Deck 9: Current Liabilities, Contingencies, and the Time Value of Money

Question 1

If a company purchases $3,000 worth of inventory with terms of 1/15, n30 and pays within 15 days, then the amount paid to the seller would be

A) $3,030
B) $2,550
C) $2,970
D) $3,000

Answer 1

C

Question 2

The landlord records the security deposit she collects from the tenant as an

A) asset
B) contra liability
C) contingent liability
D) liability

Answer 2

D

Question 3

All of the following are characteristics of current liabilities except:

A) they may involve estimated amounts.
B) they are due within one year or within the operating cycle, whichever is longer.
C) they may be replaced with a new short-term liability rather than being paid in cash.
D) all three of the above are characteristic of current liabilities.

Answer 3

D

Question 4

You just purchased an automobile for $19,450 and must decide how to pay for it. Your local bank has granted you a five-year loan. Annual payments on the loan will be made at the end of each year and the amount of the loan payments, which include principal and interest, is $5,000 per year. What is the interest rate that is being charged on the loan?

Question 5

Almost all current liabilities appear within the Activities category of the Statement of Cash Flows.

Question 6

In the statement of cash flows, an increase in a current liability will appear as an increase in the Financing category.

Question 7

On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a 1-year, 7% note. If the company's fiscal year ends as of December 31, Lawrence should make an entry to increase

A) interest payable, $1,050.
B) prepaid interest, $3,150.
C) notes payable, $1,050.
D) interest expense, $4,200.

Question 8

What is the purpose of the current ratio? How does the quick ratio differ from the current ratio?

Question 9

Which of the following is an example of a contingent liability?

A) A corporate long-term employment contract with the chief executive officer.
B) A lawsuit pending against a restaurant chain for improper preparation of food.
C) A liability for notes payable with interest included in the face amount.
D) The liability for future warranty repairs on computers sold during the current period.

Question 10

An obligation that involves an existing condition for which the outcome is not known with certainty and depends on some event that will occur in the future is call an .

Question 11

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. A company will have to pay a $50,000 liability in 4 years. How much must be deposited now into a bank account earning 8% compounded semiannually to fully fund the future payment?

A) $35,500
B) $36,550
C) $36,523
D) $34,000

Question 12

The current maturity of long-term debt is a current liability.

Question 13

Warranty expenses are the result of the selling company's estimate of the number of units sold during the current
year that may become defective and need repair or replacement during the warranty period.

Question 14

The of a single sum represents the value today of a single amount to be received or paid at a future time.

Question 15

What is meant by the term "current maturities of long-term debt" in the current liabilities section of the balance sheet?

Question 16

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then the current ratio would be

A) 1.75 to 1
B) 3.50 to 1
C) 2.25 to 1
D) 3.00 to 1

Question 17

Tyson Trucking won a settlement in a lawsuit and was offered four different payment alternatives by the defendant's insurance company. The interest rate is 6%. Ignoring tax considerations, which of the following four alternatives has the highest present value? Support your answer with the appropriate calculations.
I $150,000 now
II $45,000 per year for the next 4 years payment made at the end of the year
$5,000 now and then $20,000 per year for the next 10 years payment made at the end of
III
the year
IV $5,000 now and then $5,000 per year for the next 10 years payment made at the end of the year plus a lump-sum payment of $200,000 at the end of the eleventh year

Question 18

At December 31, 2014, an amount due on December 31, 2015, would be classified as an
_______________________ liability.

Question 19

Cole Company had the following accounts and balances on December 31, 2015:
REQUIRED:
1. Compute Cole's working capital.
2. Compute Cole's current ratio. What does this ratio indicate about Cole's condition?

Question 20

The interest earned on the principal amount only is referred to as .

Question 21

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. For a given single sum invested at 8% for 4 years, how will the future value be affected if the compounding period is changed from annual to quarterly?

A) The future value will decrease.
B) The future value will stay the same.
C) There is not enough information to determine the impact.
D) The future value will increase.

Question 22

If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.

Question 23

Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to:

A) $90,450
B) $90,000
C) $90,900
D) $91,800

Question 24

If the present and future values are known along with the number of periods, then the
_________________________ can be determined.

Question 25

What is the correct classification of the account: Discount on Notes Payable?

A) a revenue
B) a contra liability
C) an asset
D) an expense

Question 26

Estimated liability for product warranties to be paid in the future is a current liability.

Question 27

An amount that has been incurred as an expense, but has not yet been paid should be considered an accrued liability.

