Deck 10: Liabilities

Question 1

During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

Answer 1

False

Question 2

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Answer 2

True

Question 3

Unearned revenues should be classified as Other income and expense on the Income Statement.

Answer 3

False

Question 4

The higher the sales tax rate, the more profit a retailer can earn.

Question 5

$$\text { A } £ 2,000,000,7 \% , 6 \text {-month note payable requires an interest payment of } £ 140,000 \text { at maturity. }$$

Question 6

A debt due within 6 months of the statement of financial position date which is expected to be paid out of cash will be classified as a current liability.

Question 7

If a retailer sells goods for a total price of $€ 600$ , which includes an $11 \%$ sales tax, the amount of the sales tax is $€ 59.46$ .

Question 8

Interest expense on a note payable is only recorded at maturity.

Question 9

Metropolitan Symphony sells 200 season tickets for $60,000 that represents a five concert season.The amount of Unearned Ticket Revenue after the second concert is $24,000.

Question 10

The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.

Question 11

A current liability must be paid out of current earnings.

Question 12

Notes payable usually require the borrower to pay interest.

Question 13

A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.

Question 14

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Question 15

A company whose current liabilities exceed its current assets may have a liquidity problem.

Question 16

Interest expense is reported under Other income and expense in the income statement.

Question 17

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Question 18

With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

Question 19

The statement of financial position classification of a liability as current or non-current is important because it may affect the evaluation of a company's liquidity.

Question 20

A note payable must always be paid before an account payable.

Question 21

If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 22

Registered bonds are bonds that are delivered to owners by U.S.registered mail service.

Question 23

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

Question 24

If TL2,000,000 par value bonds with a carrying value of TL1,990,400 are redeemed at 97, a loss on redemption will be recorded.

Question 25

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Question 26

If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.

Question 27

If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.

Question 28

A CHF10,000,000 bond with a quoted prices of 101 ¼ is sold for CHF10,250,000.

Question 29

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Question 30

Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

Question 31

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Question 32

The board of directors may authorize more bonds than are issued.

Question 33

A debenture bond is an unsecured bond which is issued against the general credit of the borrower.

Question 34

If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.

Question 35

If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

Question 36

The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Question 37

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 38

If HK$1,800,000, 5%, bonds are issued on January 1, 2011 and pay interest semi-annually on June 30 and December 31, the total amount of interest paid to bondholders in 2011 will be HK$90,000.

Question 39

Neither corporate bond interest nor dividends are deductible for tax purposes.

Question 40

Bonds are reported on the statement of financial position at their carrying value.

Question 41

Current maturities of long-term debt are often identified as long-term debt due within one year on the statement of financial position.

Question 42

Which of the following is usually not an accrued liability?

A)Interest payable
B)Wages payable
C)Taxes payable
D)Notes payable

Question 43

The relationship of current assets to current liabilities is used in evaluating a company's

A)operating cycle.
B)revenue-producing ability.
C)short-term debt paying ability.
D)long-range solvency.

Question 44

Non-current liabilities are reported in a separate section of the statement of financial position immediately before current liabilities.

Question 45

The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

Question 46

The amount by which the principal of a mortgage will be reduced in the next year will be reported on the statement of financial position as a current liability.

Question 47

In most companies, current liabilities are paid within

A)one year through the creation of other current liabilities.
B)the operating cycle through the creation of other current liabilities.
C)one year out of current assets.
D)the operating cycle out of current assets.

Question 48

A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

Question 49

Notes payable usually are issued to meet long-term financing needs.

Question 50

Liabilities are classified on the statement of financial position as current or

A)deferred.
B)unearned.
C)non-current.
D)accrued.

Question 51

A current liability is a debt that can reasonably be expected to be paid

A)within one year.
B)between 6 months and 18 months.
C)out of currently recognized revenues.
D)out of cash currently on hand.

Question 52

Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

Question 53

The terms of the bond issue are set forth in a formal legal document called a bond indenture.

Question 54

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Question 55

Non-current liabilities are reported in a separate section of the statement of financial position immediately below current liabilities.

Question 56

Most companies pay current liabilities

A)out of current assets.
B)by issuing interest-bearing notes payable.
C)by issuing stock.
D)by creating long-term liabilities.

Question 57

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Question 58

All of the following are reported as current liabilities except

A)accounts payable.
B)bonds payable.
C)notes payable.
D)unearned revenues.

Question 59

Bonds that mature at a single specified future date are called term bonds.

Question 60

A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.

Question 61

The interest charged on a $¥ 200,000,000$ note payable, at the rate of $8 \%$ , on a 3 -month note would be

A) $¥ 16,000,000$ .
B) $¥ 8,000,000$ .
C) $¥ 4,000,000$ .
D) $¥ 2,667,000$ .

