Deck 9: Liabilities

Question 1

Interest expense on a note payable is only recorded at maturity.

Answer 1

False

Question 2

All contingent liabilities should be reported on the financial statements, even those that are unlikely to occur.

Answer 2

False

Question 3

Employee compensation is a major expense for most service companies.

Answer 3

True

Question 4

Purchasing merchandise inventory on account results in a liability.

Question 5

Unearned revenues should be classified as Other Revenues on the Income Statement.

Question 6

The current portion of a long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Question 7

A contingent liability should be disclosed to the financial statement notes if there is a reasonably possibility that a loss (or expense) will occur.

Question 8

Contingent liabilities are reported on the balance sheet.

Question 9

The lower the sales tax rate, the more income a retailer can earn.

Question 10

A future obligation that may arise due to past transactions is a contingent liability.

Question 11

It is possible for the warranty expense payable account to never zero out.

Question 12

A current liability must be paid out of current profits.

Question 13

Unearned revenue will be zero when a company has earned all of the revenue it had collected in advance.

Question 14

Notes payable usually require the borrower to accrue interest expense and interest payable at the end of the accounting period.

Question 15

The current ratio is affected by the long-term debt that must be paid in the current period.

Question 16

The estimating of warranty expense when a product is sold with a warranty is an example of a contingent liability.

Question 17

When accruing interest expense on a short-term note, the Interest Payable account will decrease.

Question 18

The exact amount of warranty expense cannot be determined, so businesses must rely on estimates.

Question 19

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Question 20

Sales tax payable is the tax collected from the customer by the retailer.

Question 21

Mitchell Corporation sells 4,000 units of inventory during the year for $500 each. The selling price includes a one-year warranty on parts. It is estimated that 3% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000. What amount will be reported as Estimated Warranty Liability at the end of the year?

A) $4,000.
B) $2,000.
C) $6,000.
D) $0.

Question 22

Failure to record an accrued liability causes a company to:

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

Question 23

Tyler Company paid $1,500 cash to replace a wheel on equipment sold under warranty. The entry to record the payment would be to:

A) debit warranty expense and credit cash.
B) debit equipment expense and credit cash.
C) debit warranty payable and credit cash.
D) debit parts expense and credit cash.

Question 24

Liabilities are classified on the balance sheet as current or:

A) unearned.
B) deferred.
C) long-term.
D) accrued

Question 25

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 will appear on the balance sheet and interest payable will appear on the income statement.
B) short-term notes payable will be included in the notes to the financial statements.
C) short-term notes payable and interest payable will appear on the balance sheet.
D) short-term notes payable, interest payable and interest expense will appear on the balance sheet.

Question 26

The current ratio is current assets:

A) minus current liabilities.
B) divided by current liabilities.
C) plus current liabilities.
D) multiplied by current liabilities.

Question 27

A current liability is a debt that can reasonably be expected to be paid:

A) within one year or the company's normal operating cycle (if it is longer than one year).
B) between 6 months and 18 months.
C) out of cash on hand.
D) out of current revenues.

Question 28

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid at maturity of the note is:

A) $108,000.
B) $106,000.
C) $100,000.
D) $104,000.

Question 29

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

A) bonds payable.
B) notes payable.
C) accounts payable.
D) unearned revenue.

Question 30

The journal entry to record payroll:

A) debits salary expense and credits salary payable for the net pay.
B) debits salary expense and credits salary payable for the gross pay.
C) debits salary expense for the gross pay and credits salary payable for the net pay.
D) debits salary expense for the net pay and credits salary payable for the gross pay.

Question 31

Monthly sales were $200,000. Warranty costs are estimated at 4% of monthly sales. In the month of sale, the company should record a credit to:

A) Warranty Payable for $8,000.
B) Warranty Expense for $8,000.
C) Sales for $8,000.
D) Inventory for $8,000.

Question 32

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

Question 33

Omaha Bank lends Nebraska Paper Company $100,000 on January 1. Nebraska Paper Company signs a $100,000, 8%, 6-month note. The entry made by Nebraska Paper Company on January 1 to record the proceeds and issuance of the note would include:

A) a debit to cash of $92,000.
B) a debit to interest expense of $8,000.
C) a credit to Notes Payable of $100,000
D) a credit to Interest Payable of $8,000.

