Deck 9: Current Liabilities, Contingencies, and the True Value of Money

Question 1

International accounting standards require companies to present classified balance sheets with liabilities classified as either current or long term.

Answer 1

True

Question 2

In the statement of cash flows, an increase in a current liability will appear as an increase in the Financing category.

Answer 2

False

Question 3

Discount on Notes Payable is treated as a reduction of notes payable on the balance sheet.

Answer 3

True

Question 4

Income taxes payable is a current liability.

Question 5

The current maturity of long-term debt is a current liability.

Question 6

A possible loss from lawsuit is not reported on the balance sheet as a current liability.

Question 7

Income taxes payable are recognized as an expense once they are paid to the respective government or taxing authority.

Question 8

Accrued wages is a current liability.

Question 9

An amount that has been incurred as an expense, but has not yet been paid should be considered an accrued liability.

Question 10

If a bank discounts a note, then the borrower needs to only pay the cash received and not the face value of the note.

Question 11

When a liability is accrued, the account debited in the transaction is a stockholders' equity account.

Question 12

For users of financial statements, the current liability classification in the balance sheet is important because it is most closely tied to the concept of profitability.

Question 13

Warranty expenses are the result of the selling company's estimate of the number of units sold during the current year that may become defective and need repair or replacement during the warranty period.

Question 14

A company gives a two-year warranty for its product.The estimated liability for product warranties is a current liability.

Question 15

Estimated liability for product warranties to be paid in the future is a current liability.

Question 16

A note payable that is due in six months is a current liability.

Question 17

U.S.standards require a classified balance sheet, but International accounting standards do not require companies to present classified balance sheets with liabilities classified as either current or long term.

Question 18

In the statement of cash flows, a decrease in accounts payable would be shown as an increase in the Operating Activities category.

Question 19

Generally, an increase in a current liability results in an increase in the operating activities category of the cash flow statement.

Question 20

A note payable due in two years is a current liability.

Question 21

The terms referring to contingencies differ between U.S.GAAP and IFRS.

Question 22

The liability for a premium offer estimated to be redeemed is not a current liability.

Question 23

If you plan to invest $10,000 and want to determine how much will be accumulated in six years if you earn interest at 7% per year, you would calculate this using the future value of an annuity.

Question 24

In a compound interest problem, if you know the future value, the present value, and the number of periods, then you can solve for the interest rate.

Question 25

Advance ticket sales for a concert next month are a current liability.

Question 26

When borrowing money to be repaid in regular future payments, the payment is based on the present value of the loan, the interest rate and the length of the loan.

Question 27

Contingent assets may be disclosed in the notes if probable and reasonably estimable.

Question 28

A contingent liability is recorded if it is probable and can be reasonably estimated.

Question 29

If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.

Question 30

$2,000 invested today at 12% with compound interest will yield $2,480 in 2 years.

Question 31

For a given contingent liability, the company has the choice of either recording it on the balance sheet or disclosing it in the notes.

Question 32

Simple interest on a loan can be calculated by multiplying the principal by the annual interest rate expressed as a percentage of the time in years or a fraction of the time in years.

Question 33

Compound interest is a repeated calculation of the interest on the principal over certain periods of time.

Question 34

An annuity is a series of equal payments made at equal intervals in the future.

Question 35

When a company uses coupon or premium offers in conjunction with the sale of its products, there is no need to record any contingent liability.

Question 36

Accountants need not worry about calculations based upon the concept of the time value of money.

Question 37

Curtain Corp.stands to receive a sufficient cash settlement from a law suit.Curtain needs to record this on its accounting records.

Question 38

International accounting standards use the term provision for those contingent items that must be recorded on the balance sheet.

Question 39

Redfearn Company has current assets of $150,000 and current liabilities of $60,000.How much inventory could it purchase on account and achieve its minimum desired current ratio of 2 to 1?

A) $10,000
B) $20,000
C) $30,000
D) $40,000

Question 40

The present value is the value today of a single amount to be paid or received at a specific date in the future.

Question 41

If current assets amount to $150, total assets $350, current liabilities $65, and total liabilities $100, then the current ratio is

A) 2.12 to 1
B) 2.31 to 1
C) 3.03 to 1
D) 3.50 to 1

Question 42

Assume the current ratio is 3 to 4.Purchases of inventory on account would cause the current ratio to

A) increase
B) decrease
C) be unchanged since the effects offset each other
D) be unchanged since it has no effects on any current accounts

Question 43

Current liabilities are defined as those liabilities which will be satisfied

A) by the end of the operating cycle.
B) within one year.
C) within one year or within the operating cycle, whichever is longer.
D) within one year or within the operating cycle, whichever is shorter.

