Deck 10: Liabilities

Question 1

The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.

Answer 1

False

Question 2

Working capital is current assets divided by current liabilities.

Answer 2

False

Question 3

A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

Answer 3

True

Question 4

Notes payable usually are issued to meet long-term financing needs.

Question 5

In most companies, current liabilities are paid within

A)one year through the creation of other current liabilities.
B)the operating cycle through the creation of other current liabilities.
C)one year or the operating cycle out of current assets.
D)the operating cycle out of current assets.

Question 6

Sales taxes collected by the retailer are recorded as a(n)

A)revenue.
B)liability.
C)expense.
D)asset.

Question 7

A cash register tape shows cash sales of $1,800 and sales taxes of $126.The journal entry to record this information is

Question 8

Hilton Company issued a 4-year interest-bearing note payable for $600,000 on January 1, 2020.Each January, the company is required to pay $150,000 on the note.How will this note be reported on the December 31, 2021 balance sheet?

A)Long-term debt, $600,000.
B)Long-term debt, $450,000.
C)Long-term debt, $300,000; Long-term debt due within one year, $150,000.
D)Long-term debt, $450,000; Long-term debt due within one year, $150,000.

Question 9

Bonds that have specific assets of the issuer pledged as collateral are

A)secured bonds.
B)callable bonds.
C)convertible bonds.
D)debenture bonds.

Question 10

Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2021, at 98.The journal entry to record the issuance will show a

A)debit to Cash of $2,000,000.
B)credit to Discount on Bonds Payable for $40,000.
C)credit to Bonds Payable for $2,040,000.
D)debit to Cash for $1,960,000.

Question 11

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a

A)gain on bond redemption of $12,000.
B)loss on bond redemption of $10,000.
C)loss on bond redemption of $12,000.
D)gain on bond redemption of $10,000.

Question 12

Winter Company purchased a building on January 2 by signing a long-term $630,000 mortgage with monthly payments of $5,400.The mortgage carries an interest rate of 10%. The entry to record the first monthly payment will include a

A)debit to the Cash account for $5,400.
B)credit to the Cash account for $5,250.
C)debit to the Interest Expense account for $5,250.
D)credit to the Mortgage Payable account for $5,400.

Question 13

If bonds are originally sold at a discount which is amortized using the straight-line method,

A)the interest expense in the earlier years of the bond's life will be less than the interest to be paid.
B)the interest expense in the earlier years of the bond's life will be the same as the interest to be paid.
C)the unamortized discount will be subtracted from the face value of the bond to determine its carrying value.
D)The unamortized discount will be added to the face value of the bond to determine its carrying value.

Question 14

Bond discount should be amortized to comply with

A)the historical cost principle.
B)the expense recognition principle.
C)the revenue recognition principle.
D)conservatism.

Question 15

A current liability is a debt the company reasonably expects to pay from existing current assets within

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

Question 16

Under IFRS, the proceeds from the issuance of convertible debt are reported as

A)debt only.
B)equity only.
C)debt or equity depending on the circumstances.
D)both debt and equity.
IFRS.

Question 17

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

Question 18

FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

Question 19

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

Question 20

Current maturities of long-term debt are often classified as long-term debt due within one year on the balance sheet.

Question 21

The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's

A)maturity value.
B)market value.
C)face value.
D)cash realizable value.

Question 22

On September 1, Joe's Painting Service borrows $150,000 from National Bank on a 4-month, $150,000, 6% note.What entry must Joe's Painting Service make on December 31 before financial statements are prepared?

Question 23

Ed's Bookstore has collected $750 in sales taxes during April.If sales taxes must 1.
D)No entry required.

Question 24

Kelly Rice has a large consulting practice.New clients are required to pay one-half of the consulting fees upfront.The balance is paid at the conclusion of the consultation.How does Rice account for the cash received at the end of the engagement?

Question 25

A bond secured by specific assets set aside to redeem the bonds is called a

A)convertible bond.
B)sinking fund bond.
C)mortgage bond.
D)secured bond.

Question 26

The market interest rate is often called the

A)stated rate.
B)effective rate.
C)coupon rate.
D)contractual rate.

Question 27

If 60, $1,000 bonds with a carrying value of $70,000 are redeemed for $65,000, the journal entry to record the transaction is

Question 28

Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,500.The mortgage carries an interest rate of 10%.The amount owed on the mortgage after the first payment will be

A)$480,000.
B)$479,500.
C)$476,000.
D)$475,500.

