Deck 9: Reporting and Interpreting Liabilities

Question 1

The choice of inventory method has an impact on the accounts payable turnover ratio.

Answer 1

False
Explanation: The accounts payable turnover numerator ratio is cost of goods sold, which is impacted by the choice of inventory method.

Question 2

A contingent liability is reported on the balance sheet if it is probable and can be estimated.

Answer 2

True
Explanation: Contingent liabilities are reported on the balance sheet when they are both probable and can be estimated.

Question 3

The quick ratio can be manipulated by management through paying off current liabilities before the end of the accounting period.

Answer 3

True
Explanation: The quick ratio can be manipulated through transactions involving quick assets and current liabilities.

Question 4

The accrual of interest on a short-term note payable decreases both the quick ratio and current assets.

Question 5

The FICA (social security)tax is a matching tax with a portion paid by both the employer and the employee.

Question 6

When a liability is initially recorded,it is recorded at the future amount of all payments.

Question 7

A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated.

Question 8

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

Question 9

Many strong companies intentionally create low quick ratios.

Question 10

A company borrowed $100,000 at 6% interest on September 1,2009.Assuming no adjusting entries have been made during the year,the entry to record interest accrued on December 31,2009 would include a debit to interest expense and a credit to interest payable for $2,000.

Question 11

The accounts payable turnover ratio is difficult to manipulate.

Question 12

A quick ratio that is high according to an industry average might mean the company may have excessive inventory levels or slow moving inventory items.

Question 13

An estimated liability can't be reported on the balance sheet.

Question 14

A current liability is created when a customer pays cash for services to be provided in the future.

Question 15

Quick assets include cash,accounts receivable,and inventory.

Question 16

Selling inventory on account increases the quick ratio.

Question 17

Purchasing inventory on account decreases the quick ratio.

Question 18

Income taxes payable is an example of an accrued liability.

Question 19

Purchasing inventory on account increases the accounts payable turnover ratio.

Question 20

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Question 21

Working capital increases when a company accrues revenues at year-end.

Question 22

A company has a quick ratio of 1.9 before paying off a large current liability with cash.As a result,what happens to the quick ratio?

A)It is greater than 1.9.
B)It is less than 1.9.
C)It remains equal to 1.9.
D)It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved.

Question 23

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Question 24

Which of the following is not a current liability?

A)A liability due within one-year for a business with a fifteen-month operating cycle.
B)A liability due within three months for a business with a two-month operating cycle.
C)A liability due within one-year for a business with a nine-month operating cycle.
D)A liability due within fifteen months for a business with a one-year operating cycle.

Question 25

A company has a quick ratio of 0.9 before paying off a large current liability with cash.As a result,what happens to the quick ratio?

A)It is greater than 0.9.
B)It is less than 0.9.
C)It remains equal to 0.9.
D)It is either greater than 0.9 or less than 0.9 depending upon the dollar amount involved.

Question 26

Which of the following accounts would not be considered when calculating the quick ratio?

A)Marketable securities.
B)Inventory.
C)Accounts receivable.
D)Accounts payable.

Question 27

The following is a partial list of account balances from the books of Probst Enterprise at the end of 2010: $$\begin{array} { l r } \text { Accounts payable } & \$ 20,500 \\\text { Accounts receivable } & 12,300 \\\text { Accrued interest on short-term note } & 1,200 \\\text { Cash } & 6,500 \\\text { Wages payable } & 1,300 \\\text { Income taxes payable } & 1,900 \\\text { Inventory } & 10,000\end{array}$$ Based solely upon these balances,what is the quick ratio?

A)0.76
B)1.15
C)0.26
D)0.79

Question 28

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows.

Question 29

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

Question 30

At year-end 2010,General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10.Which of the following is a potential cause of the decrease in this ratio?

A)An increase in accounts payable and a decrease in inventories.
B)A decrease in inventories and an increase in long-term notes payable.
C)A decrease in short-term borrowings and an increase in cash.
D)An increase in accounts payable and a decrease in cash.

Question 31

Working capital decreases when accrued wages expense is recorded at year-end.

Question 32

Which of the following statements is correct?

A)Current liabilities are initially recorded at the amount of their principal plus interest.
B)Current liabilities are those liabilities due within one year.
C)Liquidity refers to the ability to pay all debts within one year.
D)Current liabilities affect both the quick ratio and working capital.

Question 33

How is the quick ratio calculated?

A)It is current assets minus current liabilities.
B)It is current assets divided by current liabilities.
C)It is quick assets divided by current liabilities.
D)It is current liabilities divided by current assets.

Question 34

A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated.

Question 35

Which of the following accounts would not be considered when calculating the quick ratio?

A)Taxes payable
B)Accounts receivable
C)Cash
D)Prepaid rent

Question 36

An annuity is a series of consecutive payments,each one increasing by a fixed dollar amount over the payment amount of the prior year.