Question 44

A bank loaned Darden Company $10,000 on a 1-year, 6% note, but deducted the interest in advance.The journal entry made by Darden to record receipt of the cash would include a

A) an increase in Cash for $9,400
B) an increase in Cash for $600
C) a decrease in Notes Payable for $10,600
D) a decrease in Notes Payable for $9,400

Question 45

The payment of accounts payable results in a(n)

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

Question 46

If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as

A) a loss
B) an expense
C) a discount
D) prepaid interest

Question 47

The landlord records the security deposit she collects from the tenant as a(n)

A) asset
B) liability
C) contingent liability
D) contra liability

Question 48

Which of the following accounts is not classified as a current liability?

A) Note payable, due in three (3) years
B) Taxes payable
C) Salaries payable
D) Accounts payable

Question 49

All of the following are characteristics of current liabilities except:

A) They may be replaced with a new short-term liability rather than being paid in cash.
B) They may involve estimated amounts.
C) They are due within one year or within the operating cycle, whichever is longer.
D) All three of the above are characteristic of current liabilities.

Question 50

If a company purchases $3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays April 2, then the amount paid to the seller would be

A) $3,136
B) $3,150
C) $3,168
D) $3,200

Question 51

Which of the following is not classified as a noncurrent liability?

A) Bonds payable
B) Capital lease obligations
C) Current portion of long-term debt
D) Mortgage payable

Question 52

Long-term assets are $800, current liabilities are $500, and long-term liabilities are $600.If the current ratio is 2.5 to 1, then current assets are

A) $200
B) $625
C) $1,250
D) $2,000

Question 53

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory.If current liabilities are $400, then the current ratio would be

A) 1.75 to 1
B) 3.50 to 1
C) 3.00 to 1
D) 2.25 to 1

Question 54

Which of the following statements is true of liabilities?

A) Accounts payable are listed in the current liabilities section in alphabetical order by vendor.
B) Classification of current liabilities is important because of the liquidity concept.
C) Current liabilities are listed in order of decreasing amounts in the current liability section of the balance sheet.
D) The accounting principles followed in the U.S.differ from those of other countries; this is especially true for current liabilities.

Question 55

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory.If current liabilities are $400, then the quick ratio would be

A) 1.75 to 1
B) 2.25 to 1
C) 3.00 to 1
D) 3.50 to 1

Question 56

A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory.If current liabilities are $14,350, then the quick ratio would be

A) 5.0 to 1
B) 2.6 to 1
C) 2.0 to 1
D) 1.2 to 1

Question 57

If a company purchases $3,200 worth of inventory with terms of 3/10, n/30 on March 3 and pays March 12, then the amount paid to the seller would be

A) $96
B) $3,104
C) $3,200
D) None of these choices

Question 58

Assume the current ratio is 2 to 1.Payment on accrued salaries payable would cause the current ratio to

A) increase
B) decrease
C) be unchanged since the effects offset one another
D) be unchanged since it has no impact on any current accounts

Question 59

Which of the following statements about current liabilities is true?

A) Current liabilities are listed in order of decreasing amounts in the current liability section of the balance sheet.
B) The amount of current liabilities has little implication for a company's liquidity.
C) The current liability section never contains any portion of long-term liabilities.
D) The current ratio is defined as current assets divided by current liabilities.

Question 60

Assume the current ratio is 3 to 1.Estimating the warranties expense on the period's sales would cause the current ratio to

A) increase
B) decrease
C) be unchanged since the effects offset one another
D) be unchanged since it has no effect on any current accounts

Question 61

On November 1, Greenfield Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000.If you assume 360 days in year, the November 30 adjusting entry will be:

A) Debit Interest Expense $550 and credit Cash $550.
B) Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.
C) Debit Interest Expense $550 and credit Interest Payable $550.
D) Debit Interest Expense $550 and credit Notes Payable $550.

Question 62

Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date.After one month, the company's total liability for this loan amounts to:

A) $91,800
B) $90,900
C) $90,450
D) $90,000

Question 63

Long-term assets are $5,000, current liabilities are $700, and long-term liabilities are $3,000.If the current ratio is 3 to 1, then current assets are

A) $9,000
B) $6,900
C) $4,300
D) $2,100

Question 64

Proctor Inc.has a weekly payroll of $8,000 for a 5-day workweek, Monday through Friday.If December 31, the last day of the accounting year, falls on Wednesday, Proctor would make an adjusting entry that would

A) increase wages expense $4,800.
B) decrease wages payable $4,800.
C) decrease cash $4,800.
D) increase wages payable $8,000.

