Deck 9: Liabilities and Interest

Question 1

Unearned revenues

A)are considered to be a type of revenue.
B)are revenues that are collected before services or goods are delivered.
C)normally have a debit balance.
D)are credited when the sales revenue is finally earned.
E)include cash donations made to universities from wealthy alumni.

Answer 1

B

Question 2

Palto Industries pays its employees monthly.Payroll information follows: 1.The monthly gross salary for all its employees is $85,000.Palto Industries withholds 20% of the employees' gross salary for federal taxes,6.5% for state taxes,and 7.5% for Social Security (FICA)taxes.
2)Palto Industries incurs other employee-related costs.Specifically,the company must (1)match the Social Security taxes withheld from the employees,(2)contribute 3% of the employees' gross pay to the employees' pension fund,and (3)pay 5% of the employees' gross pay for health insurance premiums on behalf of the employees.
What is the journal entry to be made by Palto Industries for the accrual of payroll taxes for their monthly payroll?

Answer 2

A

Question 3

Slinger Company estimated at January 1,20X9,that its income before taxes for the year ended December 31,20X9,would be $5,500,000.Slinger Company's tax rate for the year is 42%.The company made quarterly tax payments on April,June,September,and December 15.The actual income before taxes for the year ended December 31,20X9,for the Slinger Company was $5,700,000.What was the balance in the income tax payable account at December 31,20X9?

A)$0
B)$84,000
C)$100,000
D)$144,000
E)$200,000

Answer 3

B

Question 4

T.J.West,publishes the Bunstelle Times.In June,he collected $96 in advance for 1-year subscriptions.He delivered the first issue in July.Assume one issue is published per month.The journal entry to record the delivery of the magazines in July would be

Question 5

Sales tax

A)is a tax on sales and is an expense to the company who collects it.
B)is collected from the customer and remitted to the state or local government.
C)is paid daily to the state or local government and,thus,never appears as a payable.
D)is classified as a long-term payable on the balance sheet.
E)is not collected from customers.

Question 6

A written promise to repay a loan principal plus interest at a specific future date is

A)a promissory note.
B)a line of credit.
C)commercial paper.
D)a product warranty.
E)a returnable deposit.

Question 7

The current portion of long-term debt represents

A)the amount of principal on long-term debt that comes due in the coming year.
B)the amount of long-term debt that appears in the noncurrent liability section of the balance sheet.
C)the amount of interest that comes due in the coming year.
D)a short-term loan from a bank that has also granted a long-term loan.
E)the amount of principal and interest that comes due within a coming year.

Question 8

A debt contract issued by prominent companies that allow the companies to borrow directly from investors is

A)a promissory note.
B)a line of credit.
C)commercial paper.
D)product warranties.
E)returnable deposits.

Question 9

Talk Unlimited began business on January 1,2003.The company manufactures and sells cell phones cases.The company provides a warranty on its units,whereby the company will replace any defective case for two years after the sale,at no additional cost to the customer.During 2003,Talk Unlimited had sales of $850,000.The company estimates that the cost of the warranties will be 2% of sales.No warranty claims were made in 2003.During 2004,warranty claims of $15,700 were made.All warranty claims were satisfied and paid for.What journal entry,if any,is necessary for 2004 by Talk Unlimited?

A)No journal entry is necessary.

Question 10

Master Printers,Inc.has a temporary shortfall of cash,but needs to pay its employees tomorrow.What will Master Printers,Inc.,most likely do to obtain the cash?

A)Go to a bank and sign a promissory note for the funds needed
B)Issue commercial paper in hopes that creditors will loan the company the needed funds
C)Offer a 1-day incentive to salespersons in order to increase sales and cash
D)Ask employees to wait until the company has the funds to pay them
E)Borrow money from their line of credit

Question 11

Talk Unlimited began business on January 1,2003.The company manufactures and sells cell phones cases.The company provides a warranty on its units,whereby the company will replace any defective case for two years after the sale,at no additional cost to the customer.During 2003,Talk Unlimited had sales of $850,000.The company estimates that the cost of the warranties will be 2% of sales.No warranty claims were made in 2003.During 2004,warranty claims of $15,700 were made.All warranty claims were satisfied and paid for.What journal entry,if any,is necessary for 2003 by Talk Unlimited?

A)No journal entry is necessary.

Question 12

Which of the following statements is false?

