Deck 10: Liabilities

Question 1

When a company has a fully funded pension plan, they only need to record the present value of pension payments as a current liability.

Answer 1

False

Question 2

When a company sells bonds, the bondholders are permitted to vote for the board of directors.

Answer 2

False

Question 3

Bonds secured by a pledge of specific assets are called debenture bonds.

Answer 3

False

Question 4

When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the note.

Question 5

A commitment, such as a contract to pay a football player $50,000,000 a year for five years, should be listed as a noncurrent liability.

Question 6

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

Question 7

Junk bonds are attractive to investors because they carry a high rate of interest and are usually convertible into a specified number of shares.

Question 8

If a lease transfers ownership of the property to the lessee at the end of the lease term, it should be regarded as an operating lease.

Question 9

Provisions, contingencies and commitments are usually reported in the noncurrent liability section of the financial statements.

Question 10

The current portion of long-term debt should be reported separately in the current liabilities section of the statement of financial position.

Question 11

When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date.

Question 12

Dividends paid by a corporation to its shareholders are tax deductible by the corporation but interest paid on bonds is not.

Question 13

Gross pay less withholding tax and less worker's compensation is considered net pay.

Question 14

The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues.

Question 15

A liability that is known to exist but the precise dollar amount is not known is called a possible liability

Question 16

A contingent liability is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known.

Question 17

The combination of liabilities and owners' equity used in financing the assets of a business is called the company's capital structure.

Question 18

The amount of income tax and medical care tax withheld from an employee is used to pay the employer's percentage of the tax.

Question 19

Prepayments and owners' equity are both sources of financing.

Question 20

When bonds are issued at a discount, the borrower must pay more at maturity than the amount originally received.

Question 21

Bonds, with the same face value, issued at a premium will have a higher maturity value than bonds issued at a discount

Question 22

Deferred income taxes eventually come due.

Question 23

A high interest coverage ratio is a sign of creditworthiness.

Question 24

The account Discount on Bonds Payable has a debit balance and should appear on the statement of financial position as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability.

Question 25

In a long-term finance lease, the lessor views a portion of each lease payment as interest expense.

Question 26

The quick ratio is a more stringent measure of solvency than the current ratio.

Question 27

Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made.

Question 28

The withholding of taxes from an employee's pay is a liability to the company.

Question 29

Bonds payable are a means of dividing a very large, long-term liability among many creditors some of whom may participate in the loan only for a short period of time.

Question 30

Sinking funds make a bond issue less attractive to the investor.

Question 31

In the marketplace, bond prices tend to fluctuate directly with changes in interest rates.

Question 32

Social security and medical care taxes have a cap on employees' salaries where the tax is ended.

Question 33

Contingent liabilities should be recorded in the accounting records whenever it is probable that a loss has been incurred and the amount of loss might be material in amount.

Question 34

There is a tax advantage for a company to issue bonds in lieu of shares.

Question 35

If a long-term debt is to be paid off in monthly installments over a 5-year period, the entire principal should be classified as a noncurrent liability.

Question 36

If a bond is callable, the call price is usually lower than the face value of the bond.

Question 37

Convertible bonds can be exchanged for ordinary shares at the option of the company.

Question 38

Contingent liabilities stem from past events.

Question 39

The future value will always be less than the present value.

Question 40

Liabilities that fall due within one year or within the operating cycle are classified as current liabilities.

Question 41

If a bond is selling at 103, it is selling at:

A) Maturity value and yields a 2% interest rate.
B) A discount.
C) A premium.
D) $103 per bond.

Question 42

Interest payable on a loan becomes a liability:

A) When the note payable is issued.
B) As it accrues.
C) At the maturity date.
D) When the borrowed money is received.

Question 43

Temple Corporation purchased a piece of real estate, paying $4,000,000 cash and financing $7,000,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation:

A) The aggregate amount of the monthly payments is $7,000,000.
B) Each monthly payment is greater than the amount of interest accruing each month.
C) The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease.
D) The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

Question 44

Special purpose entities (SPEs) are established by corporations to accomplish specific purposes such as borrowing money.

Question 45

The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period.

Question 46

A $1,000 bond that sells for 104 has a selling price of:

A) $1,004
B) $1,040
C) $1,400
D) $1,000

Question 47

A primary means used by credit rating agencies to evaluate a company's ability to pay its debts is to compare total assets to total liabilities.

Question 48

In preparing an amortization table, it is necessary to include:

A) The original amount of the liability, the amount of periodic payments and the interest rate.
B) The original amount of the liability, the amount of periodic payments and the amount of past payments.
C) The monthly payment, the total amount of past payments and the original amount of the liability.
D) The total amount of past payments, the interest rate and the amount of periodic payments.