Question 34

Estimated warranty payable are reported on the balance sheet as:

A) administrative expenses.
B) a long-term liability.
C) a current liability.
D) part of cost of goods sold.

Question 35

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid for interest (only) at maturity of the note is:

A) $6,000.
B) $8,000.
C) $4,000.
D) $32,000

Question 36

All of the following are reported as current liabilities EXCEPT:

A) bonds payable.
B) sales tax payable.
C) accounts payable.
D) unearned revenues.

Question 37

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

A) interest payable and a credit to cash.
B) interest expense and a credit to cash.
C) interest expense and a credit to interest payable.
D) interest payable and a credit to notes payable.

Question 38

Which of the liability accounts below is usually NOT an accrued liability:

A) interest payable.
B) wages payable.
C) taxes payable.
D) notes payable.

Question 39

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

A) going concern principle.
B) matching principle.
C) conservatism principle.
D) consistency principle.

Question 40

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The entry made by Canton Furniture Company on December 31 to record the accrued interest on the note would be:

A) a debit to interest expense and a credit to interest payable of $2,000.
B) a debit to interest payable and a credit to interest expense of $2,000.
C) a debit to interest expense and a credit to cash of $2,000.
D) a debit to interest payable and a credit to cash of $2,000.

Question 41

Nationwide Magazine sells 60,000 subscriptions in March at $15 each. The entry is made in March to record the sale of the subscriptions would include a:

A) debit to subscriptions receivable for $900,000.
B) debit to prepaid subscriptions for $900,000
C) credit to cash for $900,000.
D) credit to unearned subscription revenue for $900,000.

Question 42

A contingency that is remote:

A) should be disclosed in the financial statements.
B) does not need to be disclosed.
C) must be accrued as a loss.
D) is recorded as a contingent liability.

Question 43

Kathy's Corner Store has total receipts for the month of $36,750 including sales taxes. If the sales tax rate is 5%, what are Kathy's sales for the month?

A) $36,750
B) $35,000
C) $34,012.50
D) $1,837.50

Question 44

Unearned revenue is reported on the balance sheet as:

A) a revenue account.
B) a current liability.
C) an unearned liability.
D) a long-term debt.

Question 45

Hoover Company has a long-term note payable for $300,000 on January 1, 2012. Each month the company is required to pay $75,000 on the note. How will this note be reported on January 31, 2012?

A) Long-term liability, $300,000
B) Long-term liability, $225,000
C) Current liability, $75,000; long-term liability, $225,000
D) Current liability, $225,000; long-term liability, $75,000

Question 46

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

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

Question 47

Short-term notes payable are:

A) shown as a reduction to notes receivable on the balance sheet.
B) generally due within six to eight months.
C) shown on the balance sheet with current liabilities.
D) shown on the balance sheet after long-term liabilities.

Question 48

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

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

Question 49

On December 1, Goliath Corporation borrowed $10,000 on a 90-day, 6% note. Goliath Corporation's year end is December 31. Determine the balance in any current liabilities associated with the note as of December 31.

Question 50

Sales taxes collected by a retailer are reported as:

A) contingent liabilities.
B) revenues.
C) current assets.
D) current liabilities.

Question 51

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

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

Question 52

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

A) It should be reported in the notes to the financial statements.
B) It should be ignored until the actual loss occurs.
C) It should be accrued, reported on the financial statements and disclosed in the notes to the financial statements.
D) Nothing is required since there is only a probable chance of occurrence.

Question 53

Ironwood Company's sales for May 24 were $29,000. Ironwood is required to collect 6% state sales tax. The total cash received from customers was:

A) $1,740.
B) $27,260.
C) $29,000.
D) $30,740.

Question 54

Bertha's Pharmacy shows cash sales of $2,500 and sales taxes of $150 for the day. The journal entry to record this information would include a:

A) debit to cash of $2,650.
B) debit to sales tax expense $150.
C) credit to sales $2,650.
D) credit to sales tax payable $2,650.

Question 55

Which of the following items would not be included if a contingent liability were disclosed in the financial statements?

