Deck 9: Current Liabilities and Long-Term Debt

Question 1

Which of the following would be considered a contingent liability?

A)Federal income tax payable
B)Warranties payable
C)Pending litigation
D)Salaries payable

Answer 1

Pending litigation

Question 2

Notes payable would be an example of a known liability.

Answer 2

True

Question 3

When a liability exists, the amount owed is always known.

Answer 3

False

Question 4

A known liability is always classified as a current liability.

Question 5

An obligation dependent upon an event that has not yet occurred is an example of a(n):

A)contingent liability.
B)estimated liability.
C)known liability.
D)accrued liability.

Question 6

Making a payment on an account would be journalized with a debit to Accounts Payable and credit to Cash.

Question 7

You just purchased a new cell phone, which comes with a manufacturer's warranty of one year. The company that manufactures the cell phone would record the warranty as a(n):

A)accrued liability.
B)estimated liability.
C)known liability.
D)contingent liability.

Question 8

Safe Scooters, Inc. sold scooters which they knew had faulty brakes. Consumers found out, and Safe Scooters is now facing a lawsuit over the unsafe scooters; however, no dollar amounts have been assigned to the case. This lawsuit would be considered a(n):

A)deferred expense.
B)contingent liability.
C)estimated liability.
D)known liability.

Question 9

A note payable that is due within one year is classified as a current liability.

Question 10

Which of the following would be considered a known liability?

A)Accounts payable
B)Warranties payable
C)Pending litigation
D)Possible contingency payable

Question 11

A transaction, such as a utility bill to be paid in 30 days, would be journalized with a debit to Utilities expense and a credit to Notes payable.

Question 12

Contingent liabilities may be classified as:

A)current liabilities only.
B)long-term liabilities only.
C)notes in the financial statements only.
D)either current or long-term liabilities.

Question 13

Which of the following would be considered an estimated liability?

A)Notes payable
B)Warranties payable
C)Pending litigation
D)Sales tax payable

Question 14

Why are contingent liabilities considered unique and different from all other liabilities?

A)Whether or not a company has an obligation depends on the result of a future event.
B)Whether or not a company has an obligation depends on the result of a past event.
C)The company knows the amount of the obligation.
D)Both B and C are unique to contingent liabilities.

Question 15

Accrued liabilities, such as interest payable, would be considered a(n):

A)contingent liability.
B)estimated liability.
C)known liability.
D)unknown liability.

Question 16

Which of the following liabilities can be classified as either current or long term?

A)known and estimated
B)estimated and contingent
C)known and contingent
D)known, estimated, and contingent

Question 17

Strong Dog Magazine sold 100 new pre-paid subscriptions to their publication. The subscription money is an example of a(n):

A)accrued revenue.
B)estimated liability.
C)contingent liability.
D)known liability.

Question 18

A known obligation of an unknown amount is a(n):

A)contingent liability.
B)estimated liability.
C)known liability.
D)accrued liability.

Question 19

The majority of a company's liabilities are estimated liabilities.

Question 20

A contingent liability arises because of a past event, but is dependent upon a future event.

Question 21

Sales tax liabilities are classified as long-term payables.

Question 22

The Print Shoppe had sales on account of $7,000 which were subject to state sales tax of 6.5%. The entry to record the sales would be to: (Round your final answer to the nearest cent.)

A)debit Accounts Receivable $7,000; credit Sales Revenue $7,000.
B)debit Accounts Receivable $7,000; debit Sales Tax Payable $455.00; credit Sales Revenue $7,455.00.
C)debit Accounts Receivable $7,455.00; credit Sales Revenue $7,455.00.
D)debit Accounts Receivable $7,455.00; credit Sales Revenue $7,000; credit Sales Tax Payable $455.00.

Question 23

Estimated liabilities are generally classified as long-term liabilities.

Question 24

S&C Roofing had sales on account of $32,500 which were subject to state sales tax of 8%. The entry to record the sales would be to:

A)debit Accounts Receivable, $32,500; credit Sales revenue, $32,500.
B)debit Accounts Receivable, $35,100; credit Sale revenue, $35,100.
C)debit Accounts Receivable, $32,500; debit Sales tax payable, $2,600; credit Sales revenue, $35,100.
D)debit Accounts Receivable, $35,100; credit Sales revenue, $32,500; credit Sales tax payable, $2,600.

Question 25

State sales tax collected by a company is generally paid to the state at the end of the year.

Question 26

Lionworks Inc. signed a $57,000 8% 30-year installment note on November 1, 2016. The note requires semiannual payments of $950 plus interest on May 1 and November 1 of each year. How will Lionworks classify this loan on its December 31, 2016 Balance Sheet?

