Deck 13: Current Liabilities and Contingencies

Question 1

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

Answer 1

True

Question 2

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

Answer 2

False

Question 3

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

Answer 3

False

Question 4

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

Question 5

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

Question 6

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

Question 7

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

Question 8

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

Question 9

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

Question 10

Paying a current liability with cash will always reduce the current ratio.

Question 11

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

Question 12

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

Question 13

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

Question 14

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Question 15

A company must accrue a liability for sick pay that accumulates but does not vest.

Question 16

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

Question 17

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

Question 18

Magazine subscriptions and airline ticket sales both result in unearned revenues.

Question 19

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

Question 20

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

Question 21

Which of the following may be a current liability?

A)Withheld Income Taxes
B)Deposits Received from Customers
C)Deferred Revenue
D)All of these

Question 22

The ability to consummate the refinancing of a short-term obligation may be demon- strated by

A)actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
B)entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
C)actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
D)all of these.

Question 23

Which of the following is not a correct statement about sales taxes?

A)Sales taxes are an expense of the seller.
B)Many companies record sales taxes in the sales account.
C)If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
D)All of these are true.

Question 24

In accounting for compensated absences, the difference between vested rights and accumulated rights is

A)vested rights are normally for a longer period of employment than are accumu?lated rights.
B)vested rights are not contingent upon an employee's future service.
C)vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
D)vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

Question 25

Liabilities are

A)any accounts having credit balances after closing entries are made.
B)deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
C)obligations to transfer ownership shares to other entities in the future.
D)obligations arising from past transactions and payable in assets or services in the future.

Question 26

Which of the following statements is false?

A)A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
B)Cash dividends should be recorded as a liability when they are declared by the board of directors.
C)Under the cash basis method, warranty costs are charged to expense as they are paid.
D)FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Question 27

Which of the following should not be included in the current liabilities section of the balance sheet?

A)Trade notes payable
B)Short-term zero-interest-bearing notes payable
C)The discount on short-term notes payable
D)All of these are included

Question 28

Which of the following items is a current liability?

A)Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B)Bonds due in three years.
C)Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
D)Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

Question 29

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

A)The obligation relates to the rights that vest or accumulate.
B)Payment of the compensation is probable.
C)The obligation is attributable to employee services already performed.
D)All of these are conditions for the accrual.

Question 30

Which of these is not included in an employer's payroll tax expense?

A)F.I.C.A.(social security) taxes
B)Federal unemployment taxes
C)State unemployment taxes
D)Federal income taxes

Question 31

Of the following items, the only one which should not be classified as a current liability is

A)current maturities of long-term debt.
B)sales taxes payable.
C)short-term obligations expected to be refinanced.
D)unearned revenues.

Question 32

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank.These are 90-day notes, renewable for another 90-day period.These notes should be classified on the balance sheet of Lance Company as

A)current liabilities.
B)deferred charges.
C)long-term liabilities.
D)intermediate debt.

Question 33

Stock dividends distributable should be classified on the

A)income statement as an expense.
B)balance sheet as an asset.
C)balance sheet as a liability.
D)balance sheet as an item of stockholders' equity.

Question 34

Which of the following is not true about the discount on short-term notes payable?

A)The Discount on Notes Payable account has a debit balance.
B)The Discount on Notes Payable account should be reported as an asset on the balance sheet.
C)When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
D)All of these are true.

Question 35

An account which would be classified as a current liability is

A)dividends payable in the company's stock.
B)accounts payable-debit balances.
C)losses expected to be incurred within the next twelve months in excess of the company's insurance coverage.
D)none of these.

Question 36

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

A)a general description of the financing arrangement.
B)the terms of the new obligation incurred or to be incurred.
C)the terms of any equity security issued or to be issued.
D)the number of financing institutions that refused to refinance the debt, if any.

Question 37

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

A)portion of FICA taxes, and unemployment taxes.
B)and employer's portion of FICA taxes, and unemployment taxes.
C)portion of FICA taxes, unemployment taxes, and any voluntary deductions.
D)portion of FICA taxes, and any voluntary deductions.

Question 38

Which of the following is a current liability?

A)Preferred dividends in arrears
B)A dividend payable in the form of additional shares of stock
C)A cash dividend payable to preferred stockholders
D)All of these

Question 39

Which of the following statements is correct?