A) The nature of the item
B) Management's expected outcome
C) The amount of the contingency, if known
D) A numerical probability of the expected loss

Question 56

Davies Accessories Company entered into the following transactions relating to notes payable:
a. Prepare journal entries to record the above transactions.
b. Assuming Davies Accessories Company has a December 31 year-end, prepare any adjusting entries needed for the accrual of interest.

Question 57

The current portion of long-term debt should:

A) be reclassified as a current liability.
B) be paid immediately.
C) be classified as a long-term liability.
D) not be separated from the long-term debt.

Question 58

On December 1, Goliath Corporation borrowed $10,000 on a 90-day, 6% note. Goliath Corporation's year end is December 31. Prepare the journal entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note.

Question 59

Raleigh Company billed its customers a total of $1,155,000 for the month of November. The total includes a 5% state sales tax.
Required:
a. Prepare the journal entry to record the revenue and related liabilities for the month.
b. Prepare the journal entry to record the sales tax remittance to the state.

Question 60

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

Question 61

The future value is always more than the present value.

Question 62

The carrying amount of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 63

Corporations borrow large amounts of money by issuing (selling) bonds to the public.

Question 64

Devin's Animal Shop has the following information for the pay period of March 15 to March 31:
Required: Prepare the journal entry to record the accrued payroll on March 31 and the journal entry to remit the payroll taxes to the government on April 15.

Question 65

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 66

The carrying amount of bonds at maturity should be equal to the face value of the bonds.

Question 67

If the interest rate on a bond is 8% and the market interest rate is 7%, the bond will be issued at a price above the par value of the bond.

Question 68

If the market interest rate is greater than the stated interest rate, the bonds will sell at a discount.

Question 69

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

Question 70

The effective-interest method of amortization results in changing amounts of amortization and interest expense per period but at a constant interest rate.

Question 71

In the most recent year of operations, Bradley's Video Games sold merchandise costing $25,000 for $ 75,000. All merchandise was sold under a one-year warranty. At the time of sale, Bradley estimated that warranty claims would amount to 3% of sales. During the year, Bradley replaced defective merchandise for $1,290. All transactions were cash transactions.
Required:
a. Prepare journal entries to record all transactions related to the warranty.
b. Based solely on the above information, determine Bradley's operating income for the year.

Question 72

If bonds sell at a premium, the interest expense recognized each year will be greater than the stated interest rate.

Question 73

Wildcat Computers sells all of its computers for $2,500 each. During the month of February Wildcat sold 20 computers. It is estimated that the warranty expense is 2% of gross sales. Wildcat spent $100 in cash and $150 in parts repairing computers for this month.
Required: Prepare the journal entries to record the sale, record the estimated warranty expense, and record the warranty repairs.

Question 74

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

Question 75

French's Fine Foods experienced the following transactions during the year:
1. A customer fell in one of French's stores and is seeking $150,000 in damages. French's attorneys believe that it is remote that the customer will win the lawsuit.
2. Another customer became seriously ill after eating some bad snails purchased from French's. The customer is seeking $200,000 in damages. French's attorneys believe that it is probable that the customer will win the lawsuit and receive the $200,000.
3. A competitor is suing French's for a trademark violation and is seeking $1,500,000 in damages. French's attorneys believe that it is reasonably possible that the competitor may win the lawsuit.
Required: For each of the situations, determine the accounting treatment required. If a journal entry is needed prepare the journal entry.

Question 76

Lansing Company's general ledger shows the following balances for the selected accounts after posting adjusting entries:
Required:
Prepare the current liability section of Lansing Company's balance sheet, assuming that the current portion of the 5-year note is $30,000.

Question 77

If $120,000 face value bonds are issued at 104, the proceeds received will be $104,000.

Question 78

If $500,000, 6% bonds are issued on January 1 and pay interest semiannually, the amount of interest paid on July 1 will be $15,000.

Question 79

If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 80

All Sports Company publishes a monthly magazine. Subscriptions to the magazine cost $20 per year. During November 2012, All Sports sells 15,000 subscriptions beginning with the December issue.
Required:
a. Prepare the entry in November to record the receipt of the subscriptions.
b. Prepare the adjusting entry at December 31, 2012.