Question 37

Working capital is a measure of short-run liquidity and is measured by dividing current assets by current liabilities.

Question 38

Which of the following is incorrect?

A)Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer.
B)Liquidity is the ability of the company to meet its total obligations.
C)Current liabilities impact a company's liquidity.
D)Working capital is equal to current assets minus current liabilities.

Question 39

For the present value of a single amount,the compounding period may only be once a year.

Question 40

Working capital decreases when a company pays taxes payable.

Question 41

Which of the following statements incorrectly describes the accounts payable turnover ratio?

A)A high ratio indicates that suppliers are being paid in a timely manner.
B)It increases when inventory is sold on account regardless of the sales price.
C)It can be manipulated by aggressively paying off accounts payable at year-end.
D)It is not affected by the choice of inventory accounting methods.

Question 42

How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be reported within the financial statements?

A)It must be recorded and reported as a liability.
B)It does not need to be recorded or reported as a liability.
C)It must only be disclosed as a note to the financial statements.
D)It must be reported as a liability, but not disclosed in a note.

Question 43

Which of the following statements about contingent liabilities is incorrect?

A)A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated.
B)A disclosure note is required when the loss is probable and the amount can be reasonably estimated.
C)A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated.
D)A disclosure note is required when the loss is remote and the amount can be reasonably estimated.

Question 44

If the quick ratio has been increasing over the past several years,which of the following would cause the ratio to continue to increase?

A)An increase in accounts payable.
B)An increase in inventories.
C)An increase in short-term borrowings.
D)A decrease in taxes payable.

Question 45

Which of the following statements is correct?

A)Social Security tax is employer paid only.
B)The pay period always ends in conjunction with the company's fiscal year end.
C)Many fringe benefits such as sick and vacation leave benefits should be recognized when the employee earns the benefit not when they take the leave.
D)Unemployment taxes are paid by the employee only.

Question 46

Houston Company is involved in a lawsuit.In which of the following situations is only footnote disclosure of the contingent liability reported within the financial statements?

A)When the loss is remote and the amount cannot be reasonably estimated.
B)When the loss is probable and the amount can be reasonably estimated.
C)When the loss is reasonably possible and the amount can be reasonably estimated.
D)When the loss is remote and the amount can be reasonably estimated.

Question 47

Which of the following transactions will decrease the accounts payable turnover ratio?

A)Using cash to pay an accounts payable balance.
B)Selling inventory on account.
C)Selling inventory for cash.
D)A customer returning inventory purchased on account.

Question 48

Miranda Company borrowed $100,000 cash on September 1,2010,and signed a one-year 6%,interest-bearing note payable.Assuming no adjusting entries have been made during the year,the required adjusting entry at the end of the accounting period,December 31,2010,would be which of the following?

A) Interest expense $\quad$ 2,000
$\quad$ Interest payable $\quad$$\quad$$\quad$$\quad$ 2,000
B) $\begin{array} { l r r } \text { Interest expense } & 6,000 & \\\quad \text { Interest payable } & & 6,000\end{array}$
C) $\begin{array} { l r r } \text { Notes payable } & 100,000 & \\\text { Interest expense } & 6,000 & \\\quad \text { Cash } & & 106,000\end{array}$
D) $\begin{array} { l r r } \text { Interest expense } & 2,000 & \\\quad \text { Interest payable } & & 2,000\end{array}$

Question 49

Phipps Company borrowed $25,000 cash on October 1,2010,and signed a six-month,8% interest-bearing note payable with interest payable at maturity.Assuming that no adjusting entries have been made during the year,the amount of accrued interest payable to be reported on the December 31,2010 balance sheet is which of the following?

A)$250
B)$300
C)$500
D)$750

Question 50

Young Company is involved in a lawsuit.When would the lawsuit be recorded as a liability on the balance sheet?

A)When the loss probability is remote and the amount can be reasonably estimated.
B)When the loss is probable and the amount can be reasonably estimated.
C)When the loss probability is reasonably possible and the amount can be reasonably estimated.
D)When the loss is probable regardless of whether the loss can be reasonably estimated.

Question 51

Which of the following describes an accrued liability?

A)It is an expense that has been both incurred and paid.
B)It is an expense that has been incurred but not yet paid.
C)It is an expense that has been prepaid but not yet consumed.
D)It is a liability where the cash flow has taken place but the revenue has yet to be earned.

Question 52

On September 1,2010,Donna Equipment signed a one-year,8% interest-bearing note payable for $50,000.Assuming that Donna Equipment maintains its books on a calendar year basis,how much interest expense that should be reported in the 2011 income statement?

A)$2,667
B)$4,000
C)$1,333
D)$3,000

Question 53

The adjusting entry to record accrued interest on a note payable would not result in which of the following?

