Deck 10: Liabilities

Question 1

What adjusting entry did Backyard make on June 30 before preparing its financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Answer 1

Option A

Question 2

A typical balance sheet provides no information regarding which of the following questions?

A)To whom does the company owe money?
B)For what does the company owe money?
C)How much does the company owe?
D)What proportion of the company's debts will be paid in the short-term?

Answer 2

To whom does the company owe money?

Question 3

At the beginning of the first quarter,your company borrows $20,000 for four years at 8% interest and has to repay $5,000 of principal each year.Interest is paid at the end of the second and fourth quarters,and the principal is due at the end of the year.How would this information be reported on the balance sheet at the end of the first quarter?

A)$400 as interest expense and $20,000 under long-term debt.
B)$400 as interest payable,$5,000 as current portion of long-term debt under current liabilities,and $15,000 under long-term debt.
C)$1,600 of interest under current liabilities,$5,000 as current portion of long-term debt under current liabilities and $15,000 under long-term debt.
D)$400 as interest payable under current liabilities and $20,000 under long-term debt.

Answer 3

$400 as interest payable,$5,000 as current portion of long-term debt under current liabilities,and $15,000 under long-term debt.

Question 4

Match the appropriate variable or variables to each space in the appropriate equation.Note: you may use a variable more than once and some variables might not be used.

A)Current liabilities
B)Cash
C)Net income
D)Quick ratio
E)Net receivables
F)Stated interest rate
G)Income tax expense
H)Net bonds payable
I)Short-term investments
J)Bonds payable
K)Interest expense
L)Liquidity
______ = Liquid Assets/______
Quick Ratio = (______ + ______ + ______)/______
Times Interest Earned Ratio = (______ + ______ + ______)/______

Question 5

On January 1,which of the following journal entries will be made by Backyard to record the proceeds and issue of the note?

A)Option A
B)Option B
C)Option C
D)Option D

Question 6

.

A)Option A
B)Option B
C)Option C
D)Option D

Question 7

A company receives $95 for merchandise sold to a consumer,of which $5 is for sales tax.The $5 of sales tax:

A)increases sales revenue.
B)increases current liabilities.
C)increases selling expenses.
D)none of the above.

Question 8

Which of the following methods of amortizing bond premium or discount is required by IFRS:

A)Straight line method of amortization only.
B)Effective interest method of amortization only.
C)Either the straight line method of amortization or effective interest method of amortization.
D)Both methods must be used.

Question 9

On October 1,you borrow $200,000 for 10 years at 7% interest in order to build a new facility.In April and again in October of the following year,you pay half the annual interest to your creditors.The journal entry to record the issuance of the promissory note should:

A)debit Notes Payable for $200,000,debit Interest Expense for $14,000,credit Cash for $200,000,and credit Interest Payable for $14,000.
B)debit Accrued Interest for $14,000 and credit Cash for $14,000.
C)debit Cash for $200,000 and credit Notes Payable for $200,000.
D)debit Cash for $200,000,debit Interest Expense for $14,000,credit Notes Payable for $200,000,and credit Interest Payable $14,000.

Question 10

A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 of interest that accumulated during this accounting period that has not yet been accrued on the books.The journal entry for the interest payment should:

A)debit Interest Expense $9,000 and credit Cash $9,000.
B)debit Cash $9,000 and credit Interest Payable $9,000.
C)debit Interest Expense $3,000,debit Interest Payable $6,000,and credit Cash $9,000.
D)debit Interest Payable $6,000,debit Accrued Interest $3,000,and credit Cash $9,000.

Question 11

A company typically records the amount owed to suppliers for goods or services when:

A)they are ordered.
B)a verbal commitment to buy has first been made.
C)they are paid for.
D)the goods or services are received.

Question 12

Accrued liabilities can include all of the following except:

A)salaries payable.
B)current portion of long-term debt.
C)income tax payable.
D)interest payable.

Question 13

Current liabilities are due:

A)but not receivable for more than the current operating cycle or more than one year,whichever is longer.
B)but not payable for more than the current operating cycle or one year,whichever is longer.
C)and receivable within the current operating cycle or one year,whichever is longer.
D)and payable within the current operating cycle or one year,whichever is longer.

Question 14

Current liabilities could include all of the following except:

A)accounts payable.
B)notes payable.
C)current operating expenses.
D)Accrued payroll.

