Deck 9: Reporting and Interpreting Liabilities

Question 1

The accounts payable turnover ratio is difficult to manipulate.

Answer 1

False

Question 2

Cash received from customers may result in a current liability.

Answer 2

True

Question 3

An employee has an obligation to pay his payroll taxes to the employer.

Answer 3

False

Question 4

Wages expense is an example of an accrued liability account.

Question 5

A contingent liability is reported on the balance sheet if it is probable and can be estimated.

Question 6

A liability that is estimated because the final settlement amount is unknown cannot be reported on the balance sheet.

Question 7

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

Question 8

Purchasing inventory on account increases the accounts payable turnover ratio.

Question 9

Accounts payable and accrued liabilities are interchangeable account titles.

Question 10

A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated.

Question 11

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Question 12

The FICA (social security) tax is a matching tax with a portion paid by both the employer and the employee.

Question 13

The choice of inventory method has an impact on the accounts payable turnover ratio.

Question 14

A current liability is created when a customer pays cash for services to be provided in the future.

Question 15

A company borrowed $100,000 at 6% interest on September 1, 2016. Assuming adjusting entries have not been made during the year, the entry to record interest accrued on December 31, 2016 would include a debit to interest expense and a credit to interest payable for $2,000.

Question 16

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Question 17

When a liability is initially recorded, it is recorded at the future amount of all payments.

Question 18

The accrual of interest on a short-term note payable decreases working capital and current assets.

Question 19

Income taxes payable is an example of an accrued liability.

Question 20

The accrual of interest results in an increase liabilities and a decrease in cash.

Question 21

Working capital is a measure of long-term liquidity and is calculated by subtracting the current liabilities from the current assets.

Question 22

Working capital increases when a company accrues sales revenue at year-end.

Question 23

An annuity is a series of consecutive and unequal payments over time.

Question 24

Working capital increases when a company purchases equipment and signs a 2-year note payable.

Question 25

Which of the following statements is correct?

A)Social Security tax is paid only by the employer.
B)The pay period always ends in conjunction with the company's fiscal year-end.
C)Employee benefits such as vacation time and sick days should be recognized when the employees earn the benefit and not when they take the days off from work.
D)Unemployment taxes are paid by the employee only.

Question 26

Working capital is a measure of short-run liquidity and is measured by dividing current assets by current liabilities.

Question 27

Working capital decreases when a company pays taxes payable.

Question 28

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows.

Question 29

In order to calculate the cost of a long-term asset that is financed with long-term debt, present values concepts would be used.

Question 30

Which of the following is correct?

A)Unearned revenues are considered increases to stockholders' equity.
B)Working capital is measured as current liabilities minus current assets.
C)Working capital increases when a company pays the principal on a long-term note.
D)Unearned revenues will eventually become revenue earneD.Unearned revenues are considered a liability account until the company has provided the services at which time the revenue will be recognized.

Question 31

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

Question 32

Which of the following is not a current liability?

A)A liability due within one year for a business with a fifteen-month operating cycle.
B)A liability due within three months for a business with a two-month operating cycle.
C)A liability due within one year for a business with a nine-month operating cycle.
D)A liability due within fifteen months for a business with a one-year operating cycle.

Question 33

A contingent liability can not be disclosed in a note to the financial statements unless it can be estimated.

Question 34

An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year.

Question 35

Which of the following describes an accrued liability?

A)It is an expense that has been both incurred and paid.
B)It is an expense that has been incurred but not yet paid.
C)It is an expense that has been prepaid but not yet consumed.
D)It is a liability where the cash flow has taken place but the revenue has yet to be earneD.An accrued liability is recorded when an expense is incurred but not yet paid.

Question 36

Working capital decreases when accrued wages expense is recorded at year-end.

Question 37

Which of the following statements is correct?

A)Current liabilities are initially recorded at the amount of their principal plus interest.
B)Current liabilities are those liabilities due within one year.
C)Liquidity refers to the ability to pay all debts within one year.
D)Current liabilities affect working capital and the cash flows from operating activities.

Question 38

Which of the following is incorrect?

A)Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer.
B)Liquidity is the ability of the company to meet its total obligations.
C)Current liabilities impact a company's liquidity.
D)Working capital is equal to current assets minus current liabilities.

Question 39

When a company receives cash before products or services are provided the following results:

A)Assets and stockholders' equity increase.
B)Assets and revenue increase.
C)Liabilities and revenues increase.
D)Liabilities and assets increase.

Question 40

For the present value of a single amount, the compounding period may only be once a year.

Question 41

Which of the following statements is incorrect?

A)The currently maturing portion of long-term debt must be classified as a current liability.
B)The non-current portion of long-term debt will be correctly reported as a long-term liability.
C)Even when a company plans to refinance the currently maturing debt on a long-term basis, and has the ability to do so, it must still report the currently maturing debt as a current liability.
D)The currently maturing portion of long-term debt is a current liability if it is due within one year or from the date of the balance sheet, or within the operating cycle, whichever is longer.

Question 42

Which of the following would not be a result of the adjusting entry to record accrued interest on a note payable?

A)A decrease in net income.
B)A decrease in stockholders' equity.
C)An increase in liabilities.
D)A decrease in current assets.

Question 43

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. What is the amount to be paid to the bank on March 31, 2017 for interest and principal?

A)$50,000.
B)$51,500.
C)$54,000.
D)$56,000.

Question 44

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. Assume that no adjusting entries had been made before December 31, 2016. Which of the following would be the required adjusting entry on December 31, 2016?

A)
B)
C)
D)

Question 45

Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $84 million for 2017. In 2016, cost of goods sold was $258 million and accounts payable was $72 million. Landseeker's accounts payable turnover ratio in 2017 is closest to:

A)4.25
B)4.13
C)3.45
D)3.31

Question 46

The accrual of interest results in the following:

A)Increase in assets and liabilities.
B)Increase in assets and stockholders' equity.
C)Increase in liabilities and decrease in stockholders' equity.
D)Increase in liabilities and increase in stockholders' equity.

Question 47

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. The amount of interest expense for the year ended December 31, 2016 is:

A)$6,000.
B)$4,500.
C)$4,000.
D)$1,500.

Question 48

Which of the following best describes the accrual of interest?

A)Assets and stockholders' equity decrease.
B)Assets and liabilities decrease.
C)Net income and expenses decrease.
D)Expenses and liabilities increase.

Question 49

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2016 balance sheet is which of the following?

A)$250.
B)$300.
C)$500.
D)$750.

Question 50

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. Assume that the appropriate adjusting entry was made on December 31, 2016 and that no adjusting entries have been made during 2017. Which of the following would be the required journal entry to pay the entire amount due on March 31, 2017?

A)
B)
C)
D)

Question 51

Which of the following statements incorrectly describes the accounts payable turnover ratio?

A)A high ratio indicates that suppliers are being paid in a timely manner.
B)The ratio increases when inventory is sold on account regardless of the sales price.
C)The ratio can be manipulated by aggressively paying off accounts payable at year-end.
D)The ratio is not affected by the choice of inventory accounting methods.

Question 52

Melanie Corp. borrowed $100,000 cash on September 1, 2016, and signed a one-year 6%, interest-bearing note payable