A)Well-known examples of returnable deposits are those for returnable containers such as soft-drink bottles and beer kegs.
B)Companies that receive deposits record them as a form of receivable.
C)The account,Deposits Payable,is a current liability of the company receiving the deposit.
D)Ordinarily,the recipient of the cash deposit may use the cash for investment purposes from the date of deposit to the date of its return to the depositor.
E)None of the above

Question 13

Palto Industries pays its employees monthly.Payroll information follows: 1.The monthly gross salary for all its employees is $85,000.Palto Industries withholds 20% of the employees' gross salary for federal taxes,6.5% for state taxes,and 7.5% for Social Security (FICA)taxes.
2)Palto Industries incurs other employee-related costs.Specifically,the company must (1)match the Social Security taxes withheld from the employees,(2)contribute 3% of the employees' gross pay to the employees' pension fund,and (3)pay 5% of the employees' gross pay for health insurance premiums on behalf of the employees.
What is the journal entry to be made by Palto Industries for the gross pay and withholdings for their monthly payroll? Assume salaries will be paid two days after the journal entry.

Question 14

Smith Lots,Inc.,operates in a state where there is a 6% sales tax.If a customer pays cash for merchandise with a sales price of $500,what effect will this transaction have on Smith Lots' balance sheet? (Ignore the effect on cost of goods sold.)

A)Assets increase by $530,current liabilities increase by $30,and stockholders' equity increases by $500.
B)Assets increase by $500,and stockholders' equity increases by $500.
C)Assets increase by $500,long-term liabilities increase by $30,and stockholders' equity increases by $500.
D)Assets increase by $500,current liabilities increase by $30,and stockholders' equity increases by $470.
E)Assets increase by $530,long-term liabilities increase by $30,and stockholders' equity increases by $500.

Question 15

A liability is created

A)when merchandise is purchased with cash.
B)when owners invest in a company.
C)when merchandise is sold on account.
D)when salary expense is recognized before employees are paid.
E)when rent is paid in advance.

Question 16

Liabilities that fall due more than 1 year beyond the balance sheet date are

A)long-term liabilities.
B)delinquent liabilities.
C)current liabilities.
D)risky liabilities.
E)contingent liabilities.

Question 17

Cref,Inc.,estimated at January 1,20X3,that its income before taxes for the year ended December 31,20X3,would be $600,000.Cref,Inc.'s tax rate for the year is 40%.The company made quarterly tax payments on April,June,September,and December 15.The actual income before taxes for the year ended December 31,20X3,for Cref,Inc.,was $620,000.What was the balance in the income tax payable account at December 31,20X3 after payment of yearly taxes?

A)$0
B)$8,000
C)$15,000
D)$10,000
E)$20,000

Question 18

Sally publishes the Sunshine News.In March,she collected $600 in advance for 1-year subscriptions.The journal entry to record the receipt of $600 in March would be

Question 19

Annual Operations Company operates in a state where there is a 6% sales tax.If a customer pays cash for merchandise with a sales price of $500,Annual Operations would record the transaction using which of the following journal entries?

Question 20

Examples of a current liability include all of the following except:

A)Prepaid rent.
B)Accrued income taxes payable.
C)Accrued wages payable.
D)Current portion of long-term debt.
E)Accounts payable.

Question 21

Income tax withholdings and Social Security withholdings are a type of payroll tax that is an expense to the employer.

Question 22

Warranty costs are expensed at the time the item covered by the warranty is sold.

Question 23

Clean Out Clutter is located in a state where the sales tax is 7 1/4%.Total sales for the month of February were $104,000,all of which were subject to sales tax.
a.Prepare a journal entry that summarizes sales (all in cash)for the month.
b.Prepare a journal entry regarding the disbursement for the sales tax.

Question 24

Expenses that have been incurred and recognized on the income statement but not yet paid are accrued liabilities.

Question 25

A line of credit is a written promise to repay the loan principal plus interest at a specific future date.

Question 26

Unearned sales revenue is debited when a business receives cash in advance of performing services.

Question 27

For the week ended May 16,Cheap Printing Company had a total payroll of $183,000.Three items are withheld from employee's paychecks: (1)Social Security (FICA)tax of 7.1% of payroll; (2)income taxes,which average 20% of the payroll; and (3)employees' savings that are deposited in their credit union,which are $12,020.In addition,Cheap Printing Company pays (1)Social Security tax equal to the amount withheld from employees,(2)health insurance premiums of $12,750,and (3)contributions to the employees' pension fund of $17,000.
Prepare the journal entries to record the compensation expense and the employee benefit expense.

Question 28

Deposits to a bank by customers are considered to be current liabilities by the bank.

Question 29

The journal entry to reclassify a noncurrent liability as a current liability includes a debit to the current portion of long-term obligations.

Question 30

The portion of a long-term liability that is due within a year is still included in the long-term liability section of the balance sheet.

Question 31

A company's portion of long-term debt that includes payments due within a year should be reclassified as a current liability.

Question 32

A company selling merchandise in a state charging 6% sales tax would debit sales tax expense for 6% of gross revenue each time a sale is recorded.

