Deck 9: Liabilities

Question 1

Which of the following is a characteristic of a liability?

A)It must require a sacrifice of economic resources.
B)It may be the result of future transactions.
C)The exact amount due must be known.
D)It may be avoidable.

Answer 1

A

Question 2

Which of the following most likely would be classified as a current liability?

A)Dividends payable
B)Bonds payable
C)Three-year notes payable
D)Mortgage payable

Answer 2

A

Question 3

All of the following are current liabilities except?

A)Dividends payable
B)Term loan
C)GST payable
D)Income taxes payable

Answer 3

B

Question 4

Summerside Inc.has a term loan outstanding of $500,000 with an interest rate of 8%.They make interest payments quarterly, and the last one was November 30, 2013.They will start making payments on the loan in 2014 and will repay it in 10 equal annual instalments.What amount would be reported on their December 31, 2013, balance sheet related to the loan? $$\begin{array} { l r r } & \begin{array} { r } \text { Current } \\\text { Liabilities }\end{array} & \begin{array} { r } \text { Long-term } \\\text { Liabilities }\end{array} \\\text { A) } & \$ 0 & \$ 500,000 \\\text { B) } & \$ 3,333 & \$ 500,000 \\\text { C) } & \$ 53,333 & \$ 450,000 \\\text { D) } & \$ 60,000 & \$ 450,000\\\end{array}$$

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

Question 5

All of the following are current liabilities except?

A)Demand loan
B)Line of credit
C)Mortgage
D)Income taxes payable

Question 6

Drogan Ltd.issued a five-year interest-bearing note payable for $65,000 on January 1, 2014.Each January the company is required to pay $15,000 on the note.How will this note be reported on the December
31, 2014 balance sheet?

A)Long-term debt, $65,000
B)Long-term debt, $50,000
C)Long-term debt, $50,000; long-term debt due within one year, $5,000
D)Long-term debt, $50,000; long-term debt due within one year, $15,000

Question 7

Which of the following liabilities would be valued at their present value?

A)Unearned revenue
B)Operating bank loan
C)Future taxes
D)10-year mortgage

Question 8

When a company makes a sale and charges GST on the sale, the entry to record the sale will include which of the following?

A)A debit to GST payable
B)A debit to GST expense
C)A credit to GST payable
D)A credit to GST expense

Question 9

According to IFRS, all of the following are characteristics of a liability except:

A)obligations to provide goods or services to a third party.
B)obligations arising from past transactions.
C)events that will require sacrificing economic resources to settle.
D)obligations that will be settled with current assets.

Question 10

All of the following statements about current liabilities are true except?

A)Current liabilities are valued at their present value.
B)Current liabilities are important for assessing short-term liquidity.
C)Current liabilities will be satisfied in a year or one operating cycle.
D)The difference between the present value and the face value of a current liability is small.

Question 11

Chi Consulting purchased a new computer system and in return signed a three-year $30,000 non-interest-bearing note payable.An investigation by the company's accountant revealed that similar notes have market rates of interest around 8%.At what value should the note payable be initially recorded on Chi's financial statements?

A)$30,000
B)$10,000
C)$25,771
D)$23,815

Question 12

Failure to record a liability will probably:

A)result in overstated total liabilities and shareholders' equity.
B)result in overstated net earnings.
C)have no effect on net earnings.
D)result in overstated total assets.

Question 13

All of the following are examples of an accrued liability except?

A)Wages payable
B)Interest payable
C)Warranties payable
D)GST payable

Question 14

When the bond issuer has the option to repurchase the bond from investors at a time other than the maturity date, the bonds are called:

A)non-convertible bonds.
B)convertible bonds.
C)callable bonds.
D)retractable bonds.

Question 15

All of the following liabilities would be valued at their present value except?

A)Bonds payable
B)Pension obligations
C)Unearned revenue
D)10-year mortgage

Question 16

Which of the following best describes an accrued liability?

A)A liability whose amount can only be estimated.
B)A liability whose recording has not been triggered by an external event.
C)A liability whose related expense is not recognized until the next period.
D)A liability whose recording was triggered by an internal event.

