Deck 8: Liabilities

Question 1

Aviation Holdings Corporation's sales for the day totalled $10,552.Jensen collected an additional 5% in sales tax.The entry to record the day's sales includes a:

A) debit to Sales Tax Expense
B) debit to Sales Tax Payable
C) credit to Sales Tax Expense
D) credit to Sales Tax Payable

Answer 1

D

Question 2

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

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

Answer 2

D

Question 3

Short-term notes payable:

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

Answer 3

C

Question 4

A repair to an appliance under warranty occurs within the warranty period.What adjustment is made?

A) Warranty Expense is debited.
B) Repair Expense is debited.
C) Estimated Warranty Payable is debited.
D) Estimated Warranty Payable is credited.

Question 5

Dreams Take Flight Ltd.includes the sales tax in the amount recorded in the Sales account.The adjusting entry at the end of the period includes a:

A) debit to Sales Tax Payable
B) debit to Sales Tax Expense
C) credit to Sales
D) debit to Sales

Question 6

The account Sales Tax Payable represents a company's liability to the government for sales taxes collected.

Question 7

The adjusting entry to accrue interest on a note payable requires a credit to Interest Payable.

Question 8

An accrued expense is an expense incurred by the company but not yet paid in cash.

Question 9

On December 16,2016,the ACE Corporation purchases $15,000 of equipment by issuing a 30-day,12% note payable.The total amount of interest due on the note is:

A) $73.97
B) $147.95
C) $800.00
D) $1,800.00

Question 10

Current liabilities are obligations due within:

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

Question 11

Accrued interest on a short-term note payable is recorded by:

A) debiting Interest Expense and crediting Interest Payable
B) debiting Cash and crediting Interest Payable
C) debiting Interest Payable and crediting Cash
D) debiting Interest Payable and crediting Interest Expense

Question 12

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

A) debit to Interest Payable
B) debit to Note Payable
C) debit to Interest Expense
D) credit to Interest Expense

Question 13

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

Question 14

Warranty expense should be recorded in the period:

A) that the product sold is repaired or replaced
B) the product is sold
C) immediately following the period in which the product is sold
D) that the product is paid for by the customer

Question 15

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

Question 16

Airport Software Ltd.includes an 5% sales tax in the amount credited to the sales account.If the sales account has a balance of $675,250,the amount of the sales tax payable to the government is:

A) $29,347
B) $29,450
C) $32,155
D) $33,763

Question 17

Failure to record an accrued liability causes a company to:

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

Question 18

Revaluation Magazine receives $90 in advance from a customer for a 3-year subscription.Revaluation Magazine's entry to record this transaction would include:

A) debit to Unearned Subscription Revenue for $90
B) credit to Unearned Subscription Revenue for $90
C) debit to Subscription Revenue for $90
D) credit to Subscription Revenue for $90

Question 19

An unearned revenue arises when a company receives cash from its customers in advance of earning the revenue.

Question 20

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

A) contra liabilities and contingent liabilities
B) contingent liabilities and non contingent liabilities
C) liabilities of a known amount and liabilities whose amount must be estimated
D) liabilities of a known amount and contingent liabilities

Question 21

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

A) discount
B) premium
C) contract interest
D) effective-interest

Question 22

On April 1,2017 JetNew sells 1,000 round trip tickets to Montreal at $770 each.On May 25^th 250 of these outstanding tickets are used.Prepare the required journal entries for JetNew.

Question 23

The interest rate that investors demand for loaning their money is referred to as the:

A) stated rate of interest
B) contract rate of interest
C) effective rate of interest
D) the stated or contract rate of interest

Question 24

During its first year of operations Keene Limited had sales of $76,500.The company offers a 2- year limited warranty on all sales and expects that warranty costs for the first year will average 0.5% of sales with an additional 1.5% in the second year.During the current year the company spent $1,200 on warranty repairs.
Required:
1.Prepare all journal entries related to the warranty for the current year.
2.How will the warranty liability be reported on the company's year-end balance sheet?