Question 15

At the beginning of the quarter,your company borrows $20,000 using a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year.Interest is paid at the end of the second and fourth quarter,whereas principal payments are due at the end of each year.How does this new promissory note affect the amounts of current and non-current liabilities reported on the balance sheet at the end of the first quarter?

A)Option A
B)Option B
C)Option C
D)Option D

Question 16

During one pay period,your company distributes $130,500 to employees as net pay.The income tax withholdings were $19,000 and the Canada Pension Plan withholdings were $5,000.The total wages/salary expense to the company,which includes CPP matching,during this period was:

A)$149,500.
B)$130,500.
C)$154,500.
D)$159,500.

Question 17

If a company's gross salaries are $12,000,and it withholds $1,800 for income taxes and $800 for Employment Insurance and other deductions,the journal entry to record the employees' pay should include a:

A)debit to Salaries Expense for $9,400.
B)debit to Salaries Payable for $9,400.
C)credit to Salaries Payable for $12,000.
D)credit to Cash for $9,400.

Question 18

In October,you borrow $50,000,repayable in five years,at 8% annual interest,in order to buy new equipment.In March and again in September of the following year you pay half the annual interest to your creditors.Assuming no other long-term debt,what is the initial balance in the long-term debt account?

A)$54,000
B)$50,000
C)$46,000
D)$52,000

Question 19

On October 1,2009,you borrow $200,000 at 6% interest and record the promissory note.In April and again in October of the following year,you are required to pay half the annual interest to your creditors.On December 31,2009,your journal entry for the quarter should:

A)debit Interest Expense for $3,000 and credit Interest Payable for $3,000.
B)debit Cash for $3,000 and credit Accrued Interest for $3,000.
C)debit Interest Expense for $6,000 and credit Cash for $6,000.
D)debit Interest Expense for $6,000 and credit Notes Payable for $6,000.

Question 20

A company pays $18,000 in interest on notes,consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books.The journal entry for the interest payment should:

A)debit Interest Expense for $18,000 and credit Cash for $18,000.
B)debit Cash for $18,000 and credit Interest Payable for $18,000.
C)debit Interest Expense for $6,000,debit Interest Payable $12,000 and credit Cash for $18,000.
D)debit Interest Payable for $12,000,debit Accrued Interest $6,000 and credit Cash for $18,000.

Question 21

A company sells $200,000 in long-term bonds and pays off $200,000 in accounts payable.Which of the following statements is true?

A)Both the quick ratio and times interest earned ratio will rise.
B)The quick ratio will fall but the times interest earned ratio will rise.
C)The quick ratio will rise but the times interest earned ratio will fall.
D)Both the quick ratio and times interest earned ratio will fall.

Question 22

Your company sells $50,000 of bonds for an issue price of $48,000.Which of the following statements is correct?

A)The bonds sold at a price of 96,implying a discount of $4,000.
B)The bonds sold at a price of 48,implying a premium of $2,000.
C)The bonds sold at a price of 48,implying a premium of $4,000.
D)The bonds sold at a price of 96,implying a discount of $2,000.

Question 23

Your company sells $50,000 of bonds for an issue price of $52,000.Which of the following statements is correct?

A)The bond sold at a price of 52,implying a premium of $2,000.
B)The bond sold at a price of 104,implying a discount of $2,000.
C)The bond sold at a price of 52,implying a discount of $2,000.
D)The bond sold at a price of 104,implying a premium of $2,000.

Question 24

Which one of the following can have a non-zero balance on a post-closing trial balance?

A)Dividends declared
B)Premium on bonds payable
C)Income tax expense
D)None of the above.

Question 25

Arid Company has a quick ratio of 0.90.Which of the following,if it occurred on the last day of the accounting period,would increase Arid's quick ratio?

A)Borrowing with a short-term promissory note.
B)Paying off some accounts payable.
C)Accruing interest payable on its promissory notes.
D)None of the above.

Question 26

Your company issued bonds at a discount.Which of the following statements is not true?

A)The contra liability account,discount on bonds payable,is amortized each year by shifting part of its balance to interest expense.
B)As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
C)At the date of issuance,the market interest rate was higher than the stated interest rate on the bond.
D)At the date of issuance,the market interest rate was lower than the stated interest rate on the bond.

Question 27

Encana Corp.is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2012.Interest rates fall in the economy so that similar financial investments pay 5%.Encana will:

A)not be able to issue the bonds from the market because no one will buy them.
B)receive a higher issue price as buyers compete for the bonds.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 5%.