Question 28

Which of the following statements is true of liabilities?

A) Classification of current liabilities is important because of the liquidity concept.
B) The accounting principles followed in the U.S. differ from those of other countries; this is especially true for current liabilities.
C) Current liabilities are listed in order of decreasing amounts in the current liability section of the balance sheet.
D) Accounts payable are listed in the current liabilities section in alphabetical order by vendor.

Question 29

What are examples of accounts that might be classified as accrued liabilities in the current liabilities section of the balance sheet?

Question 30

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. Pablos wants to save some money so that he can make a down payment of $3,000 on a car when he graduates from college 4 years from now. If he opens a savings account and earns 3% on his money, compounded annually, how much will he have to invest now?

A) $2,664
B) $3,000
C) $2,520
D) $2,910

Question 31

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. The future value of equal semi-annual payments of $500 at 8% compounded semiannually for 4 years is

A) $ 868
B) $9,320
C) $2,000
D) $4,607

Question 32

Long-term assets are $800, current liabilities are $500, and long-term liabilities are $600. If the current ratio is 2.5 to 1, then current assets are

A) $ 625
B) $1,250
C) $2,000
D) $ 200

Question 33

Below are three notes payable:
REQUIRED:
Part 1. For each of the notes, calculate the simple interest due at the end of the term.
Part 2. Now assume that the interest on the notes is compounded annually. Calculate the amount of interest due at the end of the term for each note.
Part 3. Finally, assume that the interest on the notes is compounded semiannually. Calculate the amount of interest due at the end of the term for each note.
Part 4. What conclusion can you draw from a comparison of your results of each of the three scenarios?

Question 34

Curtain Corp. stands to receive a sufficient cash settlement from a law suit. Curtain needs to record this on its accounting records.

Question 35

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. To calculate the future value of an amount that is invested at 12%, compounded quarterly, at the end of three years, the interest factor used would be

A) 1% for 12 periods
B) 12% for three periods
C) 3% for 12 periods
D) 3% for four periods

Question 36

If a company purchases $3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays March 12, then the amount paid to the seller would be

A) $3,136
B) $3,168
C) $3,150
D) $3,200

Question 37

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
Interest calculated on the principal plus previous amounts of interest accumulated.

Question 38

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. The table factor for the future value of an annuity for 4 annual deposits at 8% is

A) the cumulative total of the future value of $1 factors for 4 deposits at 8%.
B) the reciprocal of the future value of $1 factor for n = 4 and 8%.
C) the same as for the future value of $1 multiplied by 4.
D) the same as using the future value of $1 factors at 8% for 3, 2, 1 and 0 periods.

Question 39

Using the indirect method, an increase in accounts payable would be shown as an in the
Activities section of the statement of cash flows.

Question 40

All of the following statements are true except:

A) Under U.S. GAAP, a contingent item should be recorded as a liability if the loss or outflow is probable and can be reasonably estimated.
B) IFRS requires a liability to be recorded as a present value amount.
C) The threshold for recording items as liabilities is a lower under U.S. GAAP than under IFRS.
D) The threshold for recording items as liabilities is a lower under IFRS than under U.S. GAAP.

Question 41

Refer to the data for Valance & Company.
REQUIRED:
1 What current liabilities appearing on the balance sheet do not appear in the operating activities section of the statement of cash flows? Why?
2 What current liabilities appear in the operating activities category of Valance's statement of cash flows? How
does the change for each year affect the cash flows from operating activities for that year?

Question 42

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
The amount that will be accumulated in the future when one amount is invested at the present time and accrues interest until the future time.

Question 43

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then the quick ratio would be

A) 2.25 to 1
B) 1.75 to 1
C) 3.50 to 1
D) 3.00 to 1

Question 44

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
The amount needed at the present time to be equivalent to a series of payments and interest in the future.

Question 45

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
A series of payments of equal amount.

Question 46

Accrued wages is not a current liability.

Question 47

Grain Company sells a product for $760. When the customer buys it, Grain provides a one-year warranty. Grain sold 1,500 products during 2015. Based on analysis of past warranty records, Grain estimates that repairs will average 6% of total sales.
REQUIRED:
1. Identify the accounting equation effects for the transaction of the estimated liability.
2. Assume that during 2015, products under warranty must be repaired using repair parts from inventory costing
$49,600. Identify the accounting equation effects for the transaction to repair products.
3. Assume that the balance of the Estimated Liabilities for Warranties account as of the beginning of 2015 was
$1,700. Calculate the balance of the account as of the end of 2015.

