Deck 9: Liabilities

Question 1

A bond that will sell for a discount when the market rate is greater than the coupon rate.

Answer 1

True

Question 2

Once sold, bonds can be traded in the market place similar to shares of stock.

Answer 2

True

Question 3

Zero-coupon notes do not pay periodic interest payments.

Answer 3

True

Question 4

A bond selling for an amount above face value is said to be selling at a discount.

Question 5

Bond ratings specify the amount at which investors can buy bonds from companies.

Question 6

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Question 7

A finance lease transfers only the use of the leased asset to the lessee.

Question 8

Recording a lease requires that both the leased asset and lease liability be reported on the balance sheet.

Question 9

Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future.

Question 10

Current liabilities are limited to those obligations that require the payment of cash within the coming year or the operating cycle, whichever is longer.

Question 11

A contingent liability is an obligation that may develop from an existing situation depending on the occurrence of a future event.

Question 12

A contingent liability that will probably occur should be recorded in the accounts even though the amount cannot be reasonably estimated.

Question 13

Lawsuits and credit guarantees are examples of contingent liabilities.

Question 14

Interest on promissory notes is often structured as an amount paid in addition to the face amount of the note.

Question 15

The formula for determining the amount of interest to be paid on a promissory note is:
Interest = Principal x Interest rate x Time

Question 16

The financial statement effect of an advance payment for services is to increase revenues.

Question 17

Sole proprietorships, partnerships and corporations are all taxable entities and incur a legal obligation for income taxes whenever income is earned.

Question 18

Quick ratio is another name for the current ratio.

Question 19

The times-interest-earned ratio reflects the number of times that the company earned interest during the year.

Question 20

There are two cash flows associated with bonds-a single payment at maturity and periodic interest payments.

Question 21

Which of the following does not affect the current liabilities section of the balance sheet?

A) Purchase of inventory on credit
B) Wages owed to employees but not yet paid
C) Insurance bill to be paid next month
D) Sale of goods on credit
E) A probable legal obligation, due within 12 months

Question 22

Warner Inc. issued a 120-day note in the amount of $90,000 on October 31, 2019 with an annual rate of 6%.
What amount of interest has accrued as of December 31, 2019?

A) $1,500
B) $1,125
C) $4,500
D) $ 915
E) Zero. The interest is accrued at the end of the 120 day period.

Question 23

Which of the following corporate bond ratings are listed in an increasing level of risk?

A) AAA, A, BB, C
B) A, AAA, BB, C
C) BB, C, A, AAA
D) C, BB, A, AAA

Question 24

What is the coupon rate used to compute?

A) Rate that investors expect to earn on this investment
B) Interest payments paid to bondholders during the life of the bond issue
C) Bond issue price
D) Fee paid to an underwriter for determining the bond price

Question 25

Which of the following transactions that impact current liabilities has a corresponding entry on the income statement?

A) Purchase inventory on credit from company XYZ on January 1
B) Payment to XYZ on February 1 for a January 1 purchase
C) Interest accrued on a note payable
D) Payment to employees in March for wages earned in February

Question 26

Which one of the following would be considered a contingent liability?

A) A company owes $100,000 on inventories purchased on credit.
B) A company has $845,000 worth of bonds outstanding.
C) A company estimates that it will probably have to pay $1,200,000 to the Department of Environment Protection for a chemical spill.
D) The company has access to a line of credit with a bank in the amount of $1,500,000.
E) The company believes that it is reasonably possible it will lose a lawsuit but is unable to determine the possible damages.

Question 27

Which of the following does not represent a current liability?

A) Accrual of taxes payable
B) Short-term loan
C) Advance payments received from customers
D) Bond issue

Question 28

How many payment periods are in a 6-year, 8% bond with an effective interest rate of 6%, and paid semiannually?

A) 3
B) 12
C) 48
D) 6

Question 29

What effects would the accrual of $80 of interest on a note payable have on financial statements?
I. Balance sheet: Liabilities are decreased by $80
II. Income statement: Expenses are increased by $80
III. Balance sheet: Retained earnings are decreased by $80
IV. Balance sheet: Cash assets are decreased by $80
V. Balance sheet: Liabilities are increased by $80

A) I, II and III
B) II, III and V
C) II, IV and V
D) II, III and IV
E) IV and V

Question 30

According to U.S. GAAP, which criteria must be met in order to recognize a contingent liability?