Question 28

You are considering buying a bond from a company that has a Quick ratio of 0.45.This means that:

A)the company has 45% of its total assets in the current category.
B)the company has 45 cents of total assets for every dollar of total liabilities.
C)the company has 45 cents of liquid assets for every dollar of current liabilities.
D)shareholders currently own 45% of the company's assets.

Question 29

A company's balance sheet at the end of year is as follows: The quick ratio for this company is:

A)approximately 1.09.
B)approximately 0.46.
C)approximately 1.47.
D)approximately 0.80.

Question 30

A company sells $200,000 in long-term bonds and buys $200,000 in inventory for cash.Which of the following statements is true?

A)The quick ratio will stay the same and the times interest earned ratio will rise.
B)The quick ratio will rise and the times interest earned ratio will rise.
C)The quick ratio will rise but the times interest earned ratio will fall.
D)The quick ratio will rise and the times interest earned ratio will stay the same.

Question 31

A company receives $102,000 when it issues a bond with a face value of $100,000 and a stated interest rate of 7%.Which of the following statements is true?

A)The annual interest expense is $7,000.
B)The market interest rate is 7%.
C)A contra account to bonds payable is not needed.
D)The face value of the bond on maturity will be $100,000.

Question 32

IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2012.Interest rates rise in the economy so that similar financial investments pay 9%.IBM will:

A)not be able to issue the bonds because no one will buy them.
B)receive a higher issue price to compensate buyers for the lower stated interest rate.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 9%.

Question 33

If the market rate of interest is 6%,a $10,000,10-year bond with a stated annual interest rate of 8% would issue at an amount:

A)less than face value (discount).
B)equal to the face value (par).
C)greater than face value (premium).
D)that cannot be determined.

Question 34

The three key pieces of information that are stated on the bond certificate are:

A)the interest payment,the face value of the bond,and the credit rating of the company.
B)the market interest rate,the price of the bond,and the maturity date.
C)the stated interest rate,the face value of the bond,and the maturity date.
D)the interest payment,the issue price of the bond,and the credit rating of the company.

Question 35

Your company issued bonds at a premium.Which of the following statements is true?

A)The contra account,premium on bonds payable,is amortized each year by adding part of its balance to interest expense.
B)On the date of issuance,the stated interest rate of the bond was less than the market interest rate.
C)As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
D)All of the above.

Question 36

Which of the following would help a company improve its quick ratio without necessarily lowering the liability risk to a creditor?

A)Borrowing money just before the end of the accounting period.
B)Shifting resources from long-term assets to short-term assets.
C)Shifting obligations from long-term liabilities to short-term liabilities.
D)All of the above.

Question 37

Which of the following statements is not true?

A)Bonds and promissory notes are two ways a company can borrow the funds necessary to finance its activities.
B)Both bonds payable and notes payable are typically initially recorded with a journal entry that debits cash and credits the relevant liability account.
C)The journal entry recording interest owed on bonds and notes includes a debit to interest expense and a credit to interest payable.
D)Bonds payable and notes payable are always non-current liability accounts.

Question 38

A company has current assets of $5 million and net income of $10 million.Current liabilities total $2.5 million,interest expense is $2 million,and income tax expense is $3 million.The times interest earned ratio for this company is approximately:

A)0.5.
B)7.5.
C)0.3.
D)2.0.

Question 39

A company has liquid assets of $5 million and net income of $10 million.Current liabilities total $2.5 million,interest expense is $2 million,and income tax expense is $3 million.What is the Quick ratio for the company?

A)0.5
B)7.5
C)0.3
D)2.0

Question 40

Which of the following is a standard of recognition of contingent liabilities required by IFRS:

A)recognize the liability if the occurrence of the future event is likely meaning it is highly probable.
B)recognize the liability if the occurrence of the future event is more likely than not meaning its probable.
C)does not require that it be measurable.
D)Recognize the liability if the occurrence of the future event is certain

Question 41

Which of the following is not used to calculate the times interest earned ratio?

A)Net income.
B)Income tax expense.
C)Interest earned on investments.
D)Interest expense.

Question 42

When the effective interest method of amortization is used,what happens to interest expense as a bond moves toward maturity?

