Deck 7: Accounting for Liabilities

Question 1

A contingent liability is

A) an unearned revenue.
B) a potential obligation,the existence or amount of which depends on a future event.
C) an amount owed to a state or local government.
D) an amount related to an impairment loss on an intangible asset.

Answer 1

B

Question 2

Taos Company sold goods to a customer for $100 and collected $7.50 in sales taxes.What type of transaction is the collection of the sales tax?

A) Asset source transaction
B) Asset use transaction
C) Asset exchange transaction
D) Claims exchange transaction

Answer 2

A

Question 3

Chicago Company sold merchandise to a customer for $600 cash in a state with a 6% sales tax rate.The total amount of cash collected from the customer was

A) $558.
B) $600.
C) $642.
D) $636.

Answer 3

D

Question 4

Accruing product warranty expense at the end of an accounting period is a/an ________ transaction.

A) asset source
B) asset use
C) asset exchange
D) claims exchange

Question 5

In accounting for a contingent liability,if the likelihood of the obligation is possible,a company must

A) recognize the liability and report it on the balance sheet.
B) provide disclosure in the footnotes to the financial statements.
C) not recognize or disclose the liability until it is certain and the exact amount is known.
D) do nothing.

Question 6

Payment of previously-accrued interest on a note payable is a/an

A) asset source transaction.
B) asset use transaction.
C) asset exchange transaction.
D) claims exchange transaction.

Question 7

In accounting for a contingent liability,if the likelihood of the obligation is probable but the amount cannot be estimated,a company must

A) recognize the liability and report it on the balance sheet.
B) provide disclosure in the footnotes to the financial statements.
C) not recognize or disclose the liability until it is certain and the exact amount is known.
D) do nothing.

Question 8

Garza Corporation sold merchandise to a customer for $4,000 subject to sales tax at 8%.The effects on the financial statements were:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 9

What is the going concern assumption?

A) Assumes a company will go out of business if it can't pay its bills
B) Assumes that a company will continue to operate indefinitely
C) Assumes that a company will follow proper accounting rules
D) Assumes that a company should continue to use the same accounting principles

Question 10

On December 31,2010,Malcolm Corporation accrued interest on a $10,000 note payable that it had issued on March 1,2010.The note was a 1-year note with interest at 6%.How did the year-end accrual of interest affect Malcolm's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 11

Providing repair services to a customer under the terms of a product warranty is a/an ________ transaction.

A) asset source
B) asset use
C) asset exchange
D) claims exchange

Question 12

Nevada Company remitted to the state $1,800 in sales taxes that it had previously collected from customers.The effects on the financial statements were:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 13

On November 1,2012,Fain Corporation paid principal and interest on a 6-month,8% note payable with a face amount of $5,000.How did this transaction affect Fain's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 14

Borrowing by issuing a note payable is a/an

A) asset source transaction.
B) asset use transaction.
C) asset exchange transaction.
D) claims exchange transaction.

Question 15

In accounting for a contingent liability,if the likelihood of the obligation is probable and the amount can be estimated,a company must

A) report the liability on the balance sheet.
B) provide disclosure in the footnotes to the financial statements.
C) not recognize the liability until it is certain and the exact amount is known.
D) do nothing.

Question 16

Nevada Company paid to the state $1,800 in sales tax that it had previously collected from customers.What type of transaction was this?

A) Asset source
B) Asset use
C) Asset exchange
D) Claims exchange

Question 17

Accrual of interest on a note payable is a/an

A) asset source transaction.
B) asset use transaction.
C) asset exchange transaction.
D) claims exchange transaction.

Question 18

Quayle Company has been sued by a customer who claims injury from use of Quayle's product.The company's lawyers and a consultant believe that the likelihood of a judgment against Quayle is remote.What should Quayle do to account for this potential liability?

A) recognize the liability and report it on the balance sheet
B) provide disclosure in the footnotes to the financial statements
C) report an allowance account on the balance sheet
D) do nothing

Question 19

In accounting for a contingent liability,if the likelihood of the obligation is remote,a company should

A) recognize the liability and report it on the balance sheet.
B) provide disclosure in the footnotes to the financial statements.
C) report an allowance account on the balance sheet.
D) do nothing.