Question 17

On January 15, 2014, Dartmouth Ltd.declared its regular quarterly dividend.It will be paid on February 15, 2014.Which of the following monthly balance sheets would have a dividend payable account reported on it?

A)December 31, 2013
B)January 14, 2014
C)January 31, 2014
D)February 28, 2014

Question 18

A company bought an asset and signed a four-year non-interest-bearing note for the full amount.If the note were recorded at its face value, which of the following statements would be true?

A)Only liabilities will be understated.
B)Only liabilities will be overstated.
C)Both assets and liabilities will be overstated.
D)Both assets and liabilities will be understated.

Question 19

Pluto Roofing Limited reported the following items on its balance sheet at December 31, 2014: $$\begin{array} { l r } \text { Bonds, } 11 \text { percent, (maturity, June } 30,2024 ) & \$ 200,000 \\\text { Dividends payable } & 100,000 \\\text { Accrued wages payable } & 30,000 \\\text { Note payable, } 13 \text { percent, due } 12 / 31 / 2016 & 80,000 \\\text { Interest payable } & 57,000 \\\text { Income taxes payable } & 29,000\end{array}$$ Current liabilities at December 31, 2014, were:

A)$116,000
B)$187,000
C)$216,000
D)$296,000

Question 20

Grand Falls Inc.has a term loan outstanding of $500,000 with an interest rate of 8%.They make interest payments quarterly, and the last one was November 30, 2014.What amount would be reported as interest payable on their December 31, 2014, balance sheet?

A)$0
B)$3,333
C)$10,000
D)$40,000

Question 21

On its most recent balance sheet date, Lancer Corp.has notes payable totalling $250,000 with the United Bank.These are 90-day notes, renewable for another 90-day period.These notes should be classified on the balance sheet of Lancer Corp.as:

A)current liabilities.
B)deferred charges.
C)long-term liabilities.
D)shareholders' equity.

Question 22

When accounting for the interest on bonds payable, the cash interest paid in each period is:

A)the same amount regardless of whether the bond was sold at par, a discount, or a premium.
B)different depending upon the date of sale.
C)higher when the effective rate of interest on the bond is greater than the coupon rate.
D)higher when the bond interest expense is calculated using the effective interest amortization.

Question 23

Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%.Interest is paid semi-annually.The company uses the effective interest method to amortize all bond premiums and discounts.What will be the interest expense on the first payment date?

A)$300
B)$368
C)$400
D)$736

Question 24

If a bond sells at a discount, the amortization of the discount will:

A)increase the interest expense.
B)decrease the interest expense.
C)increase the cash payment for interest.
D)have no effect on the interest expense.

Question 25

When will a bond sell at its face value?

A)When the coupon rate is equal to the effective rate.
B)When the coupon rate is greater than the effective rate.
C)When the coupon rate is less than the effective rate.
D)Only on the issue date.

Question 26

What is a loan that provides the borrower's property as collateral called?

A)A bond
B)A debenture
C)A mortgage
D)A note payable

Question 27

During 2014 PAG Ltd., a clothing store, sold gift certificates totalling $42,500.By December 31, $18,250 of them had been redeemed for merchandise.What would be reported on PAG's financial statements for 2014 related to the sale and redemption of the gift certificates?

A)Sales $42,500, Accounts receivable $24,250.
B)Sales $42,500, Unearned revenue $24,250.
C)Sales $18,250, Accounts receivable $24,250.
D)Sales $18,250, Unearned revenue $24,250.

Question 28

If a bond sells at a premium, the amortization of the premium will:

A)increase the interest expense.
B)decrease the interest expense.
C)decrease the cash payment for interest.
D)have no effect on the interest expense.

Question 29

What is the term for a formal borrowing arrangement that includes collateral, in which a borrower agrees to make periodic interest payments to the lender as well as repay the principal at a specific time in the future?

A)A bond
B)A debenture
C)A mortgage
D)A note payable

Question 30

What is the term for a formal borrowing arrangement that includes collateral in which a borrower agrees to make blended payments of principal and interest to the lender on a periodic basis until the debt has been paid?

A)A bond
B)A debenture
C)A mortgage
D)A note payable

Question 31

Iqualuit Inc.issued a 20-year, $100,000 bond with a semi-annual coupon rate of 4% when market interest rates were 6%.What were the proceeds of the bond at the time of issue?