A)Interest expense falls for bonds sold at either a discount or a premium.
B)Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium.
C)Interest expense rises for bonds sold at either a discount or a premium.
D)Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.

Question 43

Which of the following statements best describes a contingent liability? A contingent liability is a:

A)liability,the amount of which is known and which definitely must be paid.
B)potential liability that has arisen because of a past transaction or event,but its ultimate outcome will not be known until a future event occurs or fails to occur.
C)liability that will only be incurred if a particular future event takes place.
D)potential liability that will be incurred if a natural disaster happens.

Question 44

Using straight-line amortization,when a bond is sold at a premium:

A)the amortized premium is added to the interest payable to calculate interest expense.
B)bonds payable rises by a constant amount each year.
C)interest expense is calculated by subtracting the amortized premium from the interest payment that is to be made.
D)interest expense rises each year.

Question 45

When a company encounters a contingent liability that is remote in likelihood,the company should:

A)include a description in the foot notes to the financial statements.
B)record the amount of the liability times the probability of its occurrence.
C)record the liability and estimated amount of the loss on the balance sheet.
D)omit the information about the contingent liability from its financial statements and footnotes.

Question 46

A company issues a 5-year bond with a $7,500 discount.Using straight-line amortization,the company should:

A)debit discount on bonds payable $1,500 per year.
B)credit discount on bonds payable $1,500 per year.
C)debit interest payable $1,500 per year.
D)credit interest payable $1,500 per year.

Question 47

On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.At the end of the first year,the company should:

A)debit Interest Expense for $543,debit Premium on Bonds Payable for $157,and credit Interest Payable for $700.
B)debit Interest Expense for $700,credit Premium on Bonds Payable for $157,and credit Interest Payable for $543.
C)debit Interest Expense for $700,debit Premium on Bonds Payable for $157,and credit Interest Payable for $543.
D)debit Interest Expense for $543 and credit Interest Payable for $543.

Question 48

Times interest earned ratio of less than 1 suggests that the company:

A)is using resources very efficiently.
B)has a serious financial problem.
C)has a very high interest expense.
D)has a high level of sales revenue.

Question 49

Some bonds allow the borrower to repay the bond by issuing stock.This feature is known as:

A)convertibility.
B)a loan covenant.
C)callable.
D)seniority.

Question 50

Some bonds require the borrowing company to maintain certain financial standards as demonstrated by its financial statements.This feature is known as:

A)convertibility.
B)a loan covenant.
C)callability.
D)seniority.

Question 51

Using straight-line amortization,when a bond is sold at a discount:

A)bonds payable declines by a constant amount each year.
B)interest expense declines by a constant amount each year.
C)bonds payable net of discount declines by a constant amount each year.
D)interest expense is a constant amount each year.

Question 52

When the amount of a contingent liability cannot be estimated and its possible but not probable,the company should:

A)include a description in the footnotes to the financial statements.
B)record the amount of the liability times the probability of its occurrence.
C)record the liability and estimated amount of the loss on the balance sheet.
D)omit the information about the contingent liability from its financial statements and footnotes.

Question 53

On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.Using the effective interest method of amortization,the interest expense in the first year ended December 31 would be:

A)$700.00
B)$543.30.
C)$667.00
D)$758.80.

Question 54

Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond is calculated as the present value of:

A)$10,000 in 5 years plus the present value of $700 a year for 5 years.
B)$700 paid once a year for 5 years.
C)$10,000 to be paid in 5 years.
D)$10,000 in 5 years minus the present value of $700 a year for 5 years.

Question 55

When the amount of a contingent liability can be estimated and its likelihood is possible but not probable,the company should:

A)include a description in the footnotes to the financial statements.
B)record the amount of the liability times the probability of its occurrence.
C)record the liability and estimated amount of the loss on the balance sheet.
D)omit the information about the contingent liability from its financial statements and footnotes.

Question 56

When the amount of a contingent liability can be estimated and it is likely,the company should:

A)include a description in the footnotes to the financial statements.
B)record the estimated amount of the liability times the probability of its occurrence.
C)record the liability and estimated amount of the loss on the balance sheet.
D)omit the information about the contingent liability from its financial statements and footnotes.

Question 57

Which of the following are generally recorded as liabilities on the balance sheet?

A)Remote likelihood liabilities.
B)Possible contingent liabilities.
C)Probable contingent liabilities.
D)All of the above.