A) The obligation is certain to require payment at some point in the future
B) The obligation is probable
C) The obligation is estimable
D) The obligation is reasonably possible
E) Answers B and C

Question 31

The price of a bond is equivalent to:
I. Face value
II. Projected interest payments discounted to the present
III. The amortization amount of a bond
IV. The present value of the principal payment

A) I + III
B) I - III
C) II + IV
D) I + II

Question 32

Sonic Mart borrows $100,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable in three months.
What will Sonic Mart need to accrue on August 31, assuming that no accrual has yet been made?

A) $5,000; Decrease liabilities and decrease cash
B) $1,250; Decrease liabilities, decrease cash
C) $ 833; Increase income
D) $1,250; Increase liabilities, decrease retained earnings
E) $ 833; Increase liabilities, increase expenses

Question 33

Copper Industries plans to issue 8-year, 8%, $100,000 bonds paying interest on an annual basis, at a $2,000 premium.
Which one of the following statements is true?

A) The cash paid to bondholders will be $2,000 each interest period.
B) Copper will receive $98,000 as the issue price.
C) Copper's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
D) Copper's annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.

Question 34

On January 1, 2019, Jennings, Inc. issued $400,000, 10-year, 10% bonds for $360,000. The bonds pay interest on June 30 and December 31. The market rate is 10%.
How much is the interest expense on the bonds for the first interest payment on June 30, 2019?

A) $18,000
B) $36,000
C) $43,200
D) $21,600

Question 35

How are finance leases reported in the lessee's financial statements?
I. As an asset that is depreciated, similar to the company's other assets
II. As a footnote disclosure
III. As either a short-term or long-term liability, depending on the length of the lease

A) I and III
B) II and III
C) I only
D) II only
E) III only

Question 36

Outdoor Corp. disclosed the following lease information in its 2019 annual report (in millions).
Aggregate expected maturities of long-term debt and scheduled finance lease payments for the years shown are as follows:
What lease liability does Outdoor Corp.'s report on its balance sheet at December 31, 2019?

A) $ 13,377
B) $ 13,132
C) $ 26,509
D) $361,656

Question 37

Which of the following is not a condition requiring the use of the finance lease reporting method?

A) The lease transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease.
B) The lease term is a major part of the remaining estimated economic useful life of the leased asset.
C) The lease allows the lessee to use the leased asset during the lease term.
D) The lease provides that the lessee can purchase the leased asset and the lessee is reasonably certain to exercise the option.

Question 38

Current liabilities are all obligations that require, within the coming year or current operating cycle, whichever is longer:

A) The payment of cash
B) The use of existing current assets
C) The creation of other current liabilities
D) Either B or C
E) None of these

Question 39

Which one of the following is a current liability?

A) A credit guarantee provided for a supplier
B) Bond payable
C) Accounts receivable
D) Accounts payable
E) None of these

Question 40

Which of the following is a contingent liability?

A) Notes payable
B) Credit guarantees
C) Income tax payable
D) Excise tax payable
E) None of these

Question 41

Which of the following is not a contingent liability?

A) Environmental cleanup costs
B) Lawsuits
C) Discount on notes payable
D) Credit guarantees
E) All of these are contingent liabilities

Question 42

Which of the following liabilities is most likely an estimated amount rather than an amount known with certainty?

A) Wages payable
B) FICA taxes payable
C) Accounts payable
D) Income tax payable
E) All of the above are amounts known with certainty.

Question 43

A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts:

A) If the related future event will probably occur
B) If the amount is due in cash within one year
C) If the amount is reasonably estimated
D) Both A and C
E) None of the above

Question 44

A current liability is an obligation that requires the use of an existing asset or the creation of another current liability:

A) Within the coming year or the operating cycle, whichever is shorter
B) Within the coming year or the operating cycle, whichever is longer
C) Within the coming year
D) Within the next operating cycle
E) None of the above

Question 45

A contingent liability is an obligation that should be:

A) Disclosed in a footnote to the balance sheet when the contingency is not significant
B) Recorded in the accounts if the amount may be reasonably estimated and it is probable that the future event creating the obligation will occur
C) Classified in the owners' equity section of the balance sheet when the future event creating the liability is not likely to occur
D) Recorded in the accounts and classified in a contingent liabilities section of the balance sheet between current liabilities and long-term liabilities
E) None of the above

Question 46

Modem Appliances, Inc. sells food processors for $150 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $25 per defective unit. Sales for August are $225,000.
What is the estimated liability for product warranties for units sold in August?

A) $3,000
B) $1,800
C) $11,250
D) $1,875
E) None of the above

Question 47

Becker, Inc. sells a single product for $450 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $35 per unit. During July, 800 units were sold. Five units were reported defective and repaired in July.
What amount should be added to the Estimated Liability for Product Warranties for July?

