Question 1

Which of the following questions is asked with respect to determining the accounting for leases?

Accepted Answer

A)   Is the lease term greater than 90% of the asset's estimated life?
B)   Is the present value of the payments greater than 75% of the asset's fair market value?
C)  Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value?
D)  Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee? D

Question 2

A current liability is created when a customer pays cash for services to be provided in the future.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following statements is correct?

Accepted Answer

A)   Social Security tax is paid only by the employer.
B)   The pay period always ends in conjunction with the company's fiscal year-end.
C)  Employee benefits such as vacation time and sick days should be recognized when the employees earn the benefit and not when they take the days off from work.
D)  Unemployment taxes are paid by the employee only. C

Question 4

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to:

Accepted Answer

A)   $123,255.
B)   $130,000.
C)  $80,000.
D)  $73,255.

Question 5

Black Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash sale of equipment for a loss.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's cash flows from operating activities on the statement of cash flows?

Accepted Answer

A)   The accrual of wages and salaries expense is subtracted from net income.
B)   The loss on the equipment sale is subtracted from net income.
C)  The cash payment to purchase the insurance policy is subtracted from net income.
D)  The accrual of wages and the equipment loss are both subtracted from net income.

Question 6

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The vehicle reported on the balance sheet as of the purchase date is closest to:

Accepted Answer

A)   $44,633.
B)   $50,000.
C)  $54,633.
D)  $60,000.

Question 7

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements is correct?

Accepted Answer

A)   The inventory purchase on account increased working capital.
B)   Collecting an account receivable increases working capital.
C)  The equipment purchase decreases working capital.
D)  The inventory purchase on account decreases working capital.

Question 8

Income taxes payable is an example of an accrued liability.

Accepted Answer

A) True 
 B)False

Question 9

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,520. On January 1, 2014, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On December 31, 2014, Straight recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:

Accepted Answer

A)   $25,402.
B)   $32,000.
C)  $29,693.
D)  $27,493.

Question 10

A company's income statement reported net income of $40,000 during 2014. The income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 2015. Which of the following statements is correct assuming a 35% tax rate?

Accepted Answer

A)   A $3,000 deferred tax liability is reported as of December 31, 2014.
B)   A $3,000 deferred tax asset is reported as of December 31, 2014.
C)  A $1,050 deferred tax liability is reported as of December 31, 2014.
D)  A $1,050 deferred tax asset is reported as of December 31, 2014

Question 11

Which of the following results in a decrease in working capital?

Accepted Answer

A)   Supplies purchases with cash.
B)   Purchase of a truck in exchange for factory machinery.
C)  Acquisition of land in exchange for stock.
D)  Purchase of equipment with cash.

Question 12

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

Accepted Answer

A)   It must be recorded and reported as a liability.
B)   It does not need to be recorded or reported as a liability.
C)  It must only be disclosed as a note to the financial statements.
D)  It must be reported as a liability, but not disclosed in a note.

Question 13

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

Accepted Answer

A) True 
 B)False

Question 14

If income tax expense reported on the income statement is $45,000 for 2014, and the tax return for 2014 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2014 will be which of the following? Assume a 40% tax rate.

Accepted Answer

A)   A $3,000 liability.
B)   A $3,000 asset.
C)  A $7,500 liability.
D)  A $7,500 asset.

Question 15

When a liability is initially recorded, it is recorded at the future amount of all payments.

Accepted Answer

A) True 
 B)False

Question 16

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 17

Rocket Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash payment of a six-month note payable.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

Accepted Answer

A)   The accrual of wages and salaries expense decreases working capital.
B)   The cash payment of the note payable decreases working capital.
C)  The purchase of the insurance policy increases working capital.
D)  The cash payments for the note and insurance both decrease working capital.

Question 18

Which of the following questions is incorrect with respect to determining the accounting for leases?

Accepted Answer

A)   Is the lease term greater than 75% of the asset's expected economic life?
B)   Is the present value of the payments greater than 75% of the asset's fair market value?
C)  Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less than fair market value?
D)  Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?

Question 19

An employee has an obligation to pay his payroll taxes to the employer.

Accepted Answer

A) True 
 B)False

Question 20

On October 1, 2014, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2015 income statement?

Accepted Answer

A)   $1,000.
B)   $2,000.
C)  $3,000.
D)  $4,000.

Exam 9: Reporting and Interpreting Liabilities

Which of the following questions is asked with respect to determining the accounting for leases?

A current liability is created when a customer pays cash for services to be provided in the future.

Which of the following statements is correct?

Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the following statements is correct?

Income taxes payable is an example of an accrued liability.

Which of the following results in a decrease in working capital?

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

If income tax expense reported on the income statement is $45,000 for 2014, and the tax return for 2014 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2014 will be which of the following? Assume a 40% tax rate.

When a liability is initially recorded, it is recorded at the future amount of all payments.

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Which of the following questions is incorrect with respect to determining the accounting for leases?

An employee has an obligation to pay his payroll taxes to the employer.

On October 1, 2014, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2015 income statement?