A)A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
B)A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
C)A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
D)None of these.

Question 40

Which of the following is a current liability?

A)A long-term debt maturing currently, which is to be paid with cash in a sinking fund
B)A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
C)A long-term debt maturing currently, which is to be converted into common stock
D)None of these

Question 41

Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007.Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months.The management of Lopez estimates that this recall would cost $800,000.What accounting recognition, if any, should be accorded this situation?

A)No recognition
B)Note disclosure only
C)Operating expense of $800,000 and liability of $800,000
D)Appropriation of retained earnings of $800,000

Question 42

The numerator of the acid-test ratio consists of

A)total current assets.
B)cash and marketable securities.
C)cash and net receivables.
D)cash, marketable securities, and net receivables.

Question 43

Which of the following is not acceptable treatment for the presentation of current liabilities?

A)Listing current liabilities in order of maturity
B)Listing current liabilities according to amount
C)Offsetting current liabilities against assets that are to be applied to their liquidation
D)Showing current liabilities immediately below current assets to obtain a presentation of working capital

Question 44

Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?

A)Probable losses not reasonably estimable
B)Environmental liabilities that cannot be reasonably estimated
C)Guarantees of indebtedness of others
D)All of these must be disclosed.

Question 45

Edson Corp.signed a three-month, zero-interest-bearing note on November 1, 2007 for the purchase of $150,000 of inventory.The face value of the note was $152,205.Assuming Edson used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2007 will include a

A)debit to Discount on Note Payable for $735.
B)debit to Interest Expense for $1,470.
C)credit to Discount on Note Payable for $735.
D)credit to Interest Expense for $1,470.

Question 46

Use of the accrual method in accounting for product warranty costs

A)is required for federal income tax purposes.
B)is frequently justified on the basis of expediency when warranty costs are immaterial.
C)finds the expense account being charged when the seller performs in compliance with the warranty.
D)represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Question 47

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs.Any liability for the warranty

A)should be reported as long-term.
B)should be reported as current.
C)should be reported as part current and part long-term.
D)need not be disclosed.

Question 48

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

A)Amount of loss is reasonably estimable and event occurs infrequently.
B)Amount of loss is reasonably estimable and occurrence of event is probable.
C)Event is unusual in nature and occurrence of event is probable.
D)Event is unusual in nature and event occurs infrequently.

Question 49

Accrued liabilities are disclosed in financial statements by

A)a footnote to the statements.
B)showing the amount among the liabilities but not extending it to the liability total.
C)an appropriation of retained earnings.
D)appropriately classifying them as regular liabilities in the balance sheet.

Question 50

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties.The amount of the loss involved can be reasonably estimated.Based on the above facts, an estimated loss contingency should be

A)accrued.
B)disclosed but not accrued.
C)neither accrued nor disclosed.
D)classified as an appropriation of retained earnings.

Question 51

Which of the following is the proper way to report a gain contingency?

A)As an accrued amount.
B)As deferred revenue.
C)As an account receivable with additional disclosure explaining the nature of the contingency.
D)As a disclosure only.

Question 52

The ratio of current assets to current liabilities is called the

A)current ratio.
B)acid-test ratio.
C)current asset turnover ratio.
D)current liability turnover ratio.

Question 53

Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued.A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

A)the Marx Company admits guilt.
B)the court will decide the case within one year.
C)the damages appear to be material.
D)the cause for action occurred during the accounting period covered by the financial statements.

Question 54

Mayberry Co.has a loss contingency to accrue.The loss amount can only be reasonably estimated within a range of outcomes.No single amount within the range is a better estimate than any other amount.The amount of loss accrual should be

A)zero.
B)the minimum of the range.
C)the mean of the range.
D)the maximum of the range.

Question 55

A contingent liability

A)definitely exists as a liability but its amount and due date are indeterminable.
B)is accrued even though not reasonably estimated.
C)is not disclosed in the financial statements.
D)is the result of a loss contingency.

Question 56

Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad.On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned.Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land.The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire.Ward appears inclined to accept the Railroad's offer.The Railroad's 2007 financial statements should include the following related to the incident:

A)recognition of a loss and creation of a liability for the value of the land.
B)recognition of a loss only.
C)creation of a liability only.
D)disclosure in note form only.

