Deck 8: Liabilities

Question 1

The presence of an Unearned Revenue account on a company's balance sheet indicates that the company received cash from customers prior to providing goods and services.

Answer 1

True

Question 2

When recording interest accrued on very short-term notes, the interest can be added to the Notes Payable account.

Answer 2

False

Question 3

A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement footnotes.

Answer 3

False

Question 4

Warranty expense is recognized in the same period that the sales revenue is recognized because of the conservatism principle.

Question 5

A contingent liability is a potential liability, with the dollar amount of the liability dependent on a future event arising out of a past transaction.

Question 6

Sales tax collected by the merchant is an expense on their books.

Question 7

A contingent liability that has a probable chance of occurrence should be recorded in the financial statements.

Question 8

The amount of long-term debt that must be paid in the current period affects the current ratio.

Question 9

Current liabilities are obligations due within one year or within the company's normal operating cycle if it is longer than one year.

Question 10

Sales tax payable is an estimated liability arising out of sales revenue that has been reported on the income statement.

Question 11

For most service companies, the major expense is employee compensation.

Question 12

When a company has earned all of the revenue it had previously collected in advance, the balance in the unearned revenue account will be zero.

Question 13

Warranty payable is an example of a liability that exists, but its exact amount is not known.

Question 14

Companies that are experiencing financial difficulties will want to overstate liabilities, rather than understate liabilities.

Question 15

The estimated warranty payable account will be zeroed out at the end of every fiscal year.

Question 16

An accrued expense is an expense incurred in the current period that will be paid in a future period.

Question 17

Contingent liabilities are reported on the income statement.

Question 18

The amount of an obligation must be known in advance to be considered a liability.

Question 19

If a company has a short-term note payable, it must accrue interest expense and interest payable at the end of the period.

Question 20

The purchase of merchandise inventory frequently results in a liability.

Question 21

When a company makes a journal entry to record revenue that it had previously collected in advance:

A)it debits unearned revenue and credits cash.
B)it debits unearned revenue and credits a revenue account.
C)a liability decreases and revenue increases.
D)both B and C occur.

Question 22

At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:

A)current liabilities increase and current assets decrease.
B)current liabilities increase and equity increases.
C)current liabilities increase and equity decreases.
D)current liabilities decrease and equity decreases.

Question 23

Monthly sales were $150,000. Warranty costs are estimated at 5% of monthly sales. In the month of sale, the company should record a debit to:

A)Warranty Payable for $7,500.
B)Warranty Expense for $7,500.
C)Sales for $7,500.
D)none of the above. No entry is required since the actual liability amount is not known.

Question 24

Obligations that are due beyond one year or after the company's normal operating cycle if longer than a year are:

A)current liabilities.
B)estimated liabilities.
C)long-term liabilities.
D)current installment of long-term debt.

Question 25

1.9% note payable. The total cash paid for interest at maturity of the note (using a 360 day year)is:

A)$70.
B)$97.50.
C)$1,300.
D)$13,000.

Question 26

Warranty expense should be recorded in the period:

A)the product is paid for by the customer.
B)immediately following the period in which the product is sold.
C)the product sold is repaired or replaced.
D)the product is sold and recognized as sales.

Question 27

A company failed to recognize an accrued liability. As a result, the current ratio is:

A)understated because the denominator is overstated.
B)understated because the denominator is understated.
C)overstated because the denominator is understated.
D)overstated because the denominator is overstated.

Question 28

If at the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year:

A)short-term notes payable and interest payable will appear on the balance sheet and interest expense will appear on the income statement.
B)short-term notes payable will appear on the balance sheet and interest expense and interest payable will appear on the income statement.
C)short-term notes payable will be the only item appearing on the balance sheet.
D)none of the above will occur.

Question 29

The Oven Store has a short-term note payable of $3,000. At maturity, the interest on the note is $200 and has not been accrued. The journal entry to record the payment of the note would include:

A)a debit to Note Payable for $3,000.
B)a credit to cash for $3,200.
C)a debit to interest expense for $200.
D)all of the above.

Question 30

The accounting principle requiring that a company record the warranty expense in the same period that it records sales revenue is the:

A)consistency principle.
B)historical cost principle.
C)matching principle.
D)stable-dollar principle.

Question 31

The journal entry to record accrued interest on a short-term note payable must include a debit to:

A)Interest Expense and a credit to Notes Payable.
B)Interest Expense and a credit to Interest Payable.
C)Interest Payable and a credit to Interest Expense.
D)Interest Payable and a credit to Notes Payable.