A)$76,885
B)$77,060
C)$100,000
D)$127,355

Question 32

Prince Rupert Corporation issued a 15-year, $200,000 bond with a semi-annual coupon rate of 6% when market rates were 4%.What were the proceeds of the bond at the time of issue?

A)$177,763
B)$200,000
C)$244,473
D)$244,792

Question 33

Ralston Company sold and issued a $100,000, 10%, bond at 99.Which of the following statements is true?

A)The bond sold at a discount because the coupon interest rate was lower than the effective interest rate.
B)The bond sold at a premium because the coupon rate was higher than the effective interest rate.
C)The bond sold at a discount because the $1,000 accrued interest is added to the $100,000 face amount.
D)The bond sold for $100,000 less $1,000 of accrued interest.

Question 34

Accounting for GST includes which of the following?

A)Crediting GST Payable to record GST paid on inventory for resale.
B)Crediting GST Receivable to record GST collected from customers.
C)Debiting GST Payable to record GST paid to suppliers.
D)Debiting GST Payable to record GST collected from customers.

Question 35

Inuvik Inc.sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%.Interest is paid semi-annually.If Inuvik uses the effective interest rate method, which of the following is the correct entry to record the first interest payment? $$\begin{array} { l r r } \text { A) Dr Interest expense } & 3,000 \\\quad \text { Cr. Interest payable } & & 3,000 \\\text { B) Dr. Interest expense } & 3,000 & \\\text { Dr. Discount on bond } & 680 & \\\text { Cr. Cash } & & 3,680 \\\text { C) Dr. Interest expense } & 3,456 & \\\quad \text { Cr. Discount on bond } & & 456 \\\text { Cr. Cash } & & { 3,000 } \\\text { D) Dr. Discount on bond } & 3,456 & \\\quad \text { Cr. Cash } & { 3,456 }\end{array}$$

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

Question 36

Timmins Ltd.is issuing bonds today to finance the expansion of their production facilities.If Timmins thinks that interest rates are going to fall over the next few years, while the bond is outstanding, what feature might they want to add to the bond?

A)Make it callable.
B)Make it retractable.
C)Make it convertible.
D)Make the effective interest rate lower than the coupon rate.

Question 37

What is a bond that gives the issuer the option to repurchase the bond from investors at a time other than the maturity date called?

A)Callable bond
B)Convertible bond
C)Retractable bond
D)Purchasable bond

Question 38

Kinizi Incorporated sold a $10,000, 6%, 5-year bond for $9,189 to yield 8%.Interest is paid semi-annually.The company uses the effective interest method to amortize all bond premiums and discounts.How much of the discount is amortized at the first payment date?

A)$0
B)$68
C)$81
D)$152

Question 39

Wu Company estimates its annual warranty expenses at 2 percent of annual net sales.The following details are extracted from its financial statements: $\begin{array}{l}\text {Net sales }&\$ 4,000,000\\\text { Warranty liability account: }\\\text { January } 1,2014, \text { balance } & \$ 70,000 \text { credit } \\\text { Warranty payments during } 2014 & \$ 60,000 \text { debit }\end{array}$ After recording the 2014 warranty expense, the warranty liability account would show a December 31, 2014, balance of:

A)$70,000
B)$80,000
C)$90,000
D)$150,000

Question 40

Gander Inc.had a term loan outstanding throughout the year of $500,000 with an interest rate of 8%.They make interest payments quarterly, and the last one was November 30, 2013.The next payment on the loan, $50,000, is due December 31, 2013.What amount would be reported on Gander's income statement for the year ended December 31, 2013, related to the loan?

A)$3,333
B)$10,000
C)$40,000
D)$53,333

Question 41

Under IFRS, gains and losses due to changes in interest rates on long term debt subsequent to issuance are recorded in which of the following?