Question 20

On March 1,2012,Cross Corporation borrowed $10,000 by issuing a note payable.How did this transaction affect Cross's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 21

Knowles Company issued $100,000 of bonds at face value on January 1.The bonds carry an 8% annual stated rate of interest.Interest is payable in cash on December 31 of each year.Which of the following reflects the financial statement effects of the first interest payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 22

Long-term debt would likely be used for which of the following?

A) acquisition of inventory
B) paying premiums for insurance
C) purchasing a building
D) paying salaries

Question 23

How does the amortization of the principal balance affect the amount of interest expense recorded each succeeding year?

A) Has no effect on interest expense each succeeding year
B) Increases the amount of interest expense each succeeding year
C) Reduces the amount of interest expense each succeeding year
D) The effect depends on the interest rate.

Question 24

Applegate Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on Knight's statements?

A) paid interest and principal on loan
B) borrowed funds through a line of credit
C) paid interest on bonds
D) repaid principal on bonds at maturity

Question 25

Bonds payable are usually classified on the balance sheet as:

A) long-term liabilities.
B) current liabilities.
C) investments and funds.
D) other assets.

Question 26

On January 1,2011,Hays borrowed an additional $1,000 from Barnett Bank,bringing the total amount borrowed to $2,000.On January 1,2012,Hays paid $500 on the principal of the loan.On December 31,2012,Hays records the 2012 interest payment.The prime rate for 2012 was 5 percent.Which of the following answers shows the effect of the 2012 interest payment on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 27

When does warranty cost appear on the statement of cash flows?

A) When there is a settlement of a warranty claim made by a customer.
B) When the warranty obligation is recognized.
C) When merchandise is sold.
D) None of these.

Question 28

Hays paid the first year's interest payment on December 31,2012.Barnett Bank's prime rate was 4 percent for 2012.Which of the following answers shows the effect of this event on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 29

Sandusky Company borrowed $10,000 from the Lakeside Bank by issuing a 10% three-year installment note.Sandusky agreed to repay the principal and interest by making annual payments in the amount of $4,021.15.Based on this information,the amount of the interest expense associated with the second payment would be: (round your answer to the nearest dollar)

A) $365.
B) $698.
C) $1,000.
D) $821.

Question 30

Barrett Company obtained a $80,000 line of credit from the Garden State Bank on January 1,2012.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2012 are shown in the following table.Assume that Barrett borrows or repays on the first day of each month.Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. The amount of interest expense recognized in March,rounded to the nearest dollar,would be

A) $219.
B) $160.
C) $69.
D) $204.

Question 31

Which of the following correctly shows the effects of the December 31,2013 payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 32

Hays began its loan transactions with Barnett Bank by borrowing $1,000 on January 1,2012.Which of the following answers shows the effect of this event on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 33

Upton Company obtained an $80,000 line of credit from the Key State Bank on January 1,2012.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2012 are shown in the following table.Assume that Upton borrows or repays on the first day of each month.Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. The amount of interest expense recognized in March,rounded to the nearest dollar,would be:

A) $116.
B) $131.
C) $146.
D) $204.

Question 34

The amount of principal repayment included in the December 31,2012 payment is:

A) $27,274.
B) $27,615.
C) $37,329.
D) $40,575.

Question 35

Which of the following shows the effect of the December 31,2012 payment? (Figures rounded to nearest dollar)

A) Choice A
B) Choice B
C) Choice C
D) Choice D]

Question 36

Which of the following reflects the effect of the year-end adjusting entry to record estimated warranty expense?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 37

Which choice reflects the financial statement effects of Fleming Company's cash payment on December 31,2012?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 38

Regardless of the specific type of long-term debt,which of the following are normally required with debt transactions?