Question 32

Current liabilities are obligations due within:

A)one month or within the company's normal operating cycle if it is longer than one month.
B)one year or within the company's normal operating cycle if it is longer than one year.
C)one year or within the company's normal operating cycle if it is shorter than one year.
D)one month or within the company's normal operating cycle if it is shorter than one month.

Question 33

Current liabilities fall into two categories which are referred to as:

A)liabilities of a known amount and estimated liabilities.
B)contingent liabilities and noncontingent liabilities.
C)contingent liabilities and contra-liabilities.
D)unearned liabilities and accrued liabilities.

Question 34

1.9% note payable. The amount of accrued interest on December 31 (using a 360 day year)is:

A)$63.
B)$65.
C)$98.
D)$75.

Question 35

Failure to record an accrued liability causes a company to:

A)understate liabilities.
B)understate owners' equity.
C)overstate expenses.
D)overstate assets.

Question 36

1.9% note payable. The total cash paid on the maturity date of the note (using a 360 day year)is:

A)$13,000.
B)$13,065.
C)$13,097.50.
D)$13,750.

Question 37

Jaye's Company paid $750 cash to replace a part on equipment sold under warranty. To recognize the payment, which of the following are correct?

A)Debit Warranty Payable and credit Cash
B)Debit Warranty Expense and credit Cash
C)Debit Equipment Expense and credit Cash
D)Debit Parts Expense and credit Cash

Question 38

When a business receives cash from a customer before earning the revenue, they have a(n):

A)contingent liability.
B)unearned revenue.
C)account payable.
D)prepaid revenue.

Question 39

Which of the following are overstated as a result of the failure to record an accrued liability?

A)Net income, current ratio and rate of return on debt
B)Current ratio, acid-test ratio and rate of return on debt
C)Net income, acid-test ratio and rate of return on debt
D)Net income, current ratio and acid test ratio

Question 40

The journal entry to record payroll:

A)debits salary expense for the gross payroll and credits salary payable for the net pay.
B)credits income tax payable for the income tax that has been withheld from the employees.
C)credits FICA payable for the social security and Medicare tax withheld from the employees.
D)does all of the above.

Question 41

Potential liabilities that depend on future events arising out of past events are called:

A)actual liabilities.
B)contingent liabilities.
C)estimated liabilities.
D)long-term liabilities.

Question 42

A company has a contingent loss that can be estimated and has a probable chance of occurrence. What reporting does the FASB require regarding this contingency? A. It should be accrued and reported on the financial statements and reported in the notes to the financial statements.
B) It should be reported in the notes to the financial statements.
C) It should be ignored until the actual loss materializes.
D) It should be accrued and reported on the financial statements.

Question 43

The Salary Expense account is debited for:

A)payroll tax liabilities only.
B)gross pay only.
C)gross pay plus employee payroll liabilities.
D)gross pay minus employee payroll liabilities.

Question 44

Computing Magazine receives $100 in advance from a customer for a 2 year subscription. Computing Magazine's entry to record this transaction would include a:

A)debit to Subscription Revenue for $100.
B)credit to Subscription Revenue for $100.
C)debit to Unearned Subscription Revenue for $100.
D)credit to Unearned Subscription Revenue for $100.

Question 45

A company has a probable contingent gain that can be reasonably estimated. What reporting does the FASB require regarding this contingency?

A)It should be ignored until the actual gain materializes.
B)It should either be recorded on the financial statements or reported in the notes to the financial statements.
C)It should be accrued and reported in the financial statements.
D)It should be reported in the notes to the financial statements.

Question 46

Bonds payable are reported on the balance sheet as a percentage of their issue price.

Question 47

Speedo sales had monthly sales of $773,000. There is a 7% state sales tax. The amount of the sales tax payable is:

A)$50,570.
B)$54,110.
C)$63,250.
D)$71,242.

Question 48

A company has a contingent loss that can be estimated, but the chance of it occurring is remote. What reporting does the FASB require regarding this contingency?

A)It should not be accrued or reported in the notes to the financial statements.
B)It should be accrued and reported on the financial statements and reported in the notes to the financial statements.
C)It should be accrued and reported on the financial statements.
D)It should be reported in the notes to the financial statements.

Question 49

Davis Company's sales for March 19 were $31,900. Davis is required to collect a 7% state sales tax. The total cash received from customers was:

A)$ 2,233.
B)$21,289.
C)$31,223.
D)$34,133.

Question 50

A company has a contingent loss that can be estimated and has a reasonably possible chance of occurrence. What reporting does the FASB require regarding this contingency?

A)It should be put into a memo until the actual loss materializes.
B)It should be accrued and reported on the financial statements and reported in the notes to the financial statements.
C)It should be accrued and reported on the financial statements.
D)It should be reported in the notes to the financial statements.