A)Net income
B)Retained earnings
C)Gains and losses are not recognized in the financial statements
D)Comprehensive income

Question 42

When compared with a company recording an asset as a capital lease, the return-on-assets (ROA) and debt-to-equity for a company using an operating lease are: $$\begin{array} { l l l } & \text { ROA } & \text { Debt-to-equity } \\\hline\text { A) } & \text { Higher } & \text { Higher } \\\text { B) } & \text { Higher } & \text { Lower } \\\text { C) } & \text { Lower } & \text { Higher } \\\text { D) } & \text { Lower } & \text { Lower }\end{array}$$

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

Question 43

In a defined-benefit pension plan, the relationship between the amount funded and the amount reported as pension expense is as follows:

A)pension expense must equal the amount funded.
B)pension expense will be less than the amount funded.
C)pension expense will be more than the amount funded.
D)pension expense may be greater than, equal to, or less than the amount funded.

Question 44

An analyst is reviewing the financial statements of a company and notices that the company reports a pension liability on its balance sheet.What does the pension liability represent?

A)The present value of all future pension obligations.
B)The amount of this year's pension expense that has not been paid yet.
C)The increase in the pension obligation that was earned this year.
D)The difference between the pension plan obligations and the pension plan assets.

Question 45

Brandon Corporation has leased an asset that they are correctly recording as a capital lease.When they signed the lease the asset was recorded at $39,925.The interest rate used in the calculations is 8%, the asset has an expected useful life to Brandon of 8 years, and the annual lease payment is $10,000.The total expense related to the lease reported on Brandon's income statement in the first year of the lease is closest to?

A)$3,194
B)$4,990
C)$8,184
D)$10,000

Question 46

On January 1, 2014, Alert Construction signed a lease for a machine for $15,000 per year for 7 years.The first payment is due on December 31, 2014.The lease covers 70 per cent of the asset's useful life, and Alert expects to return the asset at the end of the lease.If Alert had borrowed money to buy the machine, they estimate the interest rate would have been 8%.The expense that would be recorded for the lease on the income statement in 2014 is closest to?

A)$6,247
B)$7,809
C)$14,056
D)$15,000

Question 47

All of the following are criteria for capitalizing a lease except?

A)It is likely that the lessee will ultimately get ownership of the asset.
B)The lessor and the lessee are unrelated companies.
C)The lease term is long enough that the lessee receives most of the economic benefits of the asset.
D)The present value of the lease payments is equal to most of the fair value of the asset.

Question 48

How is the pension expense calculated for a defined-contribution pension plan?

A)Based on the required contributions made by the employer.
B)Based on the required contributions made by the employer and employee.
C)Based on the expected portion of the future benefits that were earned that period.
D)Based on the actual contributions made by the employer and employee.

Question 49

How is the pension expense calculated for a defined-benefit plan?

A)Based on the contributions made by the employer that year.
B)Based on the expected portion of future benefits that were earned that period.
C)Based on the expected portion of current benefits that were earned that period
D)Based on the amount that the employer should contribute this year to meet the future expected benefit earned this year.

Question 50

If a company has an operating lease for an asset, which of the following entries for the lease payment is correct?
a) Dr. Lease obligation
Cr. Cash
b) Dr. Amortization expense
Cr. Cash
c) Dr. Rent expense
Dr. Amortization expense
Cr. Cash
d) Dr. Rent expense
Cr. Cash

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

Question 51

On January 1, 2014, O'Connor Construction signed a lease for a machine for $15,000 per year for 8 years.The first payment is due on December 31, 2014.The lease covers 80 per cent of the asset's useful life, and O'Connor expects to keep the asset till the end of the lease.If O'Connor had borrowed money to buy the machine, they estimate the interest rate would have been 8%.The expense that would be recorded for the lease on the income statement in 2014 is closest to?

A)$6,896
B)$8,620
C)$15,000
D)$15,516

Question 52

Which of the following would most likely be recorded as a capital lease for accounting purposes?

A)The 15-year lease on the company's head office space.
B)The 3-year leases on the salesmen's cars.
C)The 20-year lease on a piece of manufacturing equipment.
D)The 48-month lease on the office photocopier.

Question 53

In 2010 Coopermine Ltd.issued 10-year, 5% coupon bonds at par.In 2013 interest rates on similar debt have increased to 6%.What is the effect of the change in interest rates on Coopermine Ltd.'s 2013 financial statements?