A) to repay the debt
B) to pay dividends
C) to pay interest
D) A and C are both correct

Question 39

Which of the following answers correctly shows the effect of the issuance of the note on Halogen's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 40

Locke Company issued bonds payable.Which of the following choices accurately reflects how the issue would affect Locke's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 41

A current asset is

A) an asset that will be used in the operating activities of a business.
B) an asset generated by the operations of a business within the past year.
C) an asset that is expected to be used or converted to cash within one year or the operating cycle,whichever is longer.
D) a miscellaneous asset that is small in dollar amount.

Question 42

Pella Company issued bonds with a face value of $3,000,000 on January 1,2012.The bonds were issued at face value and carried a 4-year term to maturity.Interest at 9% was payable in cash on December 31 of each year.Based on this information alone,the amount of interest expense shown on the 2012 income statement and the cash flow from operating activities shown on the 2012 statement of cash flows would be:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 43

Using the effective interest rate method to amortize bond discount will

A) cause the carrying value of the bond to decrease as it approaches the maturity date
B) cause the carrying value of the bond to increase as it approaches the maturity date
C) cause the carrying value to be the same as the issue price
D) not change the carrying value

Question 44

On January 1,2012,Sol Company issued bonds with a face value of $100,000 at 105.The bonds will mature in 5 years.Interest at 10% was payable in cash on December 31 of each year.The premium will be amortized using the straight line method.Based on this information,the amount of interest expense shown on the 2012 income statement and the cash flow from operating activities shown on the 2012 statement of cash flows would be:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 45

Company N has a 5-year note payable that will mature (come due)on March 17,2012.Company N has an agreement with a local bank to refinance the liability by issuing a new note payable.On its December 31,2011 balance sheet,N should

A) report the note payable as a current liability.
B) report the note payable as a long-term liability.
C) not report the note payable on the balance sheet because it is going to be refinanced.
D) transfer the amount of the note payable to stockholders' equity.

Question 46

Which of the following items is not classified as a current asset?

A) accounts receivable
B) merchandise inventory
C) a patent
D) prepaid rent

Question 47

Sports Corporation decides to sell debenture bonds to raise $10,000.This is a/an

A)asset source transaction.
B)asset use transaction.
C)asset exchange transaction.
D)claims exchange transaction.

Question 48

On a classified balance sheet,the financial statement user will be able to distinguish between:

A) cash flow from operations and cash flow from investing activities.
B) product and period costs.
C) current and non-current assets.
D) none of these

Question 49

Current liabilities as of December 31,2012 are the

A) obligations which were incurred during 2012 in the normal course of operating the business.
B) debts on the balance sheet that must be repaid or refinanced in 2013.
C) debts related only to operating activities of the company.
D) debts on December 31,2012 that are expected to be paid using current assets during 2013.

Question 50

Which of the following statements is correct?

A) The amortization of the discount reduces the bond interest expense.
B) A discount results when the bond's issue price is greater than its face value.
C) A premium results when the bond's issue price is greater than its face value.
D) The amortization of the premium increases the bond interest expense.

Question 51

When a bond's issue price is greater than its face value,the bond must be reported on the balance sheet at its

A) face value
B) maturity value
C) issue price
D) carrying value

Question 52

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a discount?

A) Interest expense will decrease as the carrying value of the bond increases.
B) Interest expense will increase as the carrying value of the bond decreases.
C) Interest expense will decrease as the carrying value of the bond decreases.
D) Interest expense will increase as the carrying value of the bond increases.

Question 53

When a bond's issue price is greater than its face value,the actual rate of interest that must be paid is called the

A) effective interest rate
B) stated interest rate
C) coupon interest rate
D) prime interest rate

Question 54

Current liabilities include

A) some notes payable.
B) Taxes Payable.
C) the current portion of some long-term liabilities.
D) all of these.

Question 55

Discount on bond payable is a/an

A) asset account
B) liability account
C) contra liability account
D) equity account

Question 56

Which of the following would not be classified as a current asset?