Question 49

The amount of the present value of a future cash receipt will depend upon

A) The length of time until the money is received.
B) The amount of money to be received.
C) The required rate of return.
D) The amount of money to be received, the length of time until the money is received, and the required rate of return.

Question 50

Off balance sheet financing may involve either:

A) An operating lease
B) A special purpose entity
C) Both of the above
D) Neither of the above

Question 51

Which of the following is not an accurate statement regarding the distinction between debt and equity?

A) Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.
B) If a business ceases operations and liquidates, claims of all creditors have legal priority over claims of the shareholders.
C) Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment.
D) The providers of equity are owners of the business; the providers of borrowed funds are creditors.

Question 52

The amortization of bond discount by the issuing company decreases the carrying amount of its bonds payable.

Question 53

Employers are normally required to pay all of the following on the wages paid to each employee except:

A) Social security taxes
B) Worker's compensation insurance
C) Medical care taxes
D) Health insurance benefits.

Question 54

International accounting standards require that convertible bonds be classified on the statement of financial position as:

A) Part liability, part equity
B) A liability
C) Either a liability or equity
D) As an asset

Question 55

U. S. GAAP requires that convertible bonds be classified on the statement of financial position as:

A) Part liability, part equity
B) A liability
C) Either a liability or equity
D) As an asset

Question 56

In the United States, which of the following payroll costs are shared equally by the employer and the employee?

A) State unemployment taxes.
B) Workers' compensation.
C) Social security.
D) Federal unemployment taxes.

Question 57

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

A) An amount less than the stated interest rate times the principal.
B) An amount more than the stated interest rate times the principal.
C) An amount equal to the stated interest rate times the principal.
D) The company may skip the first interest payment date since the appropriate time has not passed.

Question 58

Companies may understate liabilities so as not to be perceived as risky by credit rating agencies.

Question 59

The salaries tax paid by an employer is:

A) Greater than the amount paid by the employee.
B) Less than the amount paid by the employee.
C) Equal to the amount paid by the employee.
D) The employer does not pay salaries tax, only the employee pays the tax.

Question 60

A company issues $50 million of bonds at par on 1 January 2014. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is:
A) $\begin{array}{|c|c|c|}\hline \text { Cash } & 50,000,000 & \\\hline \text { Bonds Payable } & & 50,000,000 \\\hline\end{array}$ B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & \mathbf { 5 0 , 0 0 0 , 0 0 0 } & \\\hline \text { Interest Expense } & 2,500,000 & \\\hline \text { Bonds Payable } & & \mathbf { 5 0 , 0 0 0 , 0 0 0 } \\\hline \text { Interest Payable } & & 2,500,000 \\\hline\end{array}$$ C) $$\begin{array} { | l | c | c | } \hline \text { Cash } & 50,000,000 & \\\hline \text { Interest Expense } & 5,000,000 & \\\hline \text { Bonds Payable } & & 50,000,000 \\\hline \text { Interest Payable } & & 5,000,000 \\\hline\end{array}$$ D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 50,000,000 & \\\hline \text { Interest Expense } & 500,000 & \\\hline \text { Bonds payable } & & 50,000,000 \\\hline \text { Interest payable } & & 500,000 \\\hline\end{array}$$

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

Question 61

Sinking funds usually appear on the statement of financial position as:

A) Current asset.
B) Long-term investment.
C) Current liability.
D) Appropriation of retained earnings.

Question 62

One advantage of issuing bonds instead of shares is that:

A) Interest is tax deductible whereas dividends are not.
B) Bonds have a longer maturity date.
C) Interest rates are lower than dividend rates.
D) The issuance of bonds does not affect earnings per share.

Question 63

Bonds, with the same face value, issued at a premium will:

A) Have a greater maturity value than a bond issued at a discount.
B) Have a lesser maturity value than a bond issued at a discount.
C) Have the same maturity value as a bond issued at a discount.
D) Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.

Question 64

Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or share capital. If the company issues the bonds, it will probably report:

A) Lower profit and lower income taxes expense than if it issues shares.
B) Higher profit and higher income taxes expense than if it issues shares.
C) Lower profit and higher income taxes expense than if it issues shares.
D) Higher profit and lower income taxes expense than if it issues shares.

Question 65

In relation to a bond issue, the role of the underwriter is to:

A) Guarantee payment to bondholders of both the periodic interest payments and the maturity value.
B) Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public.
C) Represent the interests of the bondholders and, if necessary, to take legal action on their behalf.
D) Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.

Question 66

The average employee of Girard Corporation earns gross pay of $175,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
$\begin{array} { | l | l | } \hline \text { Workers' compensation insurance } & 6 \% \\\hline \begin{array} { l } \text { Social security and medical care taxes } \\\text { (employer's portion) }\end{array} & 8 \% \\\hline \begin{array} { l } \text { Pension and other postretirement costs } \\\text { expense (paid by employer) }\end{array} & 5 \% \\\hline \text { Unemployment taxes expense } & 2 \% \\\hline\end{array}$
In addition, Girard pays $825 per month per employee for group health insurance.