Question 58

Some bonds mature in instalments.Bonds containing such feature are called:

A)Secured Bonds
B)Callable Bonds
C)Serial Bonds
D)Convertible Bonds

Question 59

Brief Respite,Inc.,sold underwear made from a fabric that gave many of its customers a serious rash.The customers are suing the company in a class action suit and Brief Respite's attorneys think it is probable that the case will cost the company $2 million,although the verdict is not yet in.The company should:

A)not include this information in its annual report.
B)record a liability and a gain for $2 million.
C)only explain the situation in the notes to the financial statements.
D)record a liability and a loss for $2 million.

Question 60

Some bonds allow the issuing entity to repay the loan ahead of maturity.Such bonds are called:

A)Convertible bonds.
B)Collateral bonds.
C)Callable Bonds.
D)Senior bonds.

Question 61

A company issued $400,000,10-year,10 percent bonds at 104.What is the total amount of interest expense that will be recorded over the life of these bonds?

A)$416,000
B)$400,000
C)$384,000
D)$360,000

Question 62

A company issued $400,000,10-year,10 percent bonds at 97.What is the total amount of interest expense that will be recorded over the life of these bonds?

A)$412,000
B)$400,000
C)$388,000
D)$360,000

Question 63

A company's current liabilities are the total amount it currently owes at a single point in time.
BT: Knowledge

Question 64

A company issued 10-year,7% bonds with a face value of $100,000.The company received $97,947 for the bonds.Using the straight-line method of amortization,the amount of interest expense for the first interest period is::

A)7,000.00
B)7,205.03
C)6,794.70
D)2,053.00

Question 65

GST is charged to all customers.
BT: Knowledge

Question 66

When the effective interest method of amortization is used,what happens to the amount of discount or premium amortized as a bond moves toward maturity?

A)The amount of discount or premium amortized each period decreases.
B)The amount of discount or premium amortized each period increases for bonds sold at a discount but decreases for bonds sold at a premium.
C)The amount of discount or premium amortized each period increases.
D)The amount of discount or premium amortized each period decreases for bonds sold a discount but increases for bonds sold at a premium.

Question 67

A company issued $400,000,10-year,10 percent bonds at 104.What is the issue price of these bonds?

A)$400,000
B)$386,000
C)$416,000
D)$440,000

Question 68

The principal of a loan does not include any interest charges.
BT: Knowledge

Question 69

A discount on a bond reduces the amount that the issuer has to repay to the lenders.
BT: Comprehension

Question 70

Unearned revenue is recorded as an asset until the revenue has been earned.
BT: Comprehension

Question 71

A 1-year,$30,000,10 percent note is signed on May 1.If the note is repaid on October 1 of the same year,how much interest expense is incurred?

A)$2,000
B)$625
C)$1,250
D)$600

Question 72

Publicly issued debt certificates are also known as bonds.
BT: Knowledge

Question 73

Operating cycles are generally longer than a year.
BT: Knowledge

Question 74

The face value of a bond is what it is currently worth in the market.
BT: Knowledge

Question 75

A company sells a bond with a face value of $10,000 and receives a premium of $800.Using the bonds payable,net shortcut,the company would make the following journal entry:

A)Debit Cash for $10,800 and credit Bonds Payable,net for $10,800.
B)Debit Cash for $10,800,credit Bonds Payable,net for $10,000,and credit Bond Premium for $800.
C)Debit Cash for $10,000 and debit Interest Expense for $800,credit Bonds Payable,net for $10,000 and credit Bond Premium for $800.
D)Debit Cash for $10,000,debit Interest Expense for $800,credit Bonds Payable for $10,000 and credit Bond Premium for $800.

Question 76

A company has bonds outstanding with a face value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99.How much would be the gain or loss?

A)$2,700 Gain
B)$3,700 Gain
C)$3,700 Loss
D)$2,700 Loss

Question 77

The market interest rate on a bond is also known as the effective interest rate or yield.
BT: Knowledge

Question 78

Which of the following is true about measurement of liabilities?

A)ASPE only allows the use of effective-interest method.
B)ASPE only allows the use of only straight-line method.
C)IFRS only allows the use of only effective-interest method
D)IFRS only allows the use of only straight-line method.

Question 79

Based on the following information calculate the times interest earned of the company.

A)122
B)129
C)130
D)139

Question 80

Accrued payroll includes such liabilities as retirement and health benefits not yet paid.
BT: Comprehension