Question 25

Explain the accounting process for warranties.Be specific and include in your discussion the principle that governs the accounting method.

Question 26

Unsecured Ltd.credited the Sales account for $175,600 during the month of August.All sales are for cash.Included in this amount is 5% sales tax required by the federal government for collection of GST.On August 31,Unsecured Ltd.must remit the appropriate amount of sales tax due.
Prepare all entries for May for the above transactions.

Question 27

Chapter 11 Inc.entered into the following transactions relating to notes payable:
a.Prepare journal entries to record the above transactions.
b.Assuming Chapter 11 Inc.has a December 31 year end,prepare any adjusting entries needed for the accrual of interest.For ease of computation assume that Chapter 11 Inc.calculates interest expense based on the number of months,outstanding,rather than the number of days.

Question 28

A $10,000 bond quoted at 103 1/2 is selling for:

A) $9,662
B) $9,897
C) $10,104
D) $10,350

Question 29

A $1,500 bond quoted at 98 1/2 is selling for:

A) $1,500
B) $1,518
C) $1,492
D) $1,478

Question 30

Bonds which mature at the same time are called:

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

Question 31

Unearned revenues occur when a company receives cash from customers before earning the revenue.

Question 32

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

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

Question 33

Secured bonds are also called:

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

Question 34

R.Milton Products Inc.generated sales for the current month of 200 units at $225 each,subject to sales tax of 7.5%.All sales are on account.Each unit carries a 6-month warranty.R.Milton Products Inc.promises to repair the unit should it become defective.The estimated cost to the company to honour the warranty is $60 and past experience has shown that approximately 7% of all units will have to be repaired during the warranty period.
Prepare journal entries for the following transactions:
a.Record sales for the current month including the taxes collected in the revenue account.
b.Record the estimated warranty liability associated with the current month's sales.
c.Adjust the revenue account for the proper amount of sales tax payable.

Question 35

Solvency Limited purchased equipment costing $150,000 on October 1,2016,by paying 10% down and signing an 8%,9-month note payable for the balance.Solvency Limited's year end is December 31.
a.Prepare journal entries to record the purchase of the equipment,the accrual of interest on December 31,and the payment of the note at maturity.For ease of computation assume that Solvency calculates interest expense based on the number of months,outstanding,rather than the number of days.
b.Determine the balance of any current liabilities associated with the note as of December 31,2016.

Question 36

New Growth greenhouse purchases 500 watering cans for $1,500 plus 13% HST for a total of $1,695.
In the spring New Growth sells these watering cans for $3,000 plus HST for a total of $3,390.
Prepare the following journal entries for:
a the purchase of the watering cans by New Growth
b the sale of the watering cans
c the remittance of the HST

Question 37

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

A) effective rate of interest
B) market rate of interest
C) contract rate of interest
D) the effective or market rate of interest

Question 38

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

A) mortgage bonds
B) secured bonds
C) registered bonds
D) debenture bonds

Question 39

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) par value
B) a discount
C) a premium
D) face value

Question 40

Bonds with a face value of $100,000 were sold at an effective rate of 10% to yield cash proceeds in excess of $100,000.It is apparent the bonds had a:

A) market rate greater than 10%
B) market rate less than 10%
C) stated rate less than 10%
D) stated rate greater than 10%

Question 41

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

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

Question 42

Debentures carry a lower interest rate than secured bonds because of the risk associated with them.

Question 43

Describe the two interest rates included in setting the price of a bond.

Question 44

A bond issued at a price above its maturity or par value is sold at a premium.

Question 45

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

Question 46

The market or effective rate of interest is used to calculate the actual amount of interest bondholders will receive from a company issuing bonds.

Question 47

Under the effective-interest method of amortizing bond premiums,the interest expense recorded for each semi-annual interest payment:

A) will increase over the life of the bond
B) is equal to the carrying value of the bond times the contract rate of interest for each semi-annual interest period
C) is at the same percentage of the bond's carrying value for every interest payment
D) will equal the amount of cash paid for each semi-annual interest payment

Question 48

On a bond's maturity date,its carrying value will equal the:

A) maturity value less all interest payments
B) maturity value plus all interest payments
C) maturity value
D) present value of the bond on its issuance date

Question 49

A bond issued at a discount typically has a market price that decreases toward maturity value.