A)Current Portion of Long-term debt, $0; Long-term debt, $57,000
B)Current Portion of Long-term debt, $57,000; Long-term debt, $0
C)Current Portion of Long-term debt, $950; Long-term debt, $56,050
D)Current Portion of Long-term debt, $1,900; Long-term debt, $55,100

Question 27

The current portion of long-term debt represents the principal and interest payments on long-term installment obligations that are due within one year.

Question 28

Tazo Inc. signed a $12,000 10% 15-year installment note on December 1, 2016. The note requires quarterly payments of $200 plus interest on March 1, June 1, September 1, and December 1 of each year. How will Tazo classify this loan on its December 31, 2016 Balance Sheet?

A)Current Portion of Long-term debt, $400; Long-term debt, $11,600
B)Current Portion of Long-term debt, $800; Long-term debt, $11,200
C)Current Portion of Long-term debt, $200; Long-term debt, $11,800
D)Current Portion of Long-term debt, $600; Long-term debt, $11,400

Question 29

Which of the following would NOT be a liability?

A)The signing of a three-year employment contract at a fixed annual salary
B)An obligation to provide goods or services in the future
C)A note payable with no specified maturity date
D)An obligation that is estimated in amount

Question 30

When sales tax is remitted to the state, the journal entry includes a debit to Cash and a credit to Sales Tax Payable.

Question 31

Cypress Corp. had sales on account of $19,500 which were subject to state sales tax of 12%. The entry to record the sales would be to:

A)debit Accounts Receivable $19,500; debit Sales Tax Payable $2,340; credit Sales Revenue $21,840.
B)debit Accounts Receivable $21,840; credit Sales Revenue $19,500; credit Sales Tax Payable $2,340.
C)debit Accounts Receivable $19,500; credit Sales Revenue $19,500.
D)debit Accounts Receivable $21,840; credit Sales Revenue $21,840.

Question 32

Warranty expense must be estimated and matched to revenues.

Question 33

On August 15, 2016, Sassycat Designs signed a $30,000 8% 15-year installment note which requires annual payments of $2,000 plus interest. Sassycat will classify this loan on the December 31, 2016 Balance Sheet as $2,000 current portion of long-term debt and $30,000 long-term debt.

Question 34

A company signs a note payable for $4,500 at 11% for 65 days. How much interest (to the nearest cent)will the company owe using a 360-day year? (Round your final answer to the nearest cent.)

A)$495.00
B)$88.15
C)$89.38
D)$99.21

Question 35

A major difference between Accounts Payable and Notes Payable is that:

A)only Accounts Payable are classified as current assets.
B)Notes Payable are more formal than Accounts Payable.
C)only Notes Payable charge interest.
D)Notes Payable are only long-term assets.

Question 36

Metropolitan Masonry had sales on account of $7,700 which were subject to state sales tax of 10%. The entry to record the sales would be to:

A)debit Accounts Receivable, $8,470; credit Sales revenue, $7,700; credit Sales tax payable, $770.
B)debit Accounts Receivable, $8,470; credit Sale revenue, $8,470.
C)debit Accounts Receivable, $7,700; credit Sales revenue, $7,700.
D)debit Accounts Receivable, $7,700; debit Sales tax payable, $770; credit Sales revenue, $8,470.

Question 37

Even liabilities of unknown amounts are required to be placed on the Balance Sheet.

Question 38

For a liability to exist:

A)a past transaction or event must have occurred.
B)the exact amount must be known.
C)the identity of the party must be known.
D)an obligation to pay cash in the future must exist.

Question 39

Unearned revenues are typically classified as current liabilities.

Question 40

A 12-month, 8% note dated August 1, 2016 for $5,000 would have accrued interest payable on December 31, 2016 of $166.67.

Question 41

According to the matching principle, warranty expense must always be recorded in the same period as the related revenue.

Question 42

Which of the following accurately describes how contingent liabilities are reported on the Balance Sheet?

A)Contingent liabilities are not reported.
B)Contingent liabilities are disclosed in the footnotes only.
C)Contingent liabilities are reported in the liabilities section.
D)The accounting treatment for contingent liability could be A, B, or C depending on the likelihood of an actual obligation occurring.

Question 43

The disclosure of a contingent liability only in the footnotes designates that the possibility of an actual obligation occurring is:

A)remote.
B)possible.
C)probable.
D)certain.

Question 44

The disclosure of a contingent liability in the footnotes and on the Balance Sheet indicates that the potential for the obligation occurring is:

A)remote.
B)possible.
C)probable.
D)certain.