Question 29

Presented here is a partial amortization schedule for Roseland Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (i)?

A)$31,200
B)$32,400
C)$30,000
D)$6,000

Question 30

If bonds have been issued at a discount, over the life of the bonds, the

A)carrying value of the bonds will decrease.
B)carrying value of the bonds will increase.
C)interest expense will increase, if the discount is being amortized on a straight-line basis.
D)unamortized discount will increase.

Question 31

Which of the following statements concerning current liabilities is incorrect?

A)Current liabilities include unearned revenues.
B)A company that has more current liabilities than current assets is usually the subject of some concern.
C)Current liabilities include prepaid expenses.
D)A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.

Question 32

Kingery Sales Company has the following selected accounts after posting adjusting entries: Instructions
Prepare the current liability section of Kingery Sales Company's balance sheet, assuming $16,000 of the mortgage is payable next year.

Question 33

Notes payable usually require the borrower to pay interest.

Question 34

Generally, convertible bonds do not pay interest.

Question 35

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

Question 36

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Question 37

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 38

On September 1, Joe's Painting Service borrows $150,000 from National Bank on a 4-month, $150,000, 6% note.The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is

Question 39

Layton Company does not ring up sales taxes separately on the cash register.Total receipts for October amounted to $29,400.If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes?

A)$1,400
B)$1,470
C)$70
D)It cannot be determined.

Question 40

Which one of the following is shown first under current liabilities by many companies as a matter of custom?

A)Accrued expenses
B)Current maturities of long-term debt
C)Sales taxes payable
D)Notes payable

Question 41

The interest rate investors demand for loaning funds is the

A)market interest rate.
B)stated rate.
C)contractual interest rate.
D)bond interest rate.

Question 42

If bonds are issued at a discount, it means that the

A)financial strength of the issuer is suspect.
B)market interest rate is higher than the contractual interest rate.
C)market interest rate is lower than the contractual interest rate.
D)bondholder will receive effectively less interest than the contractual interest rate.

Question 43

A corporation recognizes a gain or loss

A)when bonds are issued at a price below the face amount.
B)only when bonds are issued at a price above the face amount.
C)when bonds are redeemed before maturity.
D)when bonds are repaid at maturity.

Question 44

Farris Company borrowed $800,000 from BankTwo on January 1, 2020, in order to expand its mining capabilities.The 5-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%.What amount of interest expense will Farris recognize on its 2021 income statement?

A)$68,000.
B)$56,070.
C)$43,127.
D)$50,290.

Question 45

Presented here is a partial amortization schedule for Roseland Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $312,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (ii)?

A)$32,400
B)$27,600
C)$31,200
D)$28,800

Question 46

Hooke Company received proceeds of $377,000 on 10-year, 8% bonds issued on January 1, 2020.The bonds had a face value of $400,000, pay interest annually on December 31, and have a call price of 101.Hooke uses the straight-line method of amortization. What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2021?

A)$32,000
B)$30,160
C)$34,300
D)$29,700

Question 47

On August 1, 2020, a company borrowed cash and signed a 1-year interest-bearing note on which both the face value and interest are payable on August 1, 2021.How will the note payable and the related interest 1.

Question 48

Identify which of the following would 1.

Question 49

Notes payable are often used instead of accounts payable.

Question 50

Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

Question 51

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

Question 52

Premium on Bonds Payable is a contra account to Bonds Payable.

Question 53

A note payable is in the form of

A)a contingency that is reasonably likely to occur.
B)a written promissory note.
C)an oral agreement.
D)a standing agreement.

Question 54

The interest charged on a $400,000, 90-day note payable, at the rate of 8%, would be

A)$32,000.
B)$17,776.
C)$8,000.
D)$2,666.

Question 55

Valerie's Salon has total receipts for the month of $20,670 including sales taxes.If the sales tax rate is 6%, what are Valerie's sales for the month?

A)$19,637
B)$21,910
C)$19,500
D)It cannot be determined.

Question 56

Working capital is

A)current assets plus current liabilities.
B)current assets minus current liabilities.
C)current assets divided by current liabilities.
D)current assets multiplied by current liabilities.

Question 57

Companies with good credit ratings use _________________ bonds extensively.

A)callable bonds.
B)convertible bonds.
C)mortgage bonds.
D)debenture bonds.