Question 51

Market interest is alternatively known as effective interest.

Question 52

Which entry could be used when dealing with sales tax?

A)Debit Sales Tax Payable and credit Sales Tax Expense
B)Debit Sates Tax Expense and credit Sales
C)Debit Cash and credit Sales Tax Payable
D)Debit Sales Tax Expense and credit Sales Tax Payable

Question 53

Which of the following accounts represents a deferred revenue? I. Interest Revenue
II) Income Tax Payable
III) Unearned Subscription Revenue

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

Question 54

1.liabilities? Current Liabilities Long-Term Liabilities

A)$0 $45 million
B)$7.5 million $40 million
C)$15 million $30 million
D)$45 million $0

Question 55

Since companies cannot borrow millions from a single lender, companies will issue bonds payable to individual bondholders.

Question 56

The total earnings of an employee for the payroll period is the:

A)net pay.
B)gross pay.
C)take home pay.
D)withholdings.

Question 57

The account Discount on Bonds Payable decreases a company's liabilities.

Question 58

The current installment of long-term debt:

A)is classified as a long-term liability.
B)is classified as a short-term liability.
C)does not need to be separated from the long-term debt.
D)is none of the above.

Question 59

Short-term notes payable are:

A)generally due within three months, with a maximum time period of six months.
B)shown as a reduction to notes receivable on the balance sheet, with an appropriate footnote disclosure.
C)shown on the balance sheet after bonds payable.
D)shown on the balance sheet with current liabilities.

Question 60

A bond issued at a price below its maturity or par value is sold at a discount.

Question 61

The bond obligates the issuing company to pay the par value of the bond at a specific future time called the:

A)issuing date.
B)due date.
C)maturity date.
D)payment date.

Question 62

Bonds payable are:

A)debts of the issuing company.
B)issued to multiple lenders called bondholders.
C)groups of notes payable.
D)all of the above.

Question 63

The carrying amount of bonds issued at a discount is calculated by:

A)subtracting the sum of Discount on Bonds Payable and Interest Payable from Bonds Payable.
B)subtracting Discount on Bonds Payable from Bonds Payable.
C)subtracting Interest Expense from Bonds Payable.
D)subtracting Interest Payable from Bonds Payable.

Question 64

A bond with a stated interest rate of 8% and a market rate of 7% was issued at a price reflecting the market interest rate. As the bond matures:

A)the Premium on Bonds Payable decreases.
B)the Discount on Bonds Payable decreases.
C)the Premium on Bonds Payable increases.
D)the Discount on Bonds Payable increases.

Question 65

The organization that purchases the bonds from an issuing corporation and resells them to its clients or sells the bonds for a commission is the:

A)bank.
B)underwriter.
C)bondholders.
D)stockholders.

Question 66

The time value of money states that money earns interest over time.

Question 67

Secured bonds are also called:

A)debenture bonds.
B)convertible bonds.
C)mortgage bonds.
D)callable bonds.

Question 68

The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds Payable from Bonds Payable.

Question 69

Bond prices are quoted as a percentage of their par value.

Question 70

Bonds which are backed only by the good faith of the borrower are referred to as:

A)debenture bonds.
B)junk bonds.
C)insecure bonds.
D)unregistered bonds.

Question 71

A bond with a stated interest rate of 6% and a market rate of 8% was issued at a price reflecting the market interest rate. As the bond matures:

A)the Premium on Bonds Payable decreases.
B)the Discount on Bonds Payable decreases.
C)the Premium on Bonds Payable increases.
D)the Discount on Bonds Payable increases.

Question 72

The interest rate that the bond issuer will pay the bondholders and that is stated on the bond certificate is the:

A)stated rate.
B)market rate.
C)contract rate.
D)both A and C.

Question 73

At maturity, a bond's carrying value equals its par value.

Question 74

The carrying amount of bonds is equal to:

A)the face value of the bonds less the discount on bonds payable.
B)the face value of the bonds plus the premium on bonds payable.
C)the face value of the bonds less the premium on bonds payable.
D)both A and B.

Question 75

If the interest rate on a bond is 9% and the market interest rate is 8%, the bond will be issued at a price below the par value of the bond.

Question 76

Bonds in a particular issue which mature in installments over a period of time are called:

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

Question 77

The future value is always less than the present value.

Question 78

Present value expresses the amount of cash that must be invested today to receive a greater amount in the future.

Question 79

The stated interest rate is also referred to as the:

A)present value interest rate.
B)effective interest rate.
C)coupon rate.
D)market interest rate.

Question 80

Another term for the face value of a bond is:

A)principal.
B)maturity value.
C)par value.
D)all of the above.