Question 62

On October 1, Steve's Carpet Service borrows $€ 400,000$ from First National Bank on a $3 -$ month, $€ 400,000,8 \%$ note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is

A) $\begin{array} { l }\text {Notes Payable.}&408,000 \\ \text {Cash }&&408,000 \\\end{array}$

B) $\begin{array} { l }\text { Notes Payable.}&400,000 \\ \text { Interest Payable}&8,000 \\ \text {Cash }&&408,000 \\\end{array}$

C) $\begin{array} { l }\text { Notes Payable. }&400,000 \\ \text {Interest Payable }&32,000 \\ \text {Cash }&&432,000 \\\end{array}$

D) $\begin{array} { l }\text { Notes Payable. }&400,000 \\ \text { Interest Expense}&8,000 \\ \text { Cash}&&408,000 \\\end{array}$

Question 63

On October 1,2011 , Pennington Company issued a $€ 40,000,10 \%$ , nine-month interestbearing note. If the Pennington Company is preparing financial statements at December 31, 2011, the adjusting entry for accrued interest will include a:

A) credit to Notes Payable of $€ 1,000$ .
B) debit to Interest Expense of $€ 1,000$
C) credit to Interest Payable of $€ 2,000$ .
D) debit to Interest Expense of $€ 1,500$ .

Question 64

On September 1, Joe's Painting Service borrows $\$ 100,000$ from National Bank on a 4month, $\$ 100,000,6 \%$ note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared?

A) $\begin{array} { l }\text { Interest Payable. }&2,000 \\ \text { Interest Expense.}&&2,000 \\\end{array}$

B) $\begin{array} { l }\text { Interest Expense.}& 6,000\\ \text { Interest Payable}& &6,000\\\end{array}$

C) $\begin{array} { l } \text { Interest Expense. }&2,000 \\ \text {Interest Payable }&&2,000 \\\end{array}$

D) $\begin{array} { l }\text { Interest Expense. }&2,000 \\ \text {Notes Payable }&&2,000 \\\end{array}$

Question 65

Use the following information for questions
London Bank and Trust agrees to lend the Beckham Company £2,000,000 on January 1, 2010.Beckham Company signs a ?2,000,000, 6%, 9-month note.

-The entry made by Beckham Company on January 1 to record the proceeds and issuance of the note is

A) $\begin{array} { l } \text { Interest Expense }&90,000 \\ \text { Cash}& 1,910,000\\ \text {Notes Payable }&&2,000,000 \\\end{array}$

B) $\begin{array} { l }\text { Cash}&2,000,000 \\ \text { Notes Payable}&&2,000,000 \\\end{array}$

C) $\begin{array} { l } \text { Cash }&2,000,000 \\ \text { Interest Expense }&90,000 \\ \text {Notes Payable }&&2,090,000 \\\end{array}$

D) $\begin{array} { l } \text { Cash }&2,000,000 \\ \text { Interest Expense}&90,000 \\ \text { Notes Payable}&2,000,000 \\ \text {Interest Payable } &90,000\\\end{array}$

Question 66

A note payable is in the form of

A)a contingency that is reasonably likely to occur.
B)a written promissory note.
C)an oral agreement.
D)a standing agreement.

Question 67

When an interest-bearing note matures, the balance in the Notes Payable account is

A)less than the total amount repaid by the borrower.
B)the difference between the maturity value of the note and the face value of the note.
C)equal to the total amount repaid by the borrower.
D)greater than the total amount repaid by the borrower.

Question 68

On September 1 , Joe's Painting Service borrows $\$ 100,000$ from National Bank on a 4month, $\$ 100,000,6 \%$ note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is

A) $\begin{array} { l }\text { Notes Payable. }&102,000 \\ \text { Cash}&&102,000 \\\end{array}$

B) $\begin{array} { l }\text { Notes Payable }&100,000 \\ \text { Interest Payable}&2,000 \\ \text {Cash }& &102,000\\\end{array}$

C) $\begin{array} { l }\text { Notes Payable}&100,000 \\ \text {Interest Payable }& 6,000\\ \text {Cash }&&106,000 \\\end{array}$

D) $\begin{array} { l }\text { Notes Payable }&100,000 \\ \text { Interest Expense.}&2,000 \\ \text { Cash}&&102,000 \\\end{array}$

Question 69

Interest expense on an interest-bearing note is

A)always equal to zero.
B)accrued over the life of the note.
C)only recorded at the time the note is issued.
D)only recorded at maturity when the note is paid.