Question 58

Each of the following accounts is generally reported as a long-term liability except

A)Interest Payable.
B)Bonds Payable.
C)Discount on Bonds Payable.
D)Premium on Bonds Payable.

Question 59

If there is a loss on bonds redeemed early, it is

A)debited directly to Retained Earnings.
B)reported as an "Other Expense" on the income statement.
C)reported as part of Cost of Goods Sold on the income statement.
D)debited to Interest Expense, as a cost of financing.

Question 60

Farris Company borrowed $800,000 from BankTwo on January 1, 2020, in order to expand its mining capabilities.The 5-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%.What is the balance in the company's notes payable account at January 1, 2022?

A)$800,000
B)$507,372
C)$659,651
D)$664,000

Question 61

Presented here is a partial amortization schedule for Rosebud Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $318,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iii)?

A)$9,000.
B)$18,000.
C)$3,600.
D)$1,800.

Question 62

Jarmin Company received proceeds of $377,000 on 10-year, 8% bonds issued on January 1, 2020.The bonds had a face value of $400,000, pay interest annually on December 31 and have a call price of 101.Jarmin uses the straight-line method of amortization.What is the carrying value of the bonds on January 1, 2022?

A)$400,000
B)$381,600
C)$395,400
D)$379,300

Question 63

Companies generally report current liabilities on the balance sheet in

A)alphabetical order.
B)order of maturity.
C)random order.
D)order of magnitude.

Question 64

On December 1, Gilman Corporation borrowed $20,000 on a 90-day, 6% note.Prepare the entries to record the issuance of the note, the accrual of interest at year-end, and the payment of the note.

Question 65

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

Question 66

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

Question 67

Bonds that the issuing company can redeem at a stated dollar amount prior to maturity are convertible bonds.

Question 68

When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.

Question 69

The entry to record the proceeds upon issuing an interest-bearing note is

A)Interest Expense Cash
Notes Payable
B)Cash Notes Payable
C)Notes Payable Cash
D)Cash Notes Payable
Interest Payable

Question 70

The interest charged on a $50,000, 60-day note payable, at the rate of 6%, would be

A)$3,000.
B)$1,667.
C)$750.
D)$500.

Question 71

The amount of sales tax collected by a retail store when making sales is

A)a miscellaneous revenue for the store.
B)a current liability.
C)not recorded because it is a tax paid by the customer.
D)recorded as an operating expense.

Question 72

The current ratio is

A)current assets plus current liabilities.
B)current assets minus current liabilities.
C)current assets divided by current liabilities.
D)current assets multiplied by current liabilities.

Question 73

Corporations are granted the power to issue bonds through

A)tax laws.
B)state laws.
C)federal security laws.
D)bond debentures.

Question 74

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the

A)market interest rate increases, the contractual interest rate will decrease.
B)contractual interest rate increases, then bond prices will go down.
C)market interest rate decreases, then bond prices will go up.
D)contractual interest rate increases, the market interest rate will decrease.

Question 75

If bonds can be converted into common stock,

A)they will sell at a lower price than comparable bonds without a conversion feature.
B)they will carry a higher interest rate than comparable bonds without the conversion feature.
C)they will be converted only if the issuer calls them in for conversion.
D)the bondholder may benefit if the market price of the common stock increases substantially.

Question 76

Each of the following may be shown on a supporting schedule instead of on the balance sheet except the

A)current maturities of long-term debt.
B)conversion privileges.
C)interest rates.
D)maturity dates.

Question 77

Presented here is a partial amortization schedule for Rosebud Company which sold $300,000 of 5-year, 10% bonds on January 1, 2020, for $318,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iv)?

A)$16,200.
B)$10,800.
C)$21,600.
D)$14,400.

Question 78

A corporation issued $600,000, 10%, 7-year bonds on January 1, 2021 for $648,666, which reflects an effective-interest rate of 7%.Interest is paid annually on January 1.If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on December 31, 2021, is

A)$60,000.
B)$42,000.
C)$64,867.
D)$45,407.

Question 79

The market value (present value) of a bond is a function of all of the following except the

A)dollar amounts to be received.
B)length of time until the amounts are received.
C)market rate of interest.
D)length of time until the bond is sold.

Question 80

During December 2020, Markowitz Publishing sold 4,500 12-month annual magazine subscriptions at a rate of $20 each.The first issues were mailed in February 2021.Prepare the entries on Markowitz's books to record the sale of the subscriptions and the mailing of the first issues.