Deck 9: Current Liabilities and Long-Term Debt

Question 1

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.

Answer 1

D

Question 2

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.

Answer 2

A

Question 3

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

Answer 3

D

Question 4

A known liability is always classified as a current liability.

Question 5

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 6

A liability,such as warranties payable,would be an example of a(n):

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

Question 7

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 8

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

Question 9

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

Question 10

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

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

Question 11

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

Question 12

Which of the following would be considered a contingent liability?

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

Question 13

Current liabilities are expected to be settled within:

A)3 months.
B)6 months.
C)1 year.
D)more than 1 year.

Question 14

Which of the following would be considered an estimated liability?

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

Question 15

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

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

Question 16

Accounts Payable would be an example of a(n):

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

Question 17

The largest portion of Accounts Payable for most merchandising companies is related to the purchase of inventory on account.

Question 18

Which of the following would be considered a known liability?

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

Question 19

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

Question 20

Notes payable would be an example of a known liability.

Question 21

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

Question 22

Metropolitan Masonry had sales on account of $7,200 which were subject to state sales tax of 7%.The entry to record the sales would be to:

A)debit Accounts Receivable,$7,704;credit Sales revenue,$7,200;credit Sales tax payable,$504.
B)debit Accounts Receivable,$7,704;credit Sale revenue,$7,704.
C)debit Accounts Receivable,$7,200;credit Sales revenue,$7,200.
D)debit Accounts Receivable,$7,200;debit Sales tax payable,$504;credit Sales revenue,$7,704.

Question 23

The Print Shoppe had sales on account of $4,500 which were subject to state sales tax of 9.5%.The entry to record the sales would be to:

A)debit Accounts Receivable $4,500;credit Sales Revenue $4,500.
B)debit Accounts Receivable $4,500;debit Sales Tax Payable $427.50;credit Sales Revenue $4,927.50.
C)debit Accounts Receivable $4,927.50;credit Sales Revenue $4,927.50.
D)debit Accounts Receivable $4,927.50;credit Sales Revenue $4,500;credit Sales Tax Payable $427.50.

Question 24

Tazo Inc.signed a $30,000 10% 15-year installment note on December 1,2014.The note requires quarterly payments of $500 plus interest on March 1,June 1,September 1,and December 1 of each year.How will Budget Auto classify this loan on its December 31,2014 Balance Sheet?

A)Current Portion of Long-term debt,$1,000;Long-term debt,$29,000
B)Current Portion of Long-term debt,$2,000;Long-term debt,$28,000
C)Current Portion of Long-term debt,$500;Long-term debt,$29,500
D)Current Portion of Long-term debt,$1,500;Long-term debt,$28,500

Question 25

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

Question 26

A 12-month,8% note dated August 1,2013 for $5,000 would have accrued interest payable on December 31,2013 of $166.67.

Question 27

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 28

Lionworks Inc.signed a $45,000 8% 30-year installment note on November 1,2014.The note requires semiannual payments of $750 plus interest on May 1 and November 1 of each year.How will Budget Auto classify this loan on its December 31,2014 Balance Sheet?

A)Current Portion of Long-term debt,$0;Long-term debt,$45,000
B)Current Portion of Long-term debt,$45,000;Long-term debt,$0
C)Current Portion of Long-term debt,$750;Long-term debt,$44,250
D)Current Portion of Long-term debt,$1,500;Long-term debt,$43,500

Question 29

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

Question 30

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 31

On August 15,2014,Woods Design signed a $20,000 7% 10-year installment note which requires annual payments of $4,000 plus interest.Woods will classify this loan on the December 31,2014 Balance Sheet as $4,000 current portion of long-term debt and $20,000 long-term debt.

Question 32

Cypress Corp.had sales on account of $16,500 which were subject to state sales tax of 8%.The entry to record the sales would be to:

A)debit Accounts Receivable $16,500;debit Sales Tax Payable $1,320;credit Sales Revenue $17,820.
B)debit Accounts Receivable $17,820;credit Sales Revenue $16,500;credit Sales Tax Payable $1,320.
C)debit Accounts Receivable $16,500;credit Sales Revenue $16,500.
D)debit Accounts Receivable $17,820;credit Sales Revenue $17,820.

Question 33

S&C Roofing had sales on account of $28,500 which were subject to state sales tax of 9%.The entry to record the sales would be to:

A)debit Accounts Receivable,$28,500;credit Sales revenue,$28,500.
B)debit Accounts Receivable,$31,065;credit Sale revenue,$31,065.
C)debit Accounts Receivable,$28,500;debit Sales tax payable,$2,565;credit Sales revenue,$31,065.
D)debit Accounts Receivable,$31,065;credit Sales revenue,$28,500;credit Sales tax payable,$2,565.

Question 34

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 35

A company signs a note payable for $3,500 at 9% for 45 days.How much interest (to the nearest cent)will the company owe using a 360-day year?

A)$354.38
B)$315.00
C)$39.38
D)$38.84

Question 36

Warranty expense must be estimated and matched to revenues.

Question 37

Unearned revenues are typically classified as current liabilities.

Question 38

Sales tax liabilities are classified as long-term payables.

Question 39

Estimated liabilities are generally classified as long-term liabilities.