Question 57

A contingency can be accrued when

A)it is certain that funds are available to settle the disputed amount.
B)an asset may have been impaired.
C)the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
D)it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

Question 58

To record an asset retirement obligation (ARO), the cost associated with the ARO is

A)expensed.
B)included in the carrying amount of the related long-lived asset.
C)included in a separate account.
D)none of these.

Question 59

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

A)be accrued during the period when the compensated time is expected to be used by employees.
B)be accrued during the period following vesting.
C)be accrued during the period when earned.
D)not be accrued unless a written contractual obligation exists.

Question 60

A company is legally obligated for the costs associated with the retirement of a long-lived asset

A)only when it hires another party to perform the retirement activities.
B)only if it performs the activities with its own workforce and equipment.
C)whether it hires another party to perform the retirement activities or performs the activities itself.
D)when it is probable the asset will be retired.

Question 61

Wellman Company self insures its property for fire and storm damage.If the company were to obtain insurance on the property, it would cost them $1,000,000 per year.The company estimates that on average it will incur losses of $800,000 per year.During 2007, $350,000 worth of losses were sustained.How much total expense and/or loss should be recognized by Wellman Company for 2007?

A)$350,000 in losses and no insurance expense
B)$350,000 in losses and $450,000 in insurance expense
C)$0 in losses and $800,000 in insurance expense
D)$0 in losses and $1,000,000 in insurance expense

Question 62

A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year.The vacation accumulates and may be taken starting January 1 of the next year.The employees work 8 hours per day.In 2007, they made $17.50 per hour and in 2008 they made $20 per hour.During 2008, they took an average of 9 days of vacation each.The company's policy is to record the liability existing at the end of each year at the wage rate for that year.What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively?

A)$84,000; $117,000
B)$96,000; $120,000
C)$84,000; $120,000
D)$96,000; $117,000

Question 63

A company buys an oil rig for $2,000,000 on January 1, 2007.The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220).10% is an appropriate interest rate for this company.What expense should be recorded for 2007 as a result of these events?

A)Depreciation expense of $240,000
B)Depreciation expense of $200,000 and interest expense of $15,422
C)Depreciation expense of $200,000 and interest expense of $40,000
D)Depreciation expense of $215,420 and interest expense of $15,422

Question 64

Use the following information for questions
Raney Co.is a retail store operating in a state with a 6% retail sales tax.The retailer may keep 2% of the sales tax collected.Raney Co.records the sales tax in the Sales account.The amount recorded in the Sales account during May was $148,400.
The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is

A)$8,551.
B)$8,232.
C)$8,726.
D)$9,249.

Question 65

Use the following information for questions
Raney Co.is a retail store operating in a state with a 6% retail sales tax.The retailer may keep 2% of the sales tax collected.Raney Co.records the sales tax in the Sales account.The amount recorded in the Sales account during May was $148,400.
The amount of sales taxes (to the nearest dollar) for May is

A)$8,726.
B)$8,400.
C)$8,904.
D)$9,438.

Question 66

The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 10% is

A)10.87%.
B)10%.
C)9.09%.
D)11.11%.

Question 67

Use the following information for questions
Simson Company has 35 employees who work 8-hour days and are paid hourly.On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year.Vacation days earned in 2006 may first be taken on January 1, 2007.Information relative to these employees is as follows: $\begin{array}{rrrr}& \text { Hourly } & \text { Vacation Days Earned } &\text { Vacation Days Used}\\\text { Year } & \text { Wages } & \text { by Each Employee }&\text {by Each Emplovee }\\2006 & \$ 25.80 & 10 & 0 \\2007 & 27.00 & 10 & 8 \\2008 & 28.50 & 10 & 10\end{array}$ Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.

-What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2008?

A)$94,920.
B)$90,720.
C)$79,800.
D)$95,760.

Question 68

A company buys an oil rig for $1,000,000 on January 1, 2007.The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110).10% is an appropriate interest rate for this company.What expense should be recorded for 2007 as a result of these events?

A)Depreciation expense of $120,000
B)Depreciation expense of $100,000 and interest expense of $7,711
C)Depreciation expense of $100,000 and interest expense of $20,000
D)Depreciation expense of $107,710 and interest expense of $7,711

Question 69

The total payroll of Waters Company for the month of October, 2007 was $360,000, of which $90,000 represented amounts paid in excess of $90,000 to certain employees.$300,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes.$90,000 of federal income taxes and $9,000 of union dues were withheld.The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A.tax is 7.65% on an employee's wages to $90,000 and 1.45% in excess of $90,000.What amount should Waters record as payroll tax expense?