A) $2,250
B) $ 735
C) $9,450
D) $ 665
E) None of the above

Question 48

Two-Wheel Products Company sells bicycles for $120, with a 60-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $16 per bicycle. Sales for May were $108,000; 20 units sold in May were found defective and repaired that month.
What is the estimated liability for product warranties on May 31?

A) $544
B) $320
C) $864
D) None of the above

Question 49

Video-Technical, Inc. was organized to sell a single product for $600 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $50 per unit. During September, total sales were $198,000; 9 units sold during September were found defective and repaired.
The accrued liability for product warranties at month-end should be:

A) $ 850
B) $ 400
C) $ 450
D) $1,150
E) None of the above

Question 50

Working capital is defined as:

A) Assets - liabilities
B) Current assets
C) Current assets - Current liabilities
D) Market value - Book value

Question 51

If Marshall Toys has a current ratio of 3.2 and working capital of $2,200,000, which of the following will cause both the current ratio and working capital to decrease?

A) Paid accounts payable in the amount of $30,000
B) Recorded unpaid salaries in the amount of $80,000
C) Borrowed $100,000 from a bank to be repaid in 90-days
D) Purchased $15,000 of inventory on credit

Question 52

Working capital is defined as:

A) Current assets plus plant assets
B) Current assets plus current liabilities
C) Current assets minus current liabilities
D) Current assets divided by current liabilities
E) None of the above

Question 53

Bluer Company has a current ratio of 3.00. Which of the following events would cause its current ratio to increase?

A) Collection of an account receivable
B) Payment of an account payable
C) Purchase of office supplies on account
D) Purchase of equipment on account
E) None of the above

Question 54

The December 31, balance sheet of Jones Company includes the following information:
What is Jones's quick ratio at December 31?

A) 0.9
B) 3.0
C) 2.1
D) 1.1
E) None of the above

Question 55

The December 31 balance sheet of Occidental Company includes the following information:
What is Occidental's quick ratio at December 31?

A) 0.8
B) 2.4
C) 1.3
D) 1.5
E) None of the above

Question 56

On November 1, Mead borrowed from Miller, giving him a $6,000, 3 month, 9% note, interest payable at maturity. Mead made no entry after November 1.
On December 31, the end of the accounting period, what is the amount of the interest accrual?

A) $135
B) $ 90
C) $540
D) $ 45
E) None of the above

Question 57

London Company paid Frankfurt Company for merchandise with a $3,200, 90-day, 8% note dated May 10. If London Company pays the note at maturity, what is the amount of cash paid at that time?

A) $3,200
B) $3,456
C) $3,264
D) $ 64
E) None of the above

Question 58

On December 1, Edwards borrowed $6,000 from Barton, giving a 90-day, 10% note. On December 31, the end of the accounting period, what is the amount of accrued interest?

A) $ 50
B) $600
C) $150
D) $100

Question 59

What does the current ratio measure?

A) Solvency
B) Profitability
C) Short-term debt paying ability
D) Leverage

Question 60

On September 1, 2019, Donna Equipment signed a one-year, 8% interest bearing note payable for $100,000. Assuming Donna maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be (assume 12 months per calendar year):

A) $5,333
B) $4,000
C) $1,333
D) $3,000

Question 61

Megan Company borrowed $12,000 from Bank of Maryland on December 1, 2019, and signed a 3-month, 8% Notes Payable. If Megan's accounting period ends on December 31, 2019, which of the following will not be true for Megan Company?

A) On December 31, 2019, Megan will increase Interest Expense for $80
B) On December 31, 2019, Megan will increase Interest Payable for $80
C) On March 1, 2020, Megan will increase Interest Expense for $160
D) On March 1, 2020, Megan will decrease Interest Payable for $160

Question 62

On December 1, Flint Company purchased $30,000 of equipment by issuing a 4-month, 10% note payable to Bank of Maryland. Assuming the company's accounting period ends on December 31, the entry recorded by Flint Company on the note maturity date will include:

A) Increase to Interest Expense for $750
B) Decrease to Interest Payable for $750
C) Decrease to Interest Payable for $500
D) Increase to Interest Expense for $250

Question 63

Keck Company signed a three-month, 8% note on November 1, 2019 for the purchase of $60,000 of inventory. Assuming the company's accounting period ends on December 31, which one of the following statements is not correct?