Question 45

KLR Oil Company is being investigated, following an explosion on one of their oil rigs. They have multiple prior citations for safety violations, and this explosion killed several workers. The related damages are still unknown and cannot be reasonably estimated. What accounting treatment should KLR use for the investigation?

A)Because damages are still unknown, no action is necessary.
B)Because the likelihood of the obligation occurring is remote, footnote disclosure is all that is required.
C)Because the likelihood of the obligation occurring is probable, but the amount is unknown, this should be disclosed in the footnotes.
D)Because the likelihood of the obligation occurring is reasonably possible, this should be disclosed in the footnotes.

Question 46

Warranty expense is always recorded in the period that the warranty claims are paid.

Question 47

During the month, Evergreen Roofing settled $600 in warranty claims by replacing the defective flashing. Evergreen uses an estimated warranty account. The journal entry to record the settled claims would have been:

A)debit Estimated Warranty Payable $600; credit Cash $600.
B)debit Estimated Warranty Payable $600; credit Inventory $600.
C)debit Warranty Expense $600; credit Estimated Warranty Payable $600.
D)debit Warranty Expense $600; credit Cash $600.

Question 48

The need to create an estimated warranty liability arises from the ________ principle.

A)matching
B)entity
C)conservatism
D)objectivity

Question 49

Southeast Plumbing had cash sales for the month totaling $732,000. Southeast offers a 6-month warranty on its services. If Southeast estimates warranty claims will equal 3% of sales, the journal entry to record the estimated warranty expense for the month is:

A)debit Warranty expense, $21,960; credit Cash, $21,960.
B)debit Warranty expense, $21,960; credit Estimated warranty payable, $21,960.
C)debit Warranty expense, $21,960; credit Sales revenue, $21,960.
D)debit Estimated warranty payable, $21,960; credit Warranty expense, $21,960.

Question 50

During the month, Southeast Plumbing paid $600 to settle warranty claims. Southeast uses an estimated warranty account. The journal entry to record the payment would have been:

A)debit Estimated warranty payable, $600; credit Cash, $600.
B)debit Warranty expense, $600; credit Estimated Warranty payable, $600.
C)debit Estimated warranty payable, $600; credit Warranty expense, $600.
D)debit Warranty expense, $600; credit Cash, $600.

Question 51

TNT Construction had cash sales for the month of June totaling $44,000. TNT offers a 1-year warranty on its construction services. If TNT estimates warranty claims will equal 5% of sales, the journal entry to record the estimated warranty expense for the month is:

A)debit Warranty expense, $2,200; credit Cash, $2,200.
B)debit Estimated warranty payable, $2,200; credit Warranty expense, $2,200.
C)debit Warranty expense, $2,200; credit Estimated warranty payable, $2,200.
D)debit Warranty expense, $2,200; credit Sales revenue, $2,200.

Question 52

A company that cosigns on a loan for another company could incur a contingent liability.

Question 53

The accounting treatment of a contingent liability depends upon the likelihood of an actual obligation occurring.

Question 54

Evergreen Roofing had cash sales for the month totaling $42,000. Evergreen offers a 1-year warranty on its roofing services. If Evergreen estimates warranty claims will equal 3% of sales, the journal entry to record the estimated warranty expense for the month is:

A)debit warranty expense $1,260; credit Cash $1,260.
B)debit estimated warranty expense $1,260; credit warranty payable $1,260.
C)debit warranty expense $1,260; credit Sales Revenue $1,260.
D)debit warranty expense $1,260; credit Estimated Warranty Payable $1,260.

Question 55

During the month, TNT Construction paid $300 to settle warranty claims. TNT uses an estimated warranty account. The journal entry to record the claims payment would have been:

A)debit Warranty expense, $300; credit Cash, $300.
B)debit Warranty expense, $300; credit Estimated warranty payable, $300.
C)debit Estimated warranty payable, $300; credit Warranty expense, $300.
D)debit Estimated warranty payable, $300; credit Cash, $300.

Question 56

Contingent liabilities represent actual-NOT potential-obligations.

Question 57

If the likelihood of an obligation is remote:

A)no action is necessary in the accounting treatment.
B)the disclosure with explanation is put into the financial statement footnotes.
C)the obligation with the estimated dollars is recorded on the Balance Sheet.
D)the obligation with the estimated dollars is recorded and put into the footnotes.

Question 58

Which of the following would NOT be considered a contingent liability?

A)Pending legal action
B)Potential fines from the EPA
C)Mortgage Payable
D)Cosigning a loan

Question 59

When a company settles a warranty claim by replacing the defective goods, the journal entry will include a debit to _______ and a credit to _______.