Question 40

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 41

TNT Construction had cash sales for the month of June totaling $43,700.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,$2,185;credit Cash,$2,185.
B)debit Estimated warranty payable,$2,185;credit Warranty expense,$2,185.
C)debit Warranty expense,$2,185;credit Estimated warranty payable,$2,185.
D)debit Warranty expense,$2,185;credit Sales revenue,$2,185.

Question 42

Northwest Electric had cash sales for the month totaling $73,200.Northwest offers a 6-month warranty on its services.If Northwest estimates warranty claims will equal 2% of sales,the journal entry to record the estimated warranty expense for the month is:

A)debit Warranty expense,$1,464;credit Cash,$1,464.
B)debit Warranty expense,$1,464;credit Estimated warranty payable,$1,464.
C)debit Warranty expense,$1,464;credit Sales revenue,$1,464.
D)debit Estimated warranty payable,$1,464;credit Warranty expense,$1,464.

Question 43

During the month,Northwest Electric paid $582 to settle warranty claims.Northwest uses an estimated warranty account.The journal entry to record the payment would have been:

A)debit Estimated warranty payable,$582;credit Cash,$582.
B)debit Warranty expense,$582;credit Estimated Warranty payable,$582.
C)debit Estimated warranty payable,582;credit Warranty expense,$582.
D)debit Warranty expense,$582;credit Cash,$582.

Question 44

During the month,TNT Construction paid $278 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,$278;credit Cash,$278.
B)debit Warranty expense,$278;credit Estimated warranty payable,$278.
C)debit Estimated warranty payable,278;credit Warranty expense,$278.
D)debit Estimated warranty payable,$278;credit Cash,$278.

Question 45

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

Question 46

Contingent liabilities represent actual-NOT potential-obligations.

Question 47

Which of the following would be considered a contingent liability?

A)Sales tax obligation
B)Mortgage obligation
C)Accounts Payable obligation
D)Pending legal action

Question 48

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

Question 49

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 50

A warranty is an example of a(n):

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

Question 51

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

Question 52

Evergreen Roofing had cash sales for the month totaling $33,500.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 $1,005;credit Cash $1,005.
B)debit estimated warranty expense $1,005;credit warranty payable $1,005.
C)debit warranty expense $1,005;credit Sales Revenue $1,005.
D)debit warranty expense $1,005;credit Estimated Warranty Payable $1,005.

Question 53

During the month,Evergreen Roofing settled $300 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 $300;credit Cash $300.
B)debit Estimated Warranty Payable $300;credit Inventory $300.
C)debit Warranty Expense $300;credit Estimated Warranty Payable $300.
D)debit Warranty Expense $300;credit Cash $300.

Question 54

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

Question 55

There are times when contingent liabilities are never recorded.

Question 56

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 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

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

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

Question 59

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 60

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 61

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

Question 62

On January 1,Greene Autos signed a $210,000,6%,30-year mortgage that requires semiannual payments of $7,585 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,$7,585;credit Cash,$7,585.
B)debit Interest Expense,$1,285;debit Mortgage Payable,$6,300;credit Cash,$7,585.
C)debit Interest Expense,$6,300;debit Mortgage expense,$1,285;credit Cash,$7,585.
D)debit Interest Expense,$6,300;debit Mortgage Payable,$1,285;credit Cash,$7,585.

Question 63

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

Question 64

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 65

Bonds payable are supported by a promissory note.

Question 66

On January 1,Clive Corporation signed a $175,000,8%,30-year mortgage that requires semiannual payments of $7,735 on June 30 and December 31 of each year.The journal entry to record the second semiannual payment would be (round interest calculation to the nearest dollar)to:

A)debit Interest Expense,$6,971;debit Mortgage expense,$764;credit Cash,$7,735.
B)debit Interest Expense,$764;debit Mortgage Payable,$6,971;credit Cash,$7,735.
C)debit Interest Expense,$6,971;debit Mortgage Payable,$764;credit Cash,$7,735.
D)debit Mortgage Payable,$7,735;credit Cash,$7,735.

Question 67

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

Question 68

Bonds that are backed by collateral are:

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

Question 69

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 70

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

Question 71

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

Question 72

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

Question 73

On January 1,Clive Corporation signed a $175,000,8%,30-year mortgage that requires semiannual payments of $7,735 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 Interest Expense,$735;debit Mortgage Payable,$7,000;credit Cash,$7,735.
B)debit Interest Expense,$7,000;debit Mortgage Payable,$735;credit Cash,$7,735.
C)debit Mortgage Payable,$7,735;credit Cash,$7,735.
D)debit Interest Expense,$7,000;debit Mortgage expense,$735;credit Cash,$7,735.

Question 74

Bonds are interest-bearing notes that are issued to a single lender.

Question 75

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

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

Question 76

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 77

Bonds that mature all at the same time are:

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

Question 78

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

Question 79

On January 1,Greene Autos signed a $210,000,6%,30-year mortgage that requires semiannual payments of $7,585 on June 30 and December 31 of each year.The journal entry to record the second semiannual payment would be (round interest calculation to the nearest dollar)to:

A)debit Interest Expense,$6,261;debit Mortgage Payable,$1,324;credit Cash,$7,585.
B)debit Mortgage Payable,$7,585;credit Cash,$7,585.
C)debit Interest Expense,$6,261;debit Mortgage expense,$1,324;credit Cash,$7,585.
D)debit Interest Expense,$1,324;debit Mortgage Payable,$6,261;credit Cash,$7,585.

Question 80

Debenture bonds are the same as:

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