Question 50

Another name for the effective interest rate is the market interest rate.

Question 51

The carrying amount of bonds is equal to:

A) the face value of the bonds less the premium 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 discount on bonds payable
D) the face value of the bonds plus the premium on bonds payable or the face value of the bonds less the discount on bonds payable

Question 52

New Shu Corporation issued $100,000 worth of bonds on January 1,2014.These bonds had a 5 year term with a stated rate of 9%.At the time of sale the market rate was 10% so New Shu received $96,149 for this sale.Record the issuance of this bond.

Question 53

A bond issued at a premium typically has a market price that decreases toward maturity value.

Question 54

Market conditions may force a company to issue its bonds at less than the face value of the bonds.The Discount on Bonds Payable account is used in this situation.This account:

A) is an expense account
B) is a liability account
C) is a contra asset account
D) is a contra liability account

Question 55

On January 1,2017,JetNew Corp.issued $550,000 of 6%,5-year bonds,with annual interest payments on December 31.The bonds were issued at face value.Note JetNew uses the effective-interest method of amortization.
a.Prepare the necessary journal entries to record the issuance of the bonds and the first interest payment.
b.Determine the carrying value of the bonds on December 31,2017.

Question 56

The phrase term bonds applies when all the bonds in a particular issue mature in installments over a period of time.

Question 57

On January 1,2016,JetNew Corp.issued $300,000 of 8%,5-year bonds,with annual interest payments on January 1.The bonds were issued at face value.Note JetNew uses the effective-interest method of amortization.
a.Prepare the necessary journal entries to record the issuance of the bonds,December 31,2016 year-end entries if required and the first interest payment.
b.Prepare the journal entry to record the bond's maturity.

Question 58

On January 1,2013,JetNew Corp.issued $300,000 of 8%,5-year bonds,with annual interest payments on January 1.The bonds were issued when the market rate was higher than 8% and thus JetNew received $265,000 for this bond.Prepare the journal entry to record the issuance of this bond on January 1,2013.Show how this bond would appear on the balance sheet.

Question 59

The account Discount on Bonds Payable is a contra account to the account Bonds Payable.

Question 60

A dollar received today is worth more than a dollar to be received 5 years from now.

Question 61

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

Question 62

The premium on bonds payable:

A) reduces interest expense on the income statement
B) increases interest expense on the income statement
C) increases the amount of cash paid to bondholders over the stated rate of interest
D) decreases the amount of cash paid to bondholders over the stated rate of interest

Question 63

Under the effective-interest method of amortization,the amount of discount amortized each interest period is equal to the:

A) amount of interest expense plus the cash paid
B) total discount divided by the number of interest payments to be made
C) amount of interest expense less the cash paid
D) total amount of interest expense divided by the number of interest payments to be made

Question 64

Interest expense will decrease each period if a company uses the effective-interest method of amortization and the bonds are issued at a discount.

Question 65

Arrowplan Inc.prepares its financial statements in accordance with ASPE.It issued $800,000 of 7.5%,15-year bonds dated March 1,2017,on May 1,2017,at 97 1/2 plus accrued interest.If Arrowplan Inc.uses the straight-line method of amortization,the entry to retire the bonds on the maturity date would include a:

A) debit to Bonds Payable for $780,000
B) credit to Cash for $800,000
C) credit to Discount on Bonds Payable for $20,000
D) debit to Premium on Bonds Payable for $20,000

Question 66

On July 1,2016,the Jazz Corporation issues $4,000,000 of 10-year bonds dated July 1,2016,at 89 when the market rate of interest was 8%.Jazz Corporation uses the effective-interest method of amortization.Interest is paid each June 30 and December 31.The entry to record the first semi-annual interest payment on December 31,2016,will include a:

A) debit to Interest Expense for $142,400
B) credit to Discount on Bonds Payable for $284,800
C) debit to Premium on Bonds Payable for $160,000
D) credit to Interest Payable for $320,000

Question 67

How does a company account for the difference between interest expense and the cash payment of interest when bonds are issued at less than their face value?