Question 48

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. If Shidan has $5,000 to invest and wants to have $10,000 at the end of 9 years, what compounded interest rate must she get on her money assume annual compounding?

A) 5%
B) 7%
C) 8%
D) 6%

Question 49

Income taxes payable are recognized as an expense once they are paid to the respective government or taxing authority.

Question 50

Below are several independent items listed for which the outcome of events is unknown at year-end, December 31, 2015.
a. Maldova Company had a barge that leaked oil into the waters surrounding Alaska. The company's legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
b. It is alleged by Maldova Company that Argo Company has infringed on its trademark, during a recent advertising campaign. Maldova is suing Argo and its legal experts believe that the suit will result in an award of $750,000 in Maldova's favor.
c. Maldova offers 2-year warranties on the equipment it sells and believes that 5% of its equipment will require warranty repairs.
d. A $35 coupon, good for one year is offered by Maldova during December. At December 31, approximately 10% of the coupons have been redeemed and it is estimated that there will be a total redemption rate of 45%.
e. Maldova Company has been sued by the federal government for EPA violations. The company's legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss
REQUIRED:
1. Identify which of the items a through e should be recorded at year-end.
2. Identify which of the items a through e should not be recorded but should be disclosed in the year-end financial statements.
a. Maldova Company had a barge that leaked oil into the waters surrounding Alaska. The company's legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
b. It is alleged by Maldova Company that Argo Company has infringed on its trademark, during a recent advertising campaign. Maldova is suing Argo and its legal experts believe that the suit will result in an award of $750,000 in Maldova's favor.
c. Maldova offers 2-year warranties on the equipment it sells and believes that 5% of its equipment will require warranty repairs.
d. A $35 coupon, good for one year is offered by Maldova during December. At December 31, approximately 10% of the coupons have been redeemed and it is estimated that there will be a total redemption rate of 45%.
e. Maldova Company has been sued by the federal government for EPA violations. The company's legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss
REQUIRED:

Question 51

Which of the following accounts is not classified as a current liability?

A) Accounts payable
B) Note payable, due in three 3 years
C) Taxes payable
D) Salaries payable

Question 52

Interest that is earned or paid on the principal amount only.

Question 53

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. Barton Company has just purchased a machine with a cost of $100,000, and signed a note agreeing to pay the manufacturer equal annual amounts of $17,400. If the current rate of interest is 8%, how many equal annual payments will be made?

A) 6
B) 12
C) 10
D) 8

Question 54

Refer to the data for Valance & Company.
REQUIRED:
1 Give a possible explanation for each change in the liabilities listed in the cash flow statement. Do you think these changes are beneficial for Valance? Why or why not?
2 If there were a balance in the dividends payable account at the end of the year, would this appear in the operating activities category of the cash flow statement? Why or why not?

Question 55

Dallas Company uses the indirect method of preparing the statement of cash flows and has the following current liabilities at the beginning of the period: Accounts Payable, $35,000; Taxes Payable, $15,000. At the end of the period, the balances of the account are as follows: Accounts Payable, $25,000; Taxes Payable, $20,000. What amounts will appear in the cash flow statement? In what category of the statement will they appear?

Question 56

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
The present amount that is equivalent to an amount at a future time.

Question 57

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
The concept that indicates that people should prefer to receive an immediate amount at the present time over an equal amount in the future.

Question 58

Match each of the following terms related to interest and time value of money calculations to their appropriate definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
The amount that will be accumulated in the future when a series of payments is invested and accrues interest until the future time.

Question 59

A bank loaned Darden Company $10,000 on a 1-year, 6% note, but deducted the interest in advance. The journal entry made by Darden to record receipt of the cash would include a

A) a decrease in Notes Payable for $9,400.
B) a decrease in Notes Payable for $10,600.
C) an increase in Cash for $600.
D) an increase in Cash for $9,400.

Question 60

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. If the interest factor used to calculate the future value of $1 at 6% for 5 periods is 1.338, then the present value of $1 at 6% for 5 periods is

A) 1/1.338 x 1.338.
B) 0.338.
C) 1.338 × 1.338.
D) 1/1.338.

Question 61

Employees earn $5,000 per day, work five days per week, Monday through Friday, and get paid every Friday. If the previous payday was January 26 and the accounting period ends on January 31, what amount is the ending balance in the wages payable account?