Question 70

Admire County Bank agrees to lend Givens Brick Company $\$ 300,000$ on January 1. Givens Brick Company signs a $\$ 300,000,8 \% , 9$ -month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June $30 ?$

A) $\begin{array} { l } \text { Interest Expense }&12,000 \\ \text { Interest Payable }&&12,000 \\\end{array}$

B) $\begin{array} { l }\text { Interest Expense }&12,000 \\ \text {Cash }&&12,000 \\\end{array}$

C) $\begin{array} { l } \text { Interest Payable }&12,000 \\ \text { Cash}&&12,000 \\\end{array}$

D) $\begin{array} { l } \text { Interest Payable }&12,000 \\ \text {Interest Expense }&&12,000 \\\end{array}$

Question 71

On October 1,2010, Pennington Company issued a $€ 40,000,10 \%$ , nine-month interestbearing note. Assuming interest was accrued in June 30,2011 , the entry to record the payment of the note on July 1,2011 , will include a:

A) debit to Interest Expense of $€ 1,000$ .
B) credit to Cash of $€ 40,000$
C) debit to Interest Payable of $€ 3,000$ .
D) debit to Notes Payable of $\$ 43,000$ .

Question 72

On October 1, Steve's Carpet Service borrows $€ 400,000$ from First National Bank on a 3month, $€ 400,000,8 \%$ note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

A) $\begin{array} { l }\text { Interest Payable }&8,000 \\ \text {Interest Expense}&&8,000 \\\end{array}$

B) $\begin{array} { l }\text { Interest Expense }&32,000 \\ \text { Interest Payable}&&32,000 \\\end{array}$

C) $\begin{array} { l }\text { Interest Expense }&8,000 \\ \text {Interest Payable }&&8,000 \\\end{array}$

D) $\begin{array} { l } \text { Interest Expense}&8,000 \\ \text { Notes Payable}&&8,000 \\\end{array}$

Question 73

As interest is recorded on an interest-bearing note, the Interest Expense account is

A)increased; the Notes Payable account is increased.
B)increased; the Notes Payable account is decreased.
C)increased; the Interest Payable account is increased.
D)decreased; the Interest Payable account is increased.

Question 74

With an interest-bearing note, the amount of assets received upon issuance of the note is generally

A)equal to the note's face value.
B)greater than the note's face value.
C)less than the note's face value.
D)equal to the note's maturity value.

Question 75

The interest charged on a $¥ 100,000,000$ note payable, at the rate of $6 \%$ , on a 60 -day note would be

A) $¥ 6,000,000$ .
B) $¥ 3,333,000$ .
C) $¥ 1,500,000$ .
D) $¥ 1,000,000$ .

Question 76

Admire County Bank agrees to lend Givens Brick Company $\$ 300,000$ on January 1. Givens Brick Company signs a $\$ 300,000,8 \% , 9$ -month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30 ?

A) $\begin{array} { l }\text { Notes Payable }&318,000 \\ \text {Cash }& &318,000\\\end{array}$

B) $\begin{array} { l }\text { Notes Payable }&300,000 \\ \text { Interest Payable }&18,000 \\ \text { Cash}&&318,000 \\\end{array}$

C) $\begin{array} { l }\text { Interest Expense }& 18,000\\ \text {Notes Payable }&300,000 \\ \text {Cash }&&318,000 \\\end{array}$

D) $\begin{array} { l } \text { Interest Payable.}& 12,000\\ \text { Notes Payable}&300,000 \\ \text {Interest Expense }&6,000 \\ \text { Cash}&&318,000 \\\end{array}$

Question 77

Admire County Bank agrees to lend Givens Brick Company $\$ 300,000$ on January 1. Givens Brick Company signs a $\$ 300,000,8 \% , 9$ -month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is

A) $\begin{array} { l } \text {Interest Expense }&18,000 \\ \text { Cash.}&282,000 \\ \text {Notes Payable }&&300,000 \\\end{array}$

B) $\begin{array} { l } \text { Cash }&300,000 \\ \text {Notes Payable }&&300,000 \\\end{array}$

C) $\begin{array} { l }\text { Cash. }&300,000 \\ \text { Cash. Interest Expense }& 18,000\\ \text { Notes Payable}& &318,000\\\end{array}$

D) $\begin{array} { l } \text { Cash}& 300,000\\ \text { Interest Expense }&18,000 \\ \text {Notes Payable }&&300,000 \\ \text { Interest Payable}&&18,000 \\\end{array}$

Question 78

The interest charged on a $¥ 100,000,000$ note payable, at the rate of $8 \%$ , on a 90 -day note would be

A) $¥ 8,000,000$ .
B) $¥ 4,444,000$ .
C) $¥ 2,000,000$ .
D) $¥ 667,000$ .

Question 79

The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's

A)maturity value.
B)market value.
C)face value.
D)cash realizable value.

Question 80

The interest charged on a $¥ 200,000,000$ note payable, at the rate of $6 \%$ , on a 2 -month note would be

A) $¥ 12,000,000$ .
B) $¥ 6,000,000$ .
C) $¥ 3,000,000$ .
D) $¥ 2,000,000$ .