A) The difference is accounted for using Amortization of Bond Discount.
B) The difference is accounted for using Amortization of Bond Premium.
C) In this situation the cash payment of interest will exceed interest expense.
D) The difference is accounted for using Bonds Payable.

Question 68

When the discount on bonds payable is amortized,the carrying value of the bonds:

A) will always remain unchanged
B) will increase
C) will decrease
D) may increase or decrease depending on the face value of the bonds

Question 69

Under the effective-interest method of amortizing a bond premium,the interest expense recorded for each semi-annual interest payment:

A) will increase over the life of the bond
B) will decrease over the life of the bond
C) will equal the amount of cash paid for each semi-annual interest payment
D) is at a different percentage of the bond's carrying value for every interest payment

Question 70

Amortizing the discount on a bond payable:

A) increases the face value of the bonds
B) decreases the face value of the bonds
C) increases the carrying amount of the bonds
D) decreases the carrying amount of the bonds

Question 71

The discount on bonds payable:

A) reduces interest expense on the income statement
B) increases interest expense on the income statement
C) increases the amount of cash paid to bondholders over the stated rate of interest
D) decreases the amount of cash paid to bondholders over the stated rate of interest

Question 72

Under the effective-interest method of amortization,the cash payment on each interest payment date is calculated by multiplying the:

A) carrying value of the bonds times the effective-interest rate for the appropriate time period
B) face value of the bonds times the stated interest rate for the appropriate time period
C) face value of the bonds times the effective-interest rate for the appropriate time period
D) carrying value of the bonds times the stated interest rate for the appropriate time period

Question 73

Under the effective-interest method of amortization,interest expense each period can be calculated by multiplying the:

A) face value of the bonds times the stated interest rate for the appropriate time period
B) carrying value of the bonds times the stated interest rate for the appropriate time period
C) face value of the bonds times the effective-interest rate for the appropriate time period
D) carrying value of the bonds times the effective-interest rate for the appropriate time period

Question 74

Under the effective-interest method of amortization,the cash payment on each interest payment date will:

A) remain the same for each interest period
B) decrease if bonds are issued at a premium
C) increase if bonds are issued at par
D) increase if bonds are issued at a discount

Question 75

The carrying value of bonds will decrease each interest period if the bonds were issued at a premium.

Question 76

The effective-interest method of amortization keeps interest expense at the same dollar amount of the bond's carrying value for every interest payment over the bond's life.

Question 77

On July 1,2016,Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1,2016,at 100 1/2 when the market rate of interest was 8%.Cargo Corporation uses the effective-interest method of amortization.Interest is paid each June 30 and December 31.The entry to record the first semi-annual interest payment on December 31,2016,will include a:

A) debit to Premium on Bonds Payable for $321,600
B) credit to Premium on Bonds Payable for $320,000
C) debit to Interest Expense for $160,800
D) credit to Interest Payable for $160,000

Question 78

When using the effective-interest method of amortizing a discount or premium,interest expense is calculated by multiplying the:

A) contract interest rate by the face value of the bonds
B) effective-interest rate by the face value of the bonds
C) contract interest rate by the carrying value of the bonds
D) effective-interest rate by the carrying value of the bonds

Question 79

Under the effective-interest method of amortization for bonds,the cash payment on each interest payment date:

A) increases over the first half of the life of the bond, and then decreases thereafter
B) increases over the life of the bond
C) decreases over the life of the bond
D) is constant

Question 80

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

A) adding Premium on Bonds Payable to Bonds Payable
B) subtracting Interest Payable from Bonds Payable
C) adding Interest Payable to Bonds Payable
D) subtracting Premium on Bonds Payable from Bonds Payable