A) On February 1, 2020, the company will increase Interest Expense for $800.
B) On December 31, 2019 the company will increase Interest Expense for $800.
C) On February 1, 2020, the company will decrease Interest Payable for $800.
D) On December 31, 2019, the company will increase Interest Payable for $800.

Question 64

Justin Company signed a $90,000, three-month, 9% note payable, on December 1. If the accounting period ends on December 31, the entry made at the time of the note's maturity will include:

A) A decrease to Interest Payable for $1,350
B) An increase to Interest Expense for $2,025
C) An increase to Interest Expense for $675
D) An increase to Interest Expense for $1,350

Question 65

Clean-All Inc. sells washing machines with a 2 year warranty. Clean-All estimates that total warranty costs are 3% of sales. In the year 2019, Clean-All recorded total sales of washing machines of $700,000. The balance in the Estimated Liability for Warranties account was $38,200 on December 31, 2018, and $25,600 on December 31, 2019.
What must have been the actual cost of repairs (covered under warranty) for the year 2019?

A) $33,600
B) $32,900
C) $ 6,900
D) $44,300

Question 66

Ranch Company estimates warranty expense as 5% of sales. On January 1, warranties payable was $10,000, and the December 31 liability for the warranty was $11,000. During the year Ranch recorded sales of $150,000.
The amount paid by Ranch during the year to meet its warranty obligations was:

A) $15,000
B) $ 7,000
C) $ 6,000
D) $ 6,500

Question 67

Felicity Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $200 per unit. During January, the company sold 100,000 computers at $1,750 each, and 1,500 computers were turned in for repairs during that same month. The total actual repairs costs amounted to $185,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1 was $15,000.
What is the balance in the Estimated Warranty Liability Account at the end of January?

A) $230,000
B) $415,000
C) $215,000
D) $600,000

Question 68

Alan Company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%.
Compute the price of the bonds on their issue date (rounded to the nearest dollar).

A) $736,130
B) $698,938
C) $640,305
D) $735,110

Question 69

Jordan Corporation issued $300,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent.
If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds?

A) $332,690
B) $248,120
C) $358,802
D) $351,370

Question 70

When the market rate of interest was 10%, Wallace Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was:

A) $1,261,410
B) $ 898,895
C) $1,108,376
D) $ 900,600

Question 71

On January 1, Andrew Company issues $320,000, 15 year, 8% bonds (paying semiannual interest) for $360,800, when the annual market rate of interest is 6%.
If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a:

A) Decrease to premium on bonds payable for $1,976
B) Increase to interest expense for $12,000
C) Decrease to cash for $24,000
D) Increase to interest expense for $21,528

Question 72

Jared Company issued 6%, 5-year bonds, with par value of $800,000, paying semiannual interest, for $745,464. The annual market rate of interest on the date of issue was 8%.
Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date.

A) $29,819
B) $44,128
C) $58,837
D) $22,064

Question 73

On January 1, Alicia Company borrowed $25,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments of $4,187 on December 31 of each year.
The balance in the Note Payable account after the first payment is made is:

A) $23,250
B) $21,875
C) $21,949
D) $22,563

Question 74

C-Mart Industries issued bonds with a face value of $6,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%.
How much is the market value of the bond using a present value table?

A) $5,250,000
B) $5,789,414
C) $5,826,728
D) $5,947,050

Question 75

Core Earth Company gave a creditor a 90-day, 6% note payable for $14,000 on December 1, 2019.
Required:
a. What amount of interest will be accrued as of December 31, 2019?
b. Where will this amount be reported in the company's financial statements?

Question 76

Indicate the proper financial classification (balance sheet or income statement) for each of the following accounts:
a. Accrued interest payable
b. Bonds payable
c. Mortgage interest expense
d. Bonds due to be paid within 12 months

Question 77

Calculate the interest accrued for each of the following notes payable owed by Circle Rope Company as of December 31, 2019:

Question 78

Determine how each of the following transactions affect liabilities.
a. Payment to employees for wages previously accrued
b. Accrue interest of $100 on a note payable
c. Payment of $90 to bank for interest accrued on a note payable

Question 79

Gander Mountain took out a one-year, 6%, $50,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements?

Question 80

The following items represent various types of liabilities.
1. A manufacturing company is sued for alleged product liability. The company's attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material.
2. Omega has sold products to Bright Eye Jewelers, a retailer that sold the products to customers. The manufacturer's warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement.
3. A customer has filed a lawsuit for a minor amount against Bright Eye Jewelers. Bright Eye's attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff.
Identify if the above independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither.