Deck 7: Accounting for Liabilities

Question 1

Recognizing the obligation for product warranties is a claims exchange transaction.

Answer 1

True

Question 2

Vacation pay is considered a contingent liability to the extent that the obligation exists due to work already performed.

Answer 2

False

Question 3

Payment of interest on a note payable is considered a financing activity on the statement of cash flows.

Answer 3

False

Question 4

When calculating interest expense on a 6-month note, multiply the principal by the interest rate, and then multiply by 6/12.

Question 5

In September of Year 1, Hansen Company issued a note payable to borrow money from its bank. Principal and interest on the note would come due in June Year 2. Interest expense on this note must be accrued at the end of Year 1 for the period from issuance of the note to the last day of the accounting period.

Question 6

Flora's Flower Market sells eight potted petunias to a customer for $50.00, plus 5% sales tax. Flora's will recognize $52.50 in sales revenue.

Question 7

All lawsuits in which a company has been named a defendant should be either disclosed in the company's notes to the financial statements, or recognized as a liability on its balance sheet.

Question 8

At the end of Year 1, Durango Company recognized its obligation under product warranties. During Year 2, it replaced products to its customers under the terms of the warranties. The Year 2 warranty settlements should be recorded as asset use transactions.

Question 9

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is reduction of principal is $3,587.

Question 10

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

Question 11

A classified balance sheet is one that distinguishes between operating and non-operating assets.

Question 12

If a company offers a warranty on the products it sells, the company records the warranty expense at the time that the warranty service is provided to customers under the terms of the warranty.

Question 13

Joseph Company is preparing to repay a one-year note on May 1, Year 1. The first step in this process is to accrue eight months of interest expense.

Question 14

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

Question 15

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is interest expense is $4,500.

Question 16

If a company is located in an area where floods or earthquakes are deemed to be possible, the company should record a contingent liability.

Question 17

Vogle Company purchased $8,000 of equipment by making a $500 down payment and issuing a note for the remainder. As a result of this event, assets increased by $8,000.

Question 18

Contingent liabilities are only recognized if they arise from past events.

Question 19

Sales tax is reported as revenue when it is collected, and reported as an expense when it is paid.

Question 20

Monthly remittance of sales tax due has no impact on the income statement, but reduces cash flow from operating activities.

Question 21

The party who borrows money in a note payable is known as the:

A) Maker.
B) Payee.
C) Issuer.
D) Both Maker and Issuer.

Question 22

Park Enterprises issued bonds with a term of 5 years and a face value of $500,000, receiving cash of $508,000. The bonds pay interest once a year, with an annual rate of 7%. Assuming straight-line amortization, the amount of interest expense for the first year would be $31,600.

Question 23

The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

Question 24

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market rate of interest.

Question 25

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. With this loan, the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

Question 26

If bonds are issued at a premium, the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

Question 27

West Company borrowed $26,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 9% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

A) $0.
B) $234.
C) $585.
D) $780.

Question 28

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of two to five years.

Question 29

Peak Enterprises issued bonds with a face value of $500,000, receiving cash of $508,000. To record this event, Bonds Payable should be increased for $500,000.

Question 30

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

Question 31

The effective interest rate method of amortizing bond premium or discount results in a constant amount of interest expense every period.

Question 32

A line of credit typically has an interest rate that is fixed (constant) for the length of the agreement.

Question 33

If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

Question 34

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. When the bonds mature, Daniels will have to pay the face value of the bonds to the bondholders.

Question 35

If a company has issued bonds at a premium, the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

Question 36

Amortization of a discount on bonds payable is an asset use transaction.

Question 37

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

A) Decrease assets and decrease retained earnings by $2,000.
B) Increase liabilities and decrease stockholders' equity by $2,000.
C) Increase liabilities and decrease stockholders' equity by $1,600.
D) Decrease stockholders' equity and increase liabilities by $4,800

Question 38

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. These bonds were issued at a discount.

Question 39

If the stated interest rate for bonds is the same as the market rate of interest, the bonds will be issued at their face value.

Question 40

Houston Company borrowed $20,000 from Dallas Company on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements?

A) Increase liabilities and increase expenses
B) Increase assets and increase revenues
C) Increase assets and increase liabilities
D) No effect

Question 41

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of net income on the Year 2 income statement would be:

A) $770.
B) $630.
C) $(190).
D) $1,890.

Question 42

On August 1, Year 1 Gin Company borrowed $50,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 2 will affect Gin's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 43

Riley Company borrowed $32,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 8% annual interest rate. Riley earned cash revenue of $980 in Year 1 and $1,300 in Year 2. Assume no other transactions.The amount of net income on the Year 2 income statement would be:

A) $660.
B) $640.
C) $2,560.
D) $1,920.

Question 44

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

A) $24,720
B) $24,800
C) $25,920
D) $24,000

Question 45

Which of the following is a claims exchange transaction?

A) Accrued interest on a note payable.
B) Issued a note to purchase equipment.
C) Repaid principal on a note payable.
D) Paid interest on a note payable.

Question 46

On November 1, Year 1 Claire Company borrowed $5,000 cash from Shelter Company. The one-year note carried a 5% rate of interest. Which of the following shows how the loan will affect Claire's financial statements on November 1, Year 1?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 47

Baby Beach Company experienced an event that had the following effects on its financial statements.

-Which of the following events could have caused these effects?

A) Paid cash to settle accrued interest payable
B) Paid cash to settle the principal balance of note payable
C) Issued a note payable for cash
D) Paid cash to acquire a long-term asset

Question 48

West Company borrowed $10,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

A) $0.
B) $150.
C) $60.
D) $200.

Question 49

Riley Company borrowed $24,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 4% annual interest rate. Riley earned cash revenue of $900 in Year 1 and $500 in Year 2. Assume no other transactions.The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

A) $260 inflow
B) $500 inflow
C) $24,260 outflow
D) $460 outflow

Question 50

Madison Company issued an interest-bearing note payable with a face amount of $25,200 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

A) $2,016.
B) $840.
C) $25,200.
D) zero.

Question 51

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

A) $1,920.
B) $800.
C) $24,000.
D) zero.

Question 52

On August 1, Year 1 Gin Company borrowed $50,000 cash. The one-year note carried a 6% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will affect Gin's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 53

On May 1, Year 1, Arrow Company borrowed $10,000 from the State Bank at 9 percent annual interest. The note issued by Arrow had a one-year term. In addition, Arrow reported cash revenue of $3,400 in Year 1 and $800 in Year 2 from sales. Interest is paid when the note is due.

-The cash flow from operating activities Arrow would report on the Year 1 and Year 2 statements of cash flows would be

A) $2,800 / $500
B) $2,500 / $800
C) $2,800 / $(100)
D) $3,400 / $(100)

Question 54

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

A) $770 inflow
B) $1,400 inflow
C) $38,520 outflow
D) $1,120 outflow

Question 55

Madison Company issued an interest-bearing note payable with a face amount of $11,400 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

A) $11,932
B) $11,780
C) $12,312
D) $11,400

Question 56

Baby Beach Company experienced an event that had the following effects on its financial statements.

-Which of the following events could have caused these effects?

A) Paid cash to settle accrued interest payable
B) Paid cash to settle the principal balance of note payable
C) Issued a note payable for cash
D) Paid cash to acquire a long-term asset

Question 57

On May 1, Year 1, Arrow Company borrowed $10,000 from the State Bank at 9 percent annual interest. The note issued by Arrow had a one-year term. In addition, Arrow reported cash revenue of $3,400 in Year 1 and $800 in Year 2 from sales. Interest is paid when the note is due.

- Arrow's net income for Year 1 and Year 2 would be

A) $2,500 / $100
B) $2,800 / $500
C) $2,400 / $800
D) $2,500 / $800

Question 58

Riley Company borrowed $18,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 6% annual interest rate. Riley earned cash revenue of $840 in Year 1 and $600 in Year 2. Assume no other transactions.The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

A) $18,000 and $0.
B) $18,810 and $0.
C) $18,810 and $19,080.
D) $810 and $270.

Question 59

Issuing a note payable is a(n):

A) claims exchange transaction.
B) asset source transaction.
C) asset use transaction.
D) asset exchange transaction.