A)A decrease in net income.
B)A decrease in stockholders' equity.
C)An increase in liabilities.
D)A decrease in current assets.

Question 54

Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83 million for 2011.In 2010,cost of goods sold was $258 million and accounts payable was $72 million.What was Landseeker's accounts payable turnover ratio in 2011?

A)4.23
B)4.15
C)4.04
D)3.91

Question 55

Phipps Company borrowed $25,000 cash on October 1,2010,and signed a six-month,8% interest-bearing note payable with interest payable at maturity.The amount of interest expense to be reported during 2011 is which of the following?

A)$1,000
B)$300
C)$500
D)$750

Question 56

Chavez Chocolates had a quick ratio of 1.74 at year-end 2009.Which of the following would cause the ratio to decrease during 2010?

A)A decrease in both cash and marketable securities.
B)An increase in both cash and marketable securities.
C)An increase in current assets that exceeded the increase in current liabilities.
D)Current assets as a percentage of total assets increased while current liabilities as a percentage of total liabilities and stockholders' equity decreased.

Question 57

Which of the following statements is incorrect?

A)The currently maturing portion of long-term debt must be classified as a current liability.
B)The non-current portion of long-term debt will remain reported as a long-term liability.
C)When a company plans to refinance the currently maturing debt on a long-term basis, it must still report the currently maturing debt as a current liability.
D)The currently maturing portion of long-term debt is a current liability if it is due within the longer of one-year or the operating cycle.

Question 58

Miranda Company borrowed $100,000 cash on September 1,2010,and signed a one-year 6%,interest-bearing note payable.The interest and principal are both due on August 31,2011.Assume that the appropriate adjusting entry was made on December 31,2010 and that no adjusting entries have been made during 2011.The required journal entry to pay the note on August 31,2011 would be which of the following?

A) $\begin{array} { l r r } \text { Interest expense } & 6,000 & \\\quad \text { Cash } & & 6,000\end{array}$
B) $\begin{array} { l r r } \text { Interest expense } & 4,000 & \\\text { Interest payable } & 2,000 & \\\text { Notes payable } & 100,000 & \\\text { Cash } & & 106,000\end{array}$
C) $\begin{array} { l r r } \text { Notes payable } & 100,000 & \\\text { Interest expense } & 6,000 & \\\quad \text { Cash } & & 106,000\end{array}$
D) $\begin{array} { l r r } \text { Interest payable } & 2,000 & \\\text { Notes payable } & 100,000 & \\\quad \text { Cash } & & 102,000\end{array}$

Question 59

Purdum Farms borrowed $10 million by signing a five year note on January 1,2010 and repayments of the principal are payable annually in $2 million installments.Purdum Farms makes the first payment December 31,2010 and then prepares its balance sheet.What amount will be reported as current and long-term liabilities respectively in connection with the note at December 31,2010?

A)$2 million in current liabilities and $8 million in long-term liabilities.
B)$2 million in current liabilities and $6 million in long-term liabilities.
C)Zero in current liabilities and $8 million in long-term liabilities.
D)Zero in current liabilities and $10 million in long-term liabilities.

Question 60

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?

A)An understatement of both liabilities and stockholders' equity.
B)Net income to be overstated and assets to be understated.
C)Net income to be understated and liabilities to be understated.
D)An overstatement of net income, an understatement of liabilities, and an overstatement of stockholders' equity.

Question 61

SRJ Corporation entered into the following transactions:
The accrual of interest expense on a six-month note payable.
Collected cash for services to be provided within the next six months.
The accrual of revenue.
Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows?

A)The accrual of interest expense is added to net income.
B)Collecting cash for services to be provided in the future is deducted from net income.
C)The accrual of revenue is added to net income.
D)Collecting cash for services to be provided in the future doesn't require an adjustment to net income.

Question 62

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years; the first payment is due three months after the purchase date.Rae's incremental borrowing rate is 12%.At what amount would the vehicle be reported at on the balance sheet as of the purchase date?

A)$44,633
B)$50,000
C)$54,633
D)$60,000

Question 63

Rocket Corporation entered into the following transactions:
The accrual of wages and salaries expense.
The cash sale of equipment for a loss.
The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's cash flows from operating activities on the statement of cash flows?

A)The accrual of wages and salaries expense is deducted from net income.
B)The loss on the equipment sale is deducted from net income.
C)The cash payment to purchase the insurance policy is deducted from net income.
D)The accrual of wages and the equipment loss are both deducted from net income.

Question 64

Rocket Corporation entered into the following transactions:
The accrual of wages and salaries expense.
The cash payment of a six-month note payable.
The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

A)The accrual of wages and salaries expense decreases working capital.
B)The cash payment of the note payable decreases working capital.
C)The purchase of the insurance policy increases working capital.
D)The cash payments for the note and insurance both decrease working capital.