A)Warranty Expense, Cash
B)Warranty Expense, Inventory
C)Estimated Warranty Payable, Cash
D)Estimated Warranty Payable, Inventory

Question 60

There are times when contingent liabilities are never recorded.

Question 61

Bonds that are backed by collateral are:

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

Question 62

The Discount on Bonds Payable account is known as an adjunct account.

Question 63

If the market rate of interest is higher than the stated rate of interest, then investors will be willing to pay more and the bond is sold at a premium.

Question 64

Bonds from the same bond issue that mature at different times are called:

A)unsecured bonds.
B)term bonds.
C)convertible bonds.
D)serial bonds.

Question 65

A $5,000 bond quoted at 104.4 will cost $5,220.

Question 66

A mortgage is a special type of long-term note payable.

Question 67

On January 1, Greene Autos signed a $250,000, 6%, 30-year mortgage that requires semiannual payments of $9,033 on June 30 and December 31 of each year. The journal entry to record the first semiannual payment would be (round interest calculation to the nearest dollar)to:

A)debit Mortgage Payable, $9,033; credit Cash, $9,033.
B)debit Interest Expense, $1,533; debit Mortgage Payable, $7,500; credit Cash, $9,033.
C)debit Interest Expense, $7,500; debit Mortgage expense, $1,533; credit Cash, $9,033.
D)debit Interest Expense, $7,500; debit Mortgage Payable, $1,533; credit Cash, $9,033.

Question 68

Bonds that mature all at the same time are:

A)serial bonds.
B)term bonds.
C)secured bonds.
D)callable bonds.

Question 69

Under a capital lease, the title of an asset remains with the lessor at the end of the lease.

Question 70

A mortgage is a secured note because the building will serve as collateral.

Question 71

On January 1, Clive Corporation signed a $450,000, 5%, 30-year mortgage that requires semiannual payments of $14,559 on June 30 and December 31 of each year. The journal entry to record the second semiannual payment would be: (Round your final answer to the nearest dollar.)

A)debit Interest Expense, $11,167; debit Mortgage expense, $3,392; credit Cash, $14,559.
B)debit Interest Expense, $3,392; debit Mortgage Payable, $11,167; credit Cash, $14,559.
C)debit Interest Expense, $11,167; debit Mortgage Payable, $3,392; credit Cash, $14,559.
D)debit Mortgage Payable, $14,559; credit Cash, $14,559.

Question 72

On January 1, Greene Autos signed a $270,000, 8%, 30-year mortgage that requires semiannual payments of $11,934 on June 30 and December 31 of each year. The journal entry to record the second semiannual payment would be: (Round your final answer to the nearest dollar.)

A)debit Interest Expense, $10,755; debit Mortgage Payable, $1,179; credit Cash, $11,934.
B)debit Mortgage Payable, $11,934; credit Cash, $11,934.
C)debit Interest Expense, $10,755; debit Mortgage expense, $1,179; credit Cash, $11,934.
D)debit Interest Expense, $1,179; debit Mortgage Payable,$10,755; credit Cash, $11,934.

Question 73

TLR Productions issued $10,000 of 6% bonds payable when the market rate was 8%; therefore, they will sell them for more than $10,000.

Question 74

Bonds that may be retired at a prearranged price are called:

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

Question 75

A person or business who pays another party for the use of an asset is a lessee.

Question 76

Debentures are bonds that are backed only by the general credit of the company issuing the bond.

Question 77

Debenture bonds are the same as:

A)term bonds.
B)serial bonds.
C)secured bonds.
D)unsecured bonds.

Question 78

In general it is better to use current liabilities to finance current assets and long-term debt to finance long-term assets.

Question 79

Bonds that are backed only by the credit of the issuing company are:

A)collateral bonds.
B)callable bonds.
C)unsecured bonds.
D)term bonds.

Question 80

On January 1, Clive Corporation signed a $460,000, 6%, 30-year mortgage that requires semiannual payments of $16,621 on June 30 and December 31 of each year. The journal entry to record the first semiannual payment would be: (Round your final answer to the nearest dollar.)

A)debit Interest Expense, $2,821; debit Mortgage Payable, $13,800; credit Cash, $16,621.
B)debit Interest Expense, $13,800; debit Mortgage Payable, $2,821; credit Cash, $16,621.
C)debit Mortgage Payable, $16,621; credit Cash, $16,621.
D)debit Interest Expense, $13,800; debit Mortgage expense, $2,821; credit Cash, $16,621.