Deck 7: Accounting for and Presentation of Liabilities

Question 1

Many current liabilities are affected by accrual accounting entries. This happens because:

A) liabilities are usually paid when they are incurred.
B) accrual accounting involves recognizing liabilities before they are paid.
C) the only way to reduce a liability account balance is with an adjusting entry.
D) accrual accounting frequently involves recognizing liabilities before they are incurred.

Answer 1

B

Question 2

Current maturities of long-term debt:

A) reflect overdue installments of bonds payable.
B) are classified with long-term debt.
C) represent cash that has been set aside for debt payments due within a year.
D) permit a more accurate determination of working capital.

Answer 2

D

Question 3

The current liability for Wages Payable (or Accrued Payroll) represents the:

A) gross pay earned by employees for which they have not yet been paid.
B) net pay earned by employees for which they have not yet been paid.
C) employer's federal and state payroll tax obligation.
D) employer's liability for various withholdings that taken out of the gross pay earned by employees.

Answer 3

B

Question 4

A loan discount is:

A) a loan used to purchase a bond at a discount.
B) a discount market interest rate on a loan.
C) the same as a bond discount.
D) None of these.

Question 5

A transaction that is likely to cause an increase in a current liability is:

A) payment of accrued wages.
B) accrual of interest expense.
C) depreciation of equipment.
D) accrual of bad debts expense.

Question 6

A working capital loan will generally:

A) not have an interest rate.
B) require that interest (if any) be paid monthly.
C) not affect working capital.
D) be classified as a noncurrent liability.

Question 7

Which of the following is not usually associated with bonds?

A) Coupon rate.
B) Maturity value.
C) Face amount.
D) Maturity rate.

Question 8

Which of the following is a true statement regarding interest calculation methods?

A) Interest is calculated on either a straight-basis or a delayed-basis.
B) Interest is calculated on either a straight-basis or an undiscounted-basis.
C) If a borrower receives a loan on a discount-basis, the APR will be less than the simple interest.
D) If a borrower receives a loan on a discount-basis, the APR will be more than the simple interest rate.

Question 9

Computing a borrower's effective interest rate is another application of which of the following concepts?

A) Present value concept.
B) Current value concept.
C) Periodic interest concept.
D) None of these.

Question 10

Bonner's, Inc. borrowed $12,000 for 4 months on a discount basis. The lender used an interest rate of 8% to calculate the discount. The amount of cash Bonner's, Inc. actually had available to use from this loan was:

A) $11,040.
B) $11,680.
C) $12,000.
D) $12,320.

Question 11

The adjusting entry to accrue Interest Expense results in:

A) an increase in Interest Expense.
B) a decrease in Interest Expense.
C) a decrease in Cash.
D) a decrease in Interest Payable.

Question 12

The payment of a current liability will:

A) decrease net income.
B) decrease working capital.
C) increase working capital.
D) not affect working capital.

Question 13

Cassady, Inc. borrowed $5,000 for 3 months at an APR of 10%. The amount of interest paid on this loan was:

A) $240.
B) $120.
C) $125.
D) $500.

Question 14

A magazine publisher has an account called "Unearned Subscription Revenue." The transaction that causes the balance of this account to decrease is:

A) cash is received from new subscribers.
B) magazines are printed for the publisher.
C) magazines are mailed to subscribers.
D) subscriptions are sold to new subscribers.

Question 15

When borrowing money, the most important objective of the borrower should be to:

A) minimize monthly payments.
B) minimize the APR.
C) avoid borrowing on a discount basis.
D) make the maturity date as far in the future as possible.

Question 16

The purpose of reporting Current Maturities of Long-Term debt is to:

A) report any portion of a long-term borrowing that is to be paid in the upcoming accounting period as a current liability.
B) reclassify a portion of debt from the noncurrent section of the balance sheet to the current section of the balance sheet.
C) properly classify liabilities.
D) all of these.

Question 17

An Accounts Payable normally results from which of the following transactions?

A) Purchasing accounts for cash.
B) Purchasing property, plant and equipment on credit.
C) Purchasing goods and services from suppliers on credit.
D) All of these.

Question 18

Interest on a Note Payable is most appropriately accrued:

A) when the note is signed.
B) as of the end of each accounting period during which the note is a liability.
C) when principal payments on the note are made.
D) when the interest is paid.

Question 19

The financial leverage characteristic of long-term debt results in:

A) a reduction of the risk that creditors will not be paid.
B) a magnification of ROE relative to what it would be without long-term debt.
C) a magnification of ROI relative to what it would be without long-term debt.
D) the deductibility, for income tax purposes, of dividends to stockholders.

Question 20

When a supplier makes a downward adjustment in the amount owed by a creditor, the creditor will:

A) reduce the amount of the account payable to the supplier, and decrease an asset such as inventory.
B) increase the amount of the account payable to the supplier, and decrease an asset such as inventory.
C) reduce the amount of the account payable to the supplier, and increase cash.
D) reduce the amount of the account payable to the supplier, and decrease cash.

