Deck 11: Current Liabilities and Fair Value Accounting

Question 1

Commercial paper normally is issued by companies with poor credit ratings.

Answer 1

False

Question 2

Because failure to record a liability generally leads to failure to record an expense,it usually results in an overstatement of income.

Answer 2

True

Question 3

At the time a company signs a contract to pay an employee a certain salary in the future,it records a liability.

Answer 3

False

Question 4

Accrued liabilities often arise as a result of the passage of time.

Question 5

The classification of a liability as current or long-term is not important to the evaluation of a company's liquidity.

Question 6

The product warranty liability is an example of an estimated liability.

Question 7

Product warranties are an expense of the period in which the product is sold.

Question 8

The FUTA tax rate most often actually paid by employers is 0.8 percent.

Question 9

Current liabilities are classified as either definitely determinable liabilities or contingent liabilities.

Question 10

If any portion of a long-term debt is to be paid in the next year,that portion should be classified as a current liability.

Question 11

Unearned revenue arises from the acceptance of payment in advance for a service to be performed.

Question 12

If an accrued liability for salaries is not recorded,income for the following period will be overstated.

Question 13

Because accounting measures should be verifiable,liabilities should not be estimated.

Question 14

Liabilities generally arise from expected future transactions.

Question 15

A liability for dividends exists only when the board of stockholders requests them.

Question 16

There is no limit to the amount of income subject to the FUTA tax.

Question 17

Wages are compensation of employees at a yearly or monthly rate.

Question 18

Lines of credit from the bank need not be disclosed in the financial statements or in the notes.

Question 19

A liability must never be classified as current if it is due in more than one year.

Question 20

When a business sells an item and collects a state sales tax on it,a current liability to the state arises.

Question 21

Both the employee and the employer must bear the tax burden for unemployment benefits.

Question 22

The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.

Question 23

The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to Social Security Tax Payable and Medicare Tax Payable.

Question 24

Interest on a promissory note is recognized when the note is issued.

Question 25

The costs associated with coupons and rebates are usually reflected in contra-revenue accounts.

Question 26

The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal Unemployment Tax Payable and State Unemployment Tax Payable.

Question 27

An estimated liability is not a definite obligation of the firm because the amount cannot be definitely determined.

Question 28

Unearned revenue is an example of a definitely determinable liability.

Question 29

The term salaries refers to the compensation of employees who are paid at an hourly rate.

Question 30

Property Taxes Expense is recorded only in the month it is paid.

Question 31

Expected obligations arising from programs,such as frequent flyer miles,are usually recorded as a reduction in sales (in a contra-sales account)with a related liability.

Question 32

Vacation pay is charged properly as an expense in the month in which the employee takes a vacation.

Question 33

Based on past experience,it should be possible to estimate the amount that a product warranty will cost the company in the future.

Question 34

The amount of property tax payable is usually an estimated liability for a portion of the year.

Question 35

Social Security and Medicare taxes are borne entirely by the employee.

Question 36

Product warranties are an expense of the period in which the related product is sold.

Question 37

If a state unemployment tax is imposed,then the federal unemployment tax is not imposed.

Question 38

Only the unused portion of a line of credit is recognized as a liability.

Question 39

If the amount of a liability cannot be exactly determined,it should not be recorded.

Question 40

Gross earnings minus deductions equal take-home pay.

Question 41

A contingent liability eventually becomes either a true liability or no liability at all.

Question 42

An ordinary annuity is a series of equal payments made at the end of equal intervals of time.

Question 43

All factors in a future value table must be less than or equal to 1.000.

Question 44

The current portion of long-term debt is classified as a current liability only if it is due within the next year and is to be paid from current assets.

Question 45

There is no limit to the amount of income subject to the Medicare tax.

Question 46

A contingent liability is a liability that may materialize in the future because of something that happened in the past.

Question 47

Commercial paper consists of secured loans that are sold to the public.

Question 48

The lower the interest rate,the higher the present value factor.

Question 49

A contingent liability should be entered into the accounting records if it is both probable and reasonably estimable.

Question 50

Present value refers to an amount that must be invested today at a given rate of interest to produce a given future value.

Question 51

Decision makers rely on the future values,rather than on the present values of future cash flows.

Question 52

Lawsuits against a company in connection with an industrial accident would not be listed in the contingent liabilities section on the balance sheet.

Question 53

Potential vacation pay should be accounted for as a commitment.

Question 54

The declaration of dividends is solely the decision of the corporation's board of directors.

Question 55

A commitment is a legal obligation that meets the technical requirements for recognition as a liability.

Question 56

The lower the interest rate,the lower the future value factor.

Question 57

When a company discounts a note receivable at the bank,it has a contingent liability.

Question 58

For notes payable whose interest is stated separately,the adjusting entry would consist of a debit to Interest Expense and a credit to Interest Payable.

Question 59

All factors in a present value of a single sum table are less than 1.000.

Question 60

Common examples of commitments are leases and purchase agreements.

Question 61

The theoretical value of an asset is the future value of its expected benefits.

Question 62

To determine the payables turnover,one first calculates the days' payable.

Question 63

Which of the following most likely would be classified as a current liability?

A)Mortgage payable
B)Dividends payable
C)Five-year notes payable
D)Bonds payable

Question 64

The proposed purchase price of an asset should be compared to the present value of the benefits it will generate over its useful life.

Question 65

Current liabilities are debts that are expected to be satisfied within

A)one year or the normal operating cycle,whichever is shorter.
B)one year or the normal operating cycle,whichever is longer.
C)one year.
D)the normal operating cycle.

Question 66

In a deferred payment arrangement,interest is charged only if it is stated.

Question 67

To calculate payables turnover,an increase in merchandise inventory must be added to cost of goods sold before dividing by average accounts payable.

Question 68

On January 2,2014,Lionel Company issued $40,000 of notes payable,of which $10,000 is due on January 2 for each of the next four years.The proper balance sheet presentation on December 31,2014,is

A)Current Liabilities,$40,000.
B)Current Liabilities,$10,000;Long-Term Liabilities,$30,000.
C)Long-Term Liabilities,$40,000.
D)Current Liabilities,$30,000;Long-Term Liabilities,$10,000.

Question 69

Working capital equals current assets divided by current liabilities.

Question 70

Assets purchased under a deferred payment plan should be recorded at the present value of the installment payments.

Question 71

When compound interest is used,interest accumulates less quickly than when simple interest is used.

Question 72

If the present value of the net cash flows expected from a machine is less than its purchase price,the investment should not be made.

Question 73

Failure to record a liability probably will

A)result in an overstated net income.
B)result in overstated total liabilities and stockholders' equity.
C)have no effect on net income.
D)result in overstated total assets.

Question 74

The annual interest earned on an amount deposited into a bank account will be the same each year when compound interest is used.

Question 75

An asset purchased according to a deferred payment plan should be recorded based on the total cash paid.

Question 76

The days' payable shows the maximum time a company takes to pay its accounts payable.

Question 77

A liability is recognized when

A)the exact due date is known.
B)it is paid for.
C)an obligation has arisen.
D)the exact amount of the liability is known.

Question 78

The annual interest earned on an amount deposited into a bank account will increase each year when simple interest is used.

Question 79

Payables turnover is measured in number of days.

Question 80

The payables turnover is the number of times,on average,that a company pays its accounts payable in an accounting period.