A) Marketable Securities
B) Equipment
C) Prepaid Expenses
D) Interest Receivable

Question 57

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

A) Accounts Payable
B) Wages Payable
C) Bonds Payable
D) Interest Payable

Question 58

Using the effective interest rate method to amortize bond premium will

A) cause the carrying value of the bond to increase as it approaches the maturity date
B) cause the carrying value of the bond to decrease as it approaches the maturity date
C) cause the carrying value to be the same as the issue price
D) not change the carrying value

Question 59

Paul's Valley Company issued bonds with a $10,000 face value on January 1,2012.The bonds were issued at face value and carried 5-year term to maturity.They had a 5% stated rate of interest that was payable in cash on January 1 of each year beginning January 1,2013.Based on this information alone,the amount of total liabilities appearing on the December 31,2012 balance sheet would be:

A) $10,000.
B) $10,500.
C) $9,500.
D) $0.

Question 60

On January 1,2012,Luna Company issued bonds with a face value of $300,000 at 95.The bonds will mature in 5 years.Interest at 9% was payable in cash on December 31 of each year.The discount will be amortized using the straight line method.Based on this information,the amount of interest expense shown on the 2012 income statement and the cash flow from operating activities shown on the 2012 statement of cash flows would be:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 61

Companies that offer warranties on their products record the warranty expense at the time they provide service to customers under the terms of the warranty.

Question 62

If a company's operating cycle is 90 days long,the company would use a period of one year to identify current assets and current liabilities.

Question 63

Ransom Company borrowed $10,000 by issuing a promissory note.The note was for twelve months at an annual interest rate of 8%.

Question 64

If a company has a contingent liability where the likelihood of a future obligation is remote,the company need not record or disclose the liability.

Question 65

Accounts payable and notes payable are reported on the balance sheet at net realizable value.

Question 66

General uncertainties,such as the effect of competition on a business's operations,are not accounted for as contingent liabilities.

Question 67

A company's obligation for product warranties is a contingent liability that generally must be recognized in the financial statements.

Question 68

A line of credit typically has an interest rate that is fixed (constant)for the length of the agreement.

Question 69

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a premium?

A) Interest expense will decrease as the carrying value of the bond decreases.
B) Interest expense will decrease as the carrying value of the bond increases.
C) Interest expense will increase as the carrying value of the bond increases.
D) Interest expense will increase as the carrying value of the bond decreases.

Question 70

For a long-term note payable,repaying a portion of principal along with interest payments is called loan amortization.

Question 71

Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1,2012.The stated interest rate on these bonds is 9%.If the effective interest rate is 10.33%,interest expense in 2012 is equal to

A) $20,660
B) $17,100
C) $18,000
D) $19,627

Question 72

Vacation pay and sick leave are examples of contingent liabilities that a company generally should recognize on its financial statements.

Question 73

Company T's operating cycle is approximately 2 years long.Company T's note payable maturing in 15 months should be classified as a long-term liability.

Question 74

Rush Corporation borrowed $50,000 on January 1,2012.The loan is for a five-year period and has an annual interest rate of 8%.At the end of each year,Rush will make a payment of $12,522.82,which includes both principal and interest.The amount of the payment for 2010 that is reduction of principal is $8,502.82.

Question 75

A bond is issued at a discount when its face value is greater than its issue price.

Question 76

Installment notes are loans that require payment of interest at regular intervals and payment of principal at maturity.

Question 77

Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1,2012.The stated interest rate on these bonds is 9%.If the effective interest rate is 10.33%,interest expense and the discount amortization in 2012 are

A) $19,627 interest expense; $1,627 discount amortization
B) $18,000 interest expense; $1,627 discount amortization
C) $18,000 interest expense; $2,660 discount amortization
D) $19,627 interest expense; $2,660 discount amortization

Question 78

Rush Corporation borrowed $50,000 on January 1,2012.The loan is for a five-year period and has an annual interest rate of 8%.At the end of each year,Rush will make a payment of $12,522.82,which includes both principal and interest.With this loan,the amount of interest expense that Rush reports on its income statement will be the same for each year of the loan.

Question 79

If a company determines that the likelihood of a future obligation arising from a contingent liability is possible,the company must record a liability on its balance sheet.

Question 80

Classified balance sheets are useful for assessing a company's liquidity and solvency.