Question 60

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

A) $36,000 and $0.
B) $37,890 and $0.
C) $37,890 and $38,520.
D) $1,890 and $630.

Question 61

Benitez Company had sales of $680,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $18,300 of warranty obligations paid in cash during Year 1. Based on this information:

A) Warranty expenses would decrease net earnings by $20,400 in Year 1.
B) Cash would decrease by $18,300 as a result of the accounting events associated with warranties in Year 1.
C) The warranties payable account would increase by $2,100 in Year 1.
D) All of these answer choices are correct.

Question 62

Which of the following items is not classified as a current asset?

A) Office equipment.
B) Merchandise inventory.
C) Office supplies.
D) Prepaid rent.

Question 63

Which of the following correctly describes an installment note?

A) An installment note requires equal interest payments with the entire principal balance paid at maturity.
B) An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.
C) An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note.
D) The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

Question 64

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.Which of the following answers indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 65

Benitez Company had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information:

A) Warranty expenses would decrease net earnings by $24,000 in Year 1.
B) Cash would decrease by $13,000 as a result of the accounting events associated with warranties in Year 1.
C) The warranties payable account would increase by $11,000 in Year 1.
D) All of these answer choices are correct.

Question 66

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

A) to repay the debt
B) to pay dividends
C) to pay interest
D) to repay the interest and repay the debt

Question 67

Which of the following represents the impact of a taxable cash sale of $1,250 on the accounting equation if the sales tax rate is 4%?

A) An increase to cash for $1,300, an increase to sales tax expense for $50, and an increase to sales revenue for $1,250.
B) An increase to cash for $1,250, an increase to sales tax payable for $50, and an increase to sales revenue for $1,200.
C) An increase to cash for $1,300, an increase to sales tax payable for $50, and an increase to sales revenue for $1,250.
D) None of these answer choices is correct.

Question 68

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%?

A) An increase to cash for $420, an increase to sales tax expense for $20, and an increase to sales revenue for $400.
B) An increase to cash for $400, an increase to sales tax payable for $20, and an increase to sales revenue for $380.
C) An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.
D) None of these answer choices is correct.

Question 69

Wilson Company earned $2,000 of cash sales. Sales tax is 10%. Which of the following shows how this event would affect the company's financial statements (ignore the effects of cost of goods sold)?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 70

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

A) The amount can be reasonably estimated.
B) The outcome is probable.
C) The outcome is reasonably possible.
D) The outcome is probable and can be reasonably estimated.

Question 71

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.Which of the following answers correctly shows the effect of the issuance of the note on Platte's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 72

On a classified balance sheet, the financial statement user will be able to distinguish between:

A) cash flow from operations and cash flow from investing activities.
B) current and noncurrent assets.
C) product and period costs.
D) none of these answer choices are correct.

Question 73

Which of the following items would typically appear in the current liabilities section of a classified balance sheet?

A) Interest payable
B) Salaries payable
C) Accounts payable
D) All of these answer choices are correct.

Question 74

Selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%:

A) Increases cash flow from operating activities by $208.
B) Increases total assets by $78.
C) Increases stockholders' equity by $70.
D) All of these answer choices are correct.

Question 75

Monthly remittance of sales tax:

A) Reduces liabilities.
B) Is a claims exchange transaction.
C) Reduces stockholders' equity.
D) All of these answer choices are correct.

Question 76

Which of the following reflects the effect of the year-end estimation of warranty expense?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 77

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory).Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of Year 1 on the financial statements of Lucas?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 78

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

A) Disclose the lawsuit in the notes to the financial statements.
B) Recognize a $5 million liability on its balance sheet for the contingency.
C) Ignore the lawsuit in its financial statements.
D) Settle with the customer immediately for $5 million to avoid harmful publicity.

Question 79

When do the effects of product warranties appear on the statement of cash flows?

A) When the sale of merchandise is made.
B) When the warranty obligation is recognized.
C) When there is a settlement of a warranty claim made by a customer.
D) None of these answer choices are correct.

Question 80

Which of the following shows how remitting (paying) sales tax will affect the financial statements of the company making the payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D