Question 33

At the beginning of 20X3,Shingles Roofing had a liability for warranties of $7,000 on the books.During 20X3,Shingles Roofing had sales of $310,000.The company estimates that the cost of servicing products under warranty will average 2.5% of sales.Expenditures (all in cash)to satisfy warranty claims during 20X3 were $6,200,of which $2,500 was for products sold in 20X3.
a.Prepare the journal entries for sales revenue and the related warranty expense for 20X3.Assume
all sales are for cash.
b.Prepare the journal entry for the warranty expenditures.
c.Compute the December 31,20X3,ending balance in the Liability for Warranties account.

Question 34

Revenue collected in advance is usually a current asset.

Question 35

Manituc Beading,which resides in a 5% sales tax county,sold $13,000 worth of beads to customers in January,2X03 for cash.The company uses the periodic inventory system.Since beads were difficult to carry home,Manituc Beading offered a convenient carrying case for customers to use with the stipulation that it should be returned by the end of the month of the original sale.If customers did not return the case by January 31,2X03,Manituc Beading's agreement was to keep the deposit money.Customers paid $200 cash in carrying case deposits during January,2X03 and Manituc Beading returned $170 of the money to customers by January 31,2X03.In addition,although Manituc Beading rarely encounters batches of defective beads,it does occur on occasion.Manituc Beading estimates .5% of sales to be returned as defective,and offers a cash refund warranty for one year after purchase.
Required:
1.Prepare the journal entry to record sales and sales tax for January,2X03.
2.Prepare the journal entry to record returnable deposit money received in January,2X03.
3.Prepare the journal entry to record deposit money returned to customers and the portion of the deposit money kept by Manituc Beading.
4.Prepare the journal entry to record estimated product warranties.

Question 36

Commercial paper is a debt contract issued by prominent companies that borrow directly from investors.

Question 37

Revenues that are collected before services or goods are delivered are called unearned revenue under accrual accounting.

Question 38

If warranty obligations are material,they must be accrued when products are sold because the obligation arises then,not when the actual repair services are performed.

Question 39

Corporations pay taxes in one lump sum at the end of the year.

Question 40

A promissory note is an agreement with a bank to provide automatically short-term loans up to some pre-established maximum amount.

Question 41

The excess of a bond's issue price over its face value is known as the

A)discount.
B)effective interest amount.
C)coupon interest amount.
D)premium.
E)contingent liability.

Question 42

When the market interest rate is 13% and the coupon rate is 10%,a bond sells at

A)a discount.
B)a premium.
C)par.
D)liquidation value.
E)Cannot be determined without more information

Question 43

Which statement is false?

A)The periodic interest payment on a bond is based upon the market rate of interest.
B)Typically when a company issues a bond,the company will sell the bonds to an underwriter,who in turn sells the bonds to the general public.
C)The nominal rate of interest and the market rate of interest are usually different on the date the bond is issued.
D)If a bond is sold at a price that is greater than face value,it is said to be sold at a premium.
E)If a bond is sold at a price that is less than face value,it is said to be sold at a discount.

Question 44

Nunn Industries had the following items on its December 31,20X3,balance sheet:
Required:
Prepare the current liabilities section of Nunn Industries' balance sheet.

Question 45

The cash proceeds received from issuing a bond are less than the face value of the bond.It is apparent that the bond was issued at

A)face value.
B)a premium.
C)a discount.
D)par value.
E)nominal value.

Question 46

Notes and bonds are common financial contracts that businesses use to raise money.

Question 47

________ are a form of long-term debt that is secured by the pledge of specific property.

A)Convertible bonds
B)Mortgage bonds
C)Callable bonds
D)Sinking fund bonds
E)Debentures

Question 48

Bond interest payments are typically made

A)annually.
B)semiannually.
C)monthly.
D)quarterly.
E)weekly.

Question 49

Bonds are often called ________ financial instruments or securities because they can be transferred from one lender to another.

A)private placement
B)negotiable
C)current liability
D)long term liability
E)sinking fund

Question 50

Bonds are typically sold through

A)board of directors.
B)underwriters.
C)corporations.
D)commercial insurance companies.
E)None of the above

Question 51

Convertible bonds are attractive to investors because

A)the issuing company cannot retire the bonds before maturity.
B)they can be converted into stock by the issuing company.
C)they usually carry a higher rate of interest than non-convertible bonds.
D)they usually carry a lower rate of interest than non-convertible bonds.
E)they can be converted into stock at the holder's option.

Question 52

________ are bonds whose holders have claims against only the assets that remain after the claims of the more senior general creditors are satisfied.

