 63

Easy Electronics Inc. is a store specializing in electronic products. For the first time this year they offered a one-year warranty on all products sold in the store and sold gift cards. They estimate that the warranty costs should average 2% of sales (total sales of $8,000,000 in this past year) and by year end they had spent $40,000 on the program. For gift cards, they sold $25,000 worth during the year, but only $5,000 had been redeemed.
Instructions
The accountant has asked you to explain how these two new types of services should be recorded.

Question 64

Several provinces have eliminated the expiry dates for gift cards with a dollar value. What challenges this does this create for businesses issuing gift cards?

Question 65

You are the controller of a large Auto dealership that offers customers a three year, 60,000 km, bumper to bumper warranty at no extra cost, or customers may purchase an extended warranty that provided bumper to bumper coverage for 5 years or 100,000 km. In reviewing the year-end financial statements the General Manager notices that you have accounted for these two warranties differently. Provide the GM with an explanation of these two types of warranties and how the warranties are accounted for.