Question 65

Smith Corporation entered into the following transactions:
Purchased inventory on account.
Collected an account receivable.
Purchased equipment using cash.
Which of the following statements is correct?

A)The inventory purchase on account increased working capital.
B)Collecting an account receivable increases working capital.
C)The equipment purchase decreases working capital.
D)The inventory purchase on account increased the quick ratio.

Question 66

Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin:
• lawsuit A: The loss is probable and the loss can be reasonably estimated.
• lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated.
• lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
Which of the following statements is incorrect?

A)A disclosure note is required for lawsuit A.
B)A disclosure note is required for lawsuit C.
C)A disclosure note is not required for lawsuit B.
D)Lawsuit A is reported on the balance sheet as a liability.

Question 67

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date.Short's incremental borrowing rate is 10%.What amount of liability would be reported on the balance sheet as of the purchase date,after the initial $10,000 payment was made?

A)$100,000
B)$38,550
C)$61,446
D)$71,446

Question 68

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date,agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date.Rachel's incremental borrowing rate is 10%.At what amount would the building be reported at on the balance sheet as of the purchase date?

A)$326,500
B)$460,000
C)$287,950
D)$416,500

Question 69

SRJ Corporation entered into the following transactions:
The accrual of interest expense on a six-month note payable.
Collected cash for services to be provided within the next six months.
The accrual of revenue.
Which of the above transactions resulted in a decrease in working capital?

A)The accrual of interest expense.
B)Collecting cash for services to be provided in the future.
C)The accrual of revenue.
D)Both the accrual of interest expense and the accrual of revenue.

Question 70

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years; the first payment is due three months after the purchase date.Rae's incremental borrowing rate is 12%.At what amount would the liability be reported at on the balance sheet as of the purchase date,after the initial $10,000 payment was made?

A)$44,633
B)$50,000
C)$54,633
D)$60,000

Question 71

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
• Lawsuit A: The loss is probable,but the loss can't be reasonably estimated.
• Lawsuit B: The loss is reasonably possible,but the loss can't be reasonably estimated
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?

A)A disclosure note is required for each of the three lawsuits.
B)A disclosure note is required only for lawsuits A & C.
C)A disclosure note is required only for lawsuit A.
D)A disclosure note is required only for lawsuits B & C.

Question 72

Smith Corporation entered into the following transactions:
Purchased inventory on account.
Collected an account receivable.
Purchased equipment using cash.
Which of the above transactions resulted in an increase in working capital?

A)The inventory purchase on account.
B)Collecting an account receivable.
C)The purchase of equipment using cash.
D)None of the transactions resulted in an increase in working capital.

Question 73

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years; the first payment is due three months after the purchase date.Rusty's incremental borrowing rate is 8%.At what amount would the machine be reported at on the balance sheet as of the purchase date?

A)$123,255
B)$130,000
C)$80,000
D)$73,255

Question 74

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date.Short's incremental borrowing rate is 10%.At what amount would the land be reported at on the balance sheet?

A)$100,000
B)$38,550
C)$110,000
D)$71,446

Question 75

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date,agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date.Rachel's incremental borrowing rate is 10%.At what amount would the liability be reported at on the balance sheet as of the purchase date,after the initial $90,000 payment was made?

A)$326,500
B)$460,000
C)$287,950
D)$416,500

Question 76

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
• lawsuit A: The loss is probable,but the loss can't be reasonably estimated.
• lawsuit B: The loss is reasonably possible,but the loss can't be reasonably estimated.
• lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is incorrect?

A)A disclosure note is required for Lawsuit A.
B)A disclosure note is required for lawsuit B.
C)A disclosure note is required for lawsuit C.
D)Lawsuit A is reported on the balance sheet as a liability.

Question 77

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years; the first payment is due three months after the purchase date.Rusty's incremental borrowing rate is 8%.At what amount would the liability be reported at on the balance sheet as of the purchase date,after the initial $50,000 payment was made?

A)$123,255
B)$130,000
C)$80,000
D)$73,255

Question 78

SRJ Corporation entered into the following transactions:
The accrual of interest expense on a six-month note payable.
Collected cash for services to be provided within the next six months.
The accrual of revenue.
Which of the above transactions resulted in an increase in working capital?

A)The accrual of interest expense.
B)Collecting cash for services to be provided in the future.
C)The accrual of revenue.
D)Both the accrual of revenue and the collection of cash for future services.

Question 79

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date.Libby's incremental borrowing rate is 8%.At what amount would the liability be reported on the balance sheet as of the purchase date,after the initial $5,000 payment was made?

A)$45,000
B)$33,664
C)$38,664
D)$40,000

Question 80

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date.Libby's incremental borrowing rate is 8%.At what amount would the equipment be reported at on the balance sheet as of the purchase date?

A)$45,000
B)$38,664
C)$33,664
D)$40,000