A)They would record a gain on the change in value of the bond.
B)They would record a loss on the change in value of the bond.
C)The interest expense they record will increase.
D)There is no effect.

Question 54

Most of the information regarding a company's long term debt can be found:

A)on the balance sheet.
B)in the management discussion and analysis section of the annual report.
C)in the notes to the financial statements.
D)on the cash flow statement.

Question 55

Which of the following criteria would lead to a lease's being accounted for as a capital lease?

A)The lease is for real property.
B)The lease term is for four years, while the asset's useful life is ten years.
C)The present value of the minimum lease payments is $92,000, while the fair market value of the leased asset is $100,000.
D)The lease asset is guaranteed to revert to the lessor at the end of the lease term.

Question 56

An analyst is reviewing the financial statements of a company and notices that the company reports a pension plan asset on its balance sheet.What does the pension plan asset represent?

A)The market value of all pension plan assets.
B)The amount of next year's pension expense that has been prepaid.
C)The current year's contributions to the pension.
D)The difference between the pension plan obligations and the pension plan assets.

Question 57

Under IFRS, if an interest rate decreases after a bond is issued, the company should:

A)recognize an unrealized gain in other comprehensive income.
B)recognize a gain in net income.
C)ignore the changes in the interest rates.
D)disclose the market value of debt in the notes to the financial statements.

Question 58

If a company had capitalized a lease on an asset, which of the following entries for the lease payment would be correct?
a) Dr. Lease obligation
Cr. Cash
b) Dr. Amortization expense Cr. Cash
c) Dr. Lease obligation
Dr. Amortization expense Cr. Cash
d) Dr. Interest expense
Dr. Lease obligation
Cr. Cash

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

Question 59

Johan Limited.has a $100,000 bond outstanding with an unamortized discount of $5,679.The company has decided to retire the bonds for a cost of $102,000.The journal entry to record the retirement of the bonds will include which of the following?

A)Loss on redemption of bonds, $5,679.
B)Gain on redemption of bonds, $5,679.
C)Loss on redemption of bonds, $7,679.
D)Gain on redemption of bonds, $7,679.

Question 60

Kingston Corporation recently retired $1,000,000 worth of bonds early for $997,500.They reported a gain related to the retirement of the bonds of $24,250.What was the unamortized bond discount or premium at the time of retirement?

A)$21,750 premium
B)$24,250 premium
C)$26,750 premium
D)$21,750 discount

Question 61

Contingent liabilities will become actual liabilities depending on:

A)the outcome of a future event.
B)the degree of uncertainty surrounding the outcome of a future event.
C)a decision by the board of directors to record the liability.
D)whether they are probable and estimable.

Question 62

Which of the following commitments would not require disclosure in the financial statement notes?

A)Major property, plant and equipment expenditures.
B)Payments under non-cancellable operating leases.
C)Large purchases of materials from a regular supplier
D)Commitments involving significant risk.

Question 63

74. (p. 550) In January 2015, one of Whale Cove Company's major customers went bankrupt. The customer owed Whale Cove a large account receivable at the year-end, and estimates now indicate that they will likely only collect about one-quarter of the amount owed.How should this event be reflected in Whale Cove's December 31, 2014, financial statements?

A)Accrued as a contingent loss.
B)Disclosed as a contingent loss.
C)Accrued in the allowance for doubtful accounts.
D)Disclosed as a subsequent event.

Question 64

Just before the end of the year, Matawan Inc., entered into a contract with a supplier to purchase $100,000 of product per year over the next 5 years.The amount is a significant amount of their annual purchases.How should the contract be reflected in the current financial statements?

A)Accrued as a contingent liability.
B)Accrued as an accrued liability.
C)Disclosed as a contingent liability in the notes to the financial statements.
D)Disclosed as a commitment in the notes to the financial statements.

Question 65

A company borrows money at the rate of 10% and has a tax rate of 25%.What is their after-tax cost of borrowing?

A)2.5%
B)7.5%
C)10%
D)12.5%

Question 66

Gain contingencies, which are significant and likely and can be reasonably estimated:

A)should be disclosed in a note to the financial statements.
B)should be reported in the body of the financial statements.
C)may be reported in the body of the financial statements.
D)should not be reported or disclosed until the gain is realized.