Question 21

When a company issues a bond at a discount:

A) the company will pay less than the face amount of the bond at its maturity.
B) the company will pay more than the face amount of the bond at its maturity.
C) the company's interest expense will be less than the interest paid each year.
D) the company's interest expense will be more than the interest paid each year.

Question 22

Financial leverage refers to which of the following?

A) The difference between the rate of return earned on assets (ROI) and the rate of return earned on stockholders' equity (ROE).
B) The difference between the rate of return earned on current assets and the rate of return earned on retained earnings.
C) The leverage a firm obtains from increasing production.
D) Decreasing fixed costs per unit by increasing production.

Question 23

Southern Company's accountant failed to accrue as of 12/31/13 some employee fringe benefit program expenses that were incurred in 2013 and that will be paid in 2014. The result of this omission is to:

A) overstate 2013 net income and understate noncurrent liabilities at 12/31/13.
B) understate 2013 expenses and understate current liabilities at 12/31/13.
C) understate 2013 expenses and overstate current liabilities at 12/31/13.
D) understate 2013 net income and overstate assets at 12/31/13.

Question 24

The market value of a bond is the sum of the present value of future interest payments and the present value of the amount to be repaid at maturity, discounted at:

A) the market rate.
B) the coupon rate.
C) the dividend rate.
D) the prime rate.

Question 25

The amortization of bond discount:

A) increases the cash paid to bondholders for interest.
B) results in bond interest expense being greater than the interest paid to bondholders.
C) results in bond interest expense being less than the interest paid to bondholders.
D) reduces the carrying value of bonds payable on the balance sheet.

Question 26

When a company issues a bond at a premium:

A) the company is more profitable than most companies in its industry.
B) investors perceive the bond to be a very safe investment.
C) the company's interest expense will be less than the interest paid each year.
D) the company's interest expense will be more than the interest paid each year.

Question 27

If the market price of a bond exceeds its face amount:

A) the coupon rate is less than the market interest rate.
B) the coupon rate is more than the market interest rate.
C) the company's ROI and working capital have been increasing over time.
D) the maturity rate has been declining.

Question 28

When bonds are issued at a premium:

A) interest expense on the bonds will be less than the interest paid.
B) interest expense on the bonds will be more than the interest paid.
C) the bonds are sold for less than their face amount.
D) the coupon interest rate is less than the market interest rate.

Question 29

On September 30, 2014, David's Co.'s treasurer signed a note promising to pay $520,000 on December 31, 2014. Proceeds of the note were $501,800.
(a.) Calculate the discount rate used by the lender.
(b.) Calculate the effective interest rate on the loan.
(c.) Write the journal entry to show the effect of recording interest expense for the month of October.

Question 30

Many airlines have frequent flyer programs that permit travelers to accumulate credits that can be applied to the cost of tickets for future flights. Most airlines recognize the cost of their frequent flyer programs when the credits are used to purchase tickets. This practice, which seems to ignore the matching concept, results in:

A) stating liabilities and expenses at appropriate amounts.
B) overstating liabilities and expenses.
C) understating liabilities and expenses.
D) understating liabilities and overstating expenses.

Question 31

The noncurrent liability, Noncontrolling Interest, arises if:

A) A firm owns less than 50% of another entity.
B) A firm owns more than 50%, but less than 100%, of another entity.
C) A firm owns 100% of another entity.
D) Noncontrolling Interest is accounted for as an equity item.

Question 32

The liability for product warranty claims is an example of a liability that:

A) has been calculated using estimates.
B) has been recorded in the process of matching revenue and expense.
C) also resulted in a reduction of net income.
D) all of these.

Question 33

Which of the following is true regarding bond discounts and/or premiums?

A) Bond discount is amortized but bond premium is not.
B) Bond premium is amortized but bond discount is not.
C) Neither bond discount nor premium is amortized.
D) Both bond discount and premium are amortized.

Question 34

Southern Company's accountant failed to accrue as of 12/31/13 some employee fringe benefit program expenses that were incurred in 2013 and that will be paid in 2014. The result of this omission is to:

A) overstate the current ratio at 12/31/13 and overstate ROI and ROE for the year ended 12/31/13.
B) overstate the current ratio at 12/31/13 and understate ROI and ROE for the year ended 12/31/13.
C) understate the current ratio at 12/31/13 and understate ROI and ROE for the year ended 12/31/13.
D) not affect the current ratio at 12/31/13 but to overstate ROI and ROE for the year ended 12/31/13.

Question 35

The largest item of the Deferred Tax Liability for most companies is caused by:

A) providing the allowance for doubtful accounts for book purposes.
B) differences in inventory cost flow assumptions (FIFO vs. LIFO) for tax versus financial accounting purposes.
C) differences in depreciation methods (accelerated vs. straight-line) for tax versus financial accounting purposes.
D) amortizing bond premium or discount for tax purposes.

Question 36

The noncurrent Deferred Tax Liability account arises because:

A) some book income will never be subject to income tax.
B) some expenses are deducted for tax purposes before they are deducted for book purposes.
C) income tax rates change from year to year.
D) the company has not paid income taxes currently due.