A)$118,620.
B)$113,040.
C)$23,040.
D)$28,440.

Question 70

A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007.Historically, 10% of customers mail in the rebate form.During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers.What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?

A)$600,000; $600,000
B)$600,000; $390,000
C)$390,000; $390,000
D)$210,000; $390,000

Question 71

Timmons Co., which has a taxable payroll of $500,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%.However, because of stable employment experience, the company's state rate has been reduced to 2%.What is the total amount of federal and state unemployment tax for Timmons Co.?

A)$58,500
B)$41,000
C)$20,000
D)$14,000

Question 72

On December 31, 2006, Frye Co.has $2,000,000 of short-term notes payable due on February 14, 2007.On January 10, 2007, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $1,500,000 at one percent above the prime rate for three years.On February 2, 2007, Frye borrowed $1,200,000 from County Bank and used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable.The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2006 balance sheet which is issued on March 5, 2007 is

A)$0.
B)$300,000.
C)$500,000.
D)$800,000.

Question 73

Holbert Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 shares of common stock.If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

A)$1,500,000
B)$2,500,000
C)$1,000,000
D)$0

Question 74

Trent, Inc., is a retail store operating in a state with a 5% retail sales tax.The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month.If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected.On April 10, 2007, Trent remitted $81,480 tax to the state tax division for March 2007 retail sales.What was Trent 's March 2007 retail sales subject to sales tax?

A)$1,629,600.
B)$1,596,000.
C)$1,680,000.
D)$1,645,000.

Question 75

Use the following information for questions
Simson Company has 35 employees who work 8-hour days and are paid hourly.On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year.Vacation days earned in 2006 may first be taken on January 1, 2007.Information relative to these employees is as follows: $\begin{array}{rrrr}& \text { Hourly } & \text { Vacation Days Earned } &\text { Vacation Days Used}\\\text { Year } & \text { Wages } & \text { by Each Employee }&\text {by Each Emplovee }\\2006 & \$ 25.80 & 10 & 0 \\2007 & 27.00 & 10 & 8 \\2008 & 28.50 & 10 & 10\end{array}$ Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.

-What is the amount of expense relative to compensated absences that should be reported on Simson's income statement for 2006?

A)$0.
B)$68,880.
C)$75,600.
D)$72,240.

Question 76

Unruh Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%.However, because of stable employment experience, the company's state rate has been reduced to 2%.What is the total amount of federal and state unemployment tax for Unruh Co.?

A)$46,800
B)$32,800
C)$16,000
D)$11,200

Question 77

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007.Historically, 10% of customers mail in the rebate form.During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers.What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?

A)$400,000; $400,000
B)$400,000; $260,000
C)$260,000; $260,000
D)$140,000; $260,000

Question 78

Grogan Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 60,000 shares of common stock.If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

A)$1,200,000
B)$1,800,000
C)$600,000
D)$0

Question 79

A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year.The vacation accumulates and may be taken starting January 1 of the next year.The employees work 8 hours per day.In 2007, they made $14 per hour and in 2008 they made $16 per hour.During 2008, they took an average of 9 days of vacation each.The company's policy is to record the liability existing at the end of each year at the wage rate for that year.What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively?

A)$67,200; $93,600
B)$76,800; $96,000
C)$67,200; $96,000
D)$76,800; $93,600

Question 80

On February 10, 2007, after issuance of its financial statements for 2006, Flynn Company entered into a financing agreement with Lebo Bank, allowing Flynn Company to borrow up to $4,000,000 at any time through 2009.Amounts borrowed under the agreement bear interest at 2% above the bank's prime interest rate and mature two years from the date of loan.Flynn Company presently has $1,500,000 of notes payable with First National Bank maturing March 15, 2007.The company intends to borrow $2,500,000 under the agreement with Lebo and liquidate the notes payable to First National.The agreement with Lebo also requires Flynn to maintain a working capital level of $6,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank.From the above information only, the total short-term debt of Flynn Company as of the December 31, 2007 balance sheet date is

A)$0.
B)$1,500,000.
C)$2,000,000.
D)$4,000,000.