A) $25,000
B) $15,000
C) $10,000
D) $ 9,000

Question 62

On May 1, the Chris Company borrowed $30,000 from the Third Street Bank on a 1-year, 6% note. If the company keeps its records on a calendar year, an adjustment is needed on December 31 to increase

A) Interest Payable, $900.
B) Interest Expense, $600.
C) Interest Payable, $1,200.
D) Interest Expense, $1,800.

Question 63

Review the Note Disclosure of Legal Matters.
REQUIRED:
1 What type of liability does this lawsuit typify?
2 In your opinion, should the Company prepare a journal entry in 2015 to record a liability for this lawsuit? Why or why not?

Question 64

A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are $14,350, then the quick ratio would be

A) 2.6 to 1
B) 2.0 to 1
C) 1.2 to 1
D) 5.0 to 1

Question 65

include any amount that has been incurred due to the passage of time, but not
paid as of the balance sheet date.

Question 66

Assume that you know the total dollar amount of a loan and the amount of the monthly payments. How can you determine the interest rate as a percentage of the loan?

Question 67

International accounting standards use the term provision for those contingent items that must be recorded on the balance sheet.

Question 68

There are very important differences between U.S. and international standards regarding contingencies. Even the terms used to refer to situations with unknown outcomes differ. Explain these differences.

Question 69

Which of the following statements regarding contingencies is true?

A) Contingencies that are not estimable should not be disclosed even if probable.
B) Contingent assets, if probable and estimable, are treated in much the same way as contingent liabilities.
C) Contingencies that are probable and estimable must be recorded before the outcome of future events.
D) The accounting principle that determines whether a contingent asset is recorded is that of materiality.

Question 70

You friend, Edwin Slotkin, has started a new business, but has recently encountered a slight cash flow problem. He obtains a $1,000 loan at 10% per year from a local bank, but would like to ask you about the terms. The bank has deducted the interest in advance and he wants to know if 10% is his effective interest rate. How would you respond in an email?

Question 71

Review the Note Disclosure of Legal Matters.
REQUIRED:
1 If you were to make an entry for the lawsuit against Company, what monetary amount should be recorded? On what did you base your decision with regard to the amount?
2 Does the disclosure imply that the Company is involved in only this litigation at this time?
3 Why did this lawsuit arise? Do you believe it to be a reasonable one or do you think that the plaintiff, has little grounds for this lawsuit?

Question 72

An invoice received from a supplier for $8,000 on January 1 with terms 1/15, n/30 means that the company should pay

A) $6,800 before January 16.
B) either $7,920 before January 16 or $8,000 before the end of the month.
C) $8,000 between January 2 and January 16.
D) $7,920 before the end of January.

Question 73

On July 1, 2015, Clayton Shop borrowed $33,000 from the bank. Clayton signed a ten-month, 6% promissory note for the entire amount. Clayton uses a calendar year-end.
REQUIRED:
1. Identify the accounting equation effects for the July 1, 2015 transaction of issuing the promissory note.
2. Identify any adjustments needed at year-end.
3. Identify the accounting equation effects for the May 1, 2016 transaction to record the payment of principal and interest.

Question 74

If you plan to invest $10,000 and want to determine how much will be accumulated in six years if you earn interest at 7% per year, you would calculate this using the future value of an annuity.

Question 75

Using the future value table, a student found that the future value amount of $1 for 5 years at an annual interest rate of 10% is 1.611. The student also observed that the future value of $1 for 5 years at 10% compounded semiannually is 1.629. This means that

A) the student was looking in the wrong column; the second amount should be 1.611/2.
B) the more often the compounding, the higher the future value.
C) there was an error in the table.
D) when interest is compounded semiannually, more money must be deposited to have a desired ending balance.

Question 76

A company gives a two-year warranty for its product. The estimated liability for product warranties is a current liability.

Question 77

The payment of accounts payable results in an

A) decrease in liabilities and a decrease in assets.
B) decrease in liabilities and an increase in owners' equity.
C) decrease in liabilities and an increase in assets.
D) increase in liabilities and a decrease in owners' equity.

Question 78

Generally, an increase in a current liability results in an increase in the operating activities category of the cash flow statement.

Question 79

U.S. standards do not require a classified balance sheet, but International accounting standards require companies to present classified balance sheets with liabilities classified as either current or long term.

Question 80

A firm's year ends on December 31. Its tax is computed and submitted to the U.S. Treasury on March 15 of the
following year. When should the taxes be reported as a liability?