-Which of the following is the largest payroll-related expense incurred by Girard?

A) Group health insurance premiums.
B) Income taxes expense.
C) The employer's share of social security taxes.
D) Wages and salaries expense.

Question 67

The average employee of Girard Corporation earns gross pay of $175,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
$\begin{array} { | l | l | } \hline \text { Workers' compensation insurance } & 6 \% \\\hline \begin{array} { l } \text { Social security and medical care taxes } \\\text { (employer's portion) }\end{array} & 8 \% \\\hline \begin{array} { l } \text { Pension and other postretirement costs } \\\text { expense (paid by employer) }\end{array} & 5 \% \\\hline \text { Unemployment taxes expense } & 2 \% \\\hline\end{array}$
In addition, Girard pays $825 per month per employee for group health insurance.

-Which of the following represents the largest amount withheld from employees' paychecks?

A) Workers' compensation insurance.
B) Social Security and medical care.
C) Personal income taxes.
D) Group health insurance.

Question 68

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of ordinary shares:

A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
B) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.
C) A corporation must pay tax on the sales price of shares issued, but is not taxed on the amount received when bonds are issued.
D) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

Question 69

The average employee of Girard Corporation earns gross pay of $175,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
$\begin{array} { | l | l | } \hline \text { Workers' compensation insurance } & 6 \% \\\hline \begin{array} { l } \text { Social security and medical care taxes } \\\text { (employer's portion) }\end{array} & 8 \% \\\hline \begin{array} { l } \text { Pension and other postretirement costs } \\\text { expense (paid by employer) }\end{array} & 5 \% \\\hline \text { Unemployment taxes expense } & 2 \% \\\hline\end{array}$
In addition, Girard pays $825 per month per employee for group health insurance.

-Which of the following represents the second largest payroll related expense incurred by Girard?

A) Group health insurance premiums.
B) Income taxes expense.
C) The employer's share of social security taxes and medical care taxes.
D) Wages and salaries expense.

Question 70

If a bond is issued at par and between interest dates:

A) The cash received by the corporation will be less than the face value of the bond.
B) The cash received by the corporation will be greater than the face value of the bond.
C) The cash received by the corporation will be the same as the face value of the bond.
D) Interest receivable will be debited.

Question 71

The term "junk bonds" describes bonds with:

A) Low interest rates.
B) Indefinite maturity dates.
C) Low maturity values.
D) High risk.

Question 72

The pension expense of the current period is equal to:

A) Amounts paid to retired workers during the current period.
B) The estimated future pension benefits earned by today's workers during the current period.
C) The present value of the estimated future pension benefits earned by today's workers during the current period.
D) Cash payments made during the period to the trustee of the pension plan.

Question 73

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):

A) The portion of each payment allocated to interest expense is the same each month.
B) The sum of the monthly payments is equal to the amount of the installment note (mortgage).
C) The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.
D) The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

Question 74

The current portion of noncurrent debt should be reported:

A) Separately in the noncurrent liabilities section of the statement of financial position.
B) In the noncurrent liabilities section of the statement of financial position, along with the other long-term debt.
C) In the current liabilities section of the statement of financial position.
D) In a separate section of the statement of financial position, between noncurrent liabilities and shareholders' equity.

Question 75

Unearned revenue:

A) Appears on the income statement as income.
B) Appears on the income statement as a reduction to income.
C) Appears on the income statement as a liability.
D) Appears on the statement of financial position as a liability.

Question 76

An employer's total payroll-related costs always exceed the wages and salaries earned by employees by:

A) Amounts withheld from employees' pay.
B) Payroll taxes and mandated programs such as workers' compensation insurance.
C) 50%.
D) None of the above. Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees, because of amounts withheld from employees' checks.

Question 77

A bond that is not secured is also known as:

A) A sinking fund.
B) A mortgage.
C) A debenture.
D) A junk bond.

Question 78

Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date?

A) The original liability is classified as current, with a footnote describing management's plan for refinancing.
B) The original liability is classified as current and the new loan is reported as a long-term liability.
C) The original liability is classified as long-term; the new loan is not included in liabilities at this date.
D) The original liability need not be reported at all; only the new loan is reported as a long-term liability.

Question 79

The amounts that a business withholds as taxes from an employee's earnings:

A) Represent payroll taxes expense to the employer.
B) Are deposited in an interest-bearing account until the employee is terminated.
C) Represent miscellaneous revenue to the employer.
D) Represent current liabilities to the employer.

Question 80

When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a:

A) Convertible bond.
B) Callable bond.
C) Junk bond.
D) Debenture bond.