A)Subordinated debentures
B)Mortgage bonds
C)Callable bonds
D)Sinking fund bonds
E)Convertible bonds

Question 53

As the market rate of interest rises above the nominal or stated interest rate for a bond,the market price of the bond will

A)stay the same.
B)fall.
C)rise.
D)Cannot be determined without more information
E)go in sync with the stock's price.

Question 54

The interest rate that determines the amount of cash paid for interest to the bondholder is referred to as the

A)effective rate.
B)market rate.
C)coupon rate.
D)daily rate.
E)imputed rate.

Question 55

When the market interest rate is 7% and the coupon rate is 10%,a bond sells at

A)a discount.
B)a premium.
C)par.
D)liquidation value.
E)Cannot be determined without more information

Question 56

Protective covenants are provisions in a bond that are intended to protect the shareholders' interests.

Question 57

A debenture is a debt security with a general claim against the company's total assets,rather than against a particular asset.

Question 58

If a $10,000 bond,with a 12% coupon rate,is trading at 100,what can be said about the current price and current yield of the bond?

Question 59

________ are subject to redemption before maturity at the option of the issuer.

A)Debentures
B)Mortgage bonds
C)Callable bonds
D)Sinking fund bonds
E)Convertible bonds

Question 60

A callable bond is one in which the bondholder can sell the bond back to the company,even if the company does not want the bond returned.

Question 61

In items a-f,define whether the bond was issued at a premium (PR),discount,(DI),or par (PAR)when the face value of the bond was $1,000 with a 10% coupon rate.

Question 62

The spreading of bond discount over the life of the bonds as interest expense is called

A)discount amortization.
B)effective-interest amortization.
C)compound interest amortization.
D)premium amortization.
E)LIBOR.

Question 63

Interest expense that is not explicitly recognized in a loan agreement is referred to as coupon or nominal interest.

Question 64

Which of the following is not true of bonds issued at a premium?

A)The cash proceeds exceed the face amount of the bonds.
B)The amortization of bond premium decreases the interest expense.
C)The amount of the Premium on Bonds Payable account is subtracted from the face amount of the bonds to determine the net liability reported in the balance sheet.
D)The market rate was below the coupon rate.
E)Amortization of the premium decreases the carrying value of the bond.

Question 65

Which statement is true regarding zero coupon bonds?

A)They provide cash interest payments during their life.
B)They are sold for more than the face or maturity value.
C)The investor determines their market value at the issuance date by calculating the present value of their maturity value,using the market rate of interest for bonds having similar terms and risks.
D)They are also called callable debentures.
E)They are also called junk bonds.

Question 66

Debenture bonds may be subordinated,which means that their interest rates may vary depending on the prime rate.

Question 67

Higher rated bonds are safer,and companies with better ratings generally pay lower interest rates.

Question 68

Companies that have a poor credit rating will always issue a bond at a discount.

Question 69

Convertible bonds are bonds that may be redeemed before maturity date by the issuing corporation.

Question 70

What is the relation between the market interest rate and the bond issue price? Include descriptions of bond discount and premium in your explanation.

Question 71

The discount on bonds payable

A)serves to reduce interest expense on the income statement.
B)serves to increase interest expense on the income statement.
C)is never allowed by investment bankers when debt is issued.
D)serves to increase the cash interest payment.
E)is an adjunct account to bonds payable.

Question 72

Early extinguishment of debt

A)is not allowed by the FASB during the first 2 years bonds are outstanding
B)will never have related gains or losses recorded on the books.
C)occurs when the issuer redeems its own bonds by purchases on the open market or by exercising their rights to redeem callable bonds.
D)is not permitted.
E)is permitted only in the banking industry.

Question 73

Bond prices can change very much,even though periodic interest payments will occur and the principal amount of the bond will be paid at maturity.

Question 74

Negotiable instruments are legal financial contracts that can be transferred from one lender to another.

Question 75

The issuance of bonds is shown on the statement of cash flows as

A)a cash inflow from financing activities.
B)a cash inflow from investing activities.
C)a cash inflow from operating activities.
D)a cash outflow from financing activities.
E)a cash outflow from investing activities.

Question 76

The market interest rate that equates the proceeds from a loan with the present value of the loan payments is called

A)implicit interest rate.
B)nominal interest rate.
C)imputed interest rate.
D)coupon interest.
E)both A and C.

Question 77

A protective covenant is a contract whereby the issuing corporation of a bond promises that it will abide by stated provisions.

Question 78

Which of the following is false? The discount on bonds payable is

A)amortized over the life of the bond.
B)deducted from bonds payable.
C)a contra account to bonds payable.
D)reported in liabilities section of the balance sheet.
E)an adjunct account to bonds payable.

Question 79

A callable bond is one in which the bondholder can sell the bond back to the company,even if the company does not want the bond returned.

Question 80

Sinking fund bonds require the issuer to make annual payments into a sinking fund.