Question 67

71. (p. 549) A company should disclose a commitment made to purchase something in the future in all of the following situations except:

A)if it involves an unusual degree of risk.
B)if it is in the normal course of business.
C)if it involves a significant expenditure.
D)if it commits the entity to issue shares.

Question 68

A company paid total interest on its debt last year of $400,000 and also paid out $250,000 in dividends.If their tax rate is 40%, what was the after-tax cost to the company of each of those sources of financing? $\begin{array}{lll}&\text { Interest } & \text { Dividends }\\a)&\$ 400,000 & \$ 250,000 \\b)&\$ 400,000 & \$ 150,000 \\c)&\$ 240,000 & \$ 250,000 \\d)&\$ 240,000 & \$ 150,000\end{array}$

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

Question 69

On February 1, 2014, Burnaby Company renewed its banking arrangements with its principle bank.None of the terms of their loans changed.How should this event be reflected in Burnaby's December 31, 2013, financial statements?

A)Disclosed as a purchase commitment.
B)Disclosed as a subsequent event.
C)Accrued as a current liability.
D)It is not reflected in Burnaby's financial statement.

Question 70

A contingent liability, which is significant, probable, and can be reasonably estimated:

A)should be disclosed in a note to the financial statements.
B)should be reported as a provision in the body of the financial statements.
C)may be reported in the body of the financial statements.
D)should not be reported or disclosed.

Question 71

Which of the following ratios can be used to evaluate an entity's capital structure?

A)Current ratio
B)Debt-to-equity
C)Interest-coverage ratio
D)Return-on-assets

Question 72

A former employee was fired last year for stealing $500 from the company's petty cash drawer.The former employee is now suing the company for wrongful dismissal on the grounds that they should never have put him in-charge of the petty cash drawer.The company's lawyer does not think there is any chance the employee could win their suit.How should the company report the situation?

A)They should go back and restate the income statement from last year.
B)They should accrue a liability this period.
C)They should disclose the potential liability this period.
D)They should do nothing.

Question 73

All of the following are examples of contingent losses except?

A)Lawsuits
B)Income tax reassessments
C)Guarantees of third party debt
D)Warranties

Question 74

What is the term used to describe how an entity is financed?

A)Capital structure
B)Leverage
C)Shareholders' equity
D)Obligation

Question 75

Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.If they are reassessed, the amount they will owe could be as high as $2,000,000.Their accountant has been unable to tell them how likely it is that they will owe the additional taxes.This is an example of which of the following?

A)An accrued liability
B)A contingent liability
C)A contingent asset
D)A future income tax liability

Question 76

A contingent liability or asset whose existence and amount has to be confirmed by some future event:

A)should be disclosed in a note to the financial statements.
B)should be reported as a provision in the body of the financial statements.
C)may be reported in the body of the financial statements.
D)should not be reported or disclosed.

Question 77

Which of the following is an example of an executory contract?

A)A warranty obligation on a product sold.
B)Interest accrued on an outstanding loan.
C)An agreement to purchase inventory next month.
D)The purchase of goods from a supplier.

Question 78

How is the pension expense calculated for a defined-contribution plan?

A)Based on the contributions made by the employer that year.
B)Based on the expected portion of future benefits that were earned that period.
C)Based on the expected portion of current benefits that were earned that period
D)Based on the amount that the employer should contribute this year to meet the future expected benefit earned this year.

Question 79

On February 1, 2016, White Rock Company retired some bonds it had outstanding.How should this event be reflected in White Rock's December 31, 2015, financial statements?

A)Disclosed as a contingent gain.
B)Disclosed as a subsequent event.
C)Accrued as a gain on bond retirement.
D)It is not reflected in White Rock's financial statement.

Question 80

Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.If they are reassessed, the amount they will owe could be as high as $2,000,000.Neither their accountant nor their attorney has been able to tell them how likely it will be that they will owe the additional taxes.How should Portage La Prairie Company report the situation?

A)They should go back and restate the income statement from two years ago.
B)They should accrue a liability this period.
C)They should disclose the potential liability in the notes.
D)They should do nothing.