Question 65

Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect cash provided by operating activities is

A) accounts payable.
B) interest payable.
C) notes payable.
D) taxes payable.

Question 66

On November 1, 2016, Brownsville Co.borrowed $80,000 from State Bank and signed a 12%, six-month note payable, all due at maturity.The interest on this loan is stated separately.At December 31, 2016, the adjusting entry for this note includes a:

A) Debit to Interest Expense for $3,200.
B) Credit to Notes Payable for $1,600.
C) Credit to Cash for $4,800.
D) Credit to Interest Payable for $1,600.

Question 67

A company's weekly payroll amounts to $50,000 and payday for the week is every Friday.Employees work five days per week, Monday through Friday.The appropriate journal entry was recorded at the end of the accounting period, Monday, March 31, 2016.What amount is wages expense for April for the payday, Friday, April, 4, 2016?

A) $ -0-
B) $40,000
C) $10,000
D) $50,000

Question 68

There are some liabilities, such as income tax payable, for which the amounts must be estimated.Failure to estimate these amounts and record them would be a violation of the

A) matching principle
B) convention of conservation
C) practice of consistency
D) concept of historical cost

Question 69

If a company purchases $3,000 worth of inventory with terms of 1/15, n30 and pays within 15 days, then the amount paid to the seller would be

A) $2,550
B) $2,970
C) $3,000
D) $3,030

Question 70

Executive, Inc.has a weekly payroll of $10,000 for a 5-day workweek, Monday through Friday.If December 31, the last day of the accounting year, falls on Thursday, Executive would make an adjusting entry that would

A) increase Wages Expense $8,000.
B) decrease Wages Payable $2,000.
C) decrease Cash $8,000.
D) increase Wages Payable $2,000.

Question 71

Interest payable on a loan becomes a liability:

A) When the borrowed money is received.
B) When the note payable is issued.
C) At the maturity date.
D) As it accrues.

Question 72

An example of a current liability that must be accrued is

A) accounts payable.
B) current maturity of long-term debt.
C) revenue received in advance.
D) income taxes payable.

Question 73

On November 1, 2016, Brownsville Co.borrowed $80,000 from State Bank and signed a 12%, six-month note payable, all due at maturity.The interest on this loan is stated separately.At December 31, 2016, Brownsville Co.'s overall liability for this loan amounts to:

A) $84,800
B) $80,000
C) $81,600
D) $83,200

Question 74

On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a 1-year, 7% note.If the company's fiscal year ends as of December 31, Lawrence should make an entry to increase

A) interest expense, $4,200.
B) notes payable, $1,050.
C) interest payable, $1,050.
D) prepaid interest, $3,150.

Question 75

If current assets amount to $62,000, total assets $350,000, current liabilities $31,000, and total liabilities $125,000, then the current ratio is

A) 0.5 to 1
B) 2.0 to 1
C) 2.8 to 1
D) 3.0 to 1

Question 76

On May 1, the Chris Company borrowed $30,000 from the Third Street Bank on a 1-year, 6% note.If the company keeps its records on a calendar year, an entry is needed on December 31 to increase

A) Interest Expense, $600.
B) Interest Expense, $1,800.
C) Interest Payable, $900.
D) Interest Payable, $1,200.

Question 77

All of the following statements are true except:

A) U.S.standards do not require a classified balance sheet.
B) IFRS require companies to present classified balance sheets.
C) Under IFRS, an unclassified balance sheet based on the order of liquidity is acceptable only when it provides more reliable information than a classified one.
D) U.S.standards require a classified balance sheet with liabilities in order by size or by order of liquidity.

Question 78

Employees earn $6,000 per day, work five days per week, Monday through Friday, and get paid every Friday.If the previous payday was January 26 and the accounting period ends on January 31, what amount is the ending balance in the wages payable account?

A) $18,000
B) $6,000
C) $30,000
D) None of these choices.

Question 79

A bank loaned York Construction Company $35,000 on a 1-year, 6% note, but deducted the interest in advance.The journal entry made by York to record receipt of the cash would include an

A) increase in Cash for $35,000.
B) decrease in Notes Payable for $32,900.
C) increase in Discount on Notes Payable for $2,100.
D) increase in Interest Revenue for $2,100.

Question 80

An invoice received from a supplier for $8,000 on January 1 with terms 1/15, n/30 means that the company should pay

A) $7,920 before the end of January.
B) either $7,920 before January 16 or $8,000 before the end of the month.
C) $8,000 between January 2 and January 16.
D) $6,800 before January 16.