Question 37

In consolidated financial statements:

A) the parent's and subsidiary's financial statements are reported on a separate basis.
B) the parent's and subsidiary's financial statements are reported on a combined basis.
C) financial statements are reported on an industry-wide basis.
D) None of these.

Question 38

On March 15, 2014, Birkshire Energy obtained a nine-month working capital loan from the First National Bank of Oglesby. The face amount of the note signed by the treasurer was $300,000. The interest rate charged by the bank was 10 percent. The bank made the loan on a discount basis. (Round your final answers to the nearest dollar).
(a.) Calculate the loan proceeds made available to Birkshire.
(b.) Calculate the amount of interest expense related to this loan during the six months ended June 30, 2014.
(c.) What is the amount of the current liability related to this loan to be shown in the June 30, 2014, balance sheet?

Question 39

Which of the following is(are) a true statement(s) pertaining to bonds?

A) Bonds can be sold at a discount, par, or payable.
B) Bonds can be sold at a discount, par, or premium.
C) The SEC sets the market price of a bond.
D) The issuing firm sets the price of a bond.

Question 40

Which of the following is not sometimes associated with bonds?

A) Debenture.
B) Callable.
C) Cumulative.
D) Convertible.

Question 41

Assume that Wallywill, Inc. offered its customers, which are primarily retail stores who sell its products, an advertising allowance equal to 8% of the amount of purchases from Wallywill during December, if the retail store would spend the money for advertising in January. Wallywill Inc.'s sales in December totaled $5,000,000, and it was expected that 70% of those sales were made to retailers who would take advantage of the advertising allowance offer. Write the journal entry or use the horizontal model to show the effect of the accrual that should be made as of December 31 with respect to the advertising allowance offer.

Question 42

Ariel, Inc., issued $30 million face amount of 9% bonds when market interest rates were 9.30% for bonds of similar risk and other characteristics.
(a.) How much interest will be paid annually on these bonds?
(b.) Will the bonds be issued at a premium or discount? Explain your answer.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than, the amount of interest paid each year? Explain your answer.

Question 43

At December 31, 2013, the end of the first year of operations at Xavion Inc., the firm's accountant neglected to accrue payroll taxes of $27,700 that were applicable to payrolls for the year then ended.
(a.) Write the journal entry or use the horizontal model to show the effect of the accrual that should have been made as of December 31, 2013.
(b.) Determine the income statement and balance sheet effects of not accruing 2013 payroll taxes at December 31, 2013 (assuming that the payroll taxes were not accrued, as originally stated).
(c.) Assume that when the payroll taxes were paid in January 2014, the payroll tax expense account was charged. Assume that at December 31, 2014, the accountant again neglected to accrue the payroll tax liability, which was $20,400 at that date. Determine the income statement and balance sheet effects of not accruing 2014 payroll taxes at December 31, 2014.

Question 44

Claudette, Inc., provides warranties for many of its products. The January 1, 2014, balance of the Estimated Warranty Liability account was $38,500. Based on an analysis of warranty claims during the past several years, this year's warranty provision was estimated to be 0.8 percent of sales. During 2014, the actual costs of servicing products under warranty were $51,000, and sales were $5,300,000.
(a.) What amount of Warranty Expense will appear on the income statement for 2014?
(b.) What amount will be reported in the Estimated Warranty Liability account on the December 31, 2014, balance sheet?

Question 45

Ariana Co. issued $2,000,000 face amount of 15%, 20-year bonds on April 1, 2014. The bonds pay interest on a semi-annual basis on June 30 and December 31 each year.
(a.) Assume that market interest rates were slightly lower than 15% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount?
(b.) Independent of part (a), assume that the proceeds were $1,980,000. Write the journal entry or use the horizontal model to show the effects of issuing the bonds.
(c.) Assume that the bonds were issued for $1,980,000 as in part (b). Calculate the interest expense that Ariana Co. will show with respect to these bonds in its income statement for the year ended December 31, 2014, assuming that the discount of $20,000 is amortized on a straight-line basis.

Question 46

On April 15, 2014, Melissa purchased $30,000 of Verbecke Co.'s 12%, 20-year bonds at face amount. Verbecke Co. has paid interest due on the bonds regularly. On April 15, 2018, market interest rates had risen to 14% and Melissa is considering selling the bonds. Using the present value tables in Chapter 6 of the textbook, calculate the market value of Melissa's bonds on April 15, 2018.

Question 47

The Defiance College sells season tickets for four home football games at a price of $30. For the 2014 season, 5,000 season tickets were sold.
(a.) Write the journal entry or use the horizontal model to show the effect of the sale of the season tickets.
(b.) Write the journal entry or use the horizontal model to show the effect of hosting a home football game.
(c.) Where on the balance sheet would the account balance representing funds Received for games not yet played be classified? Assume that The Defiance College follows the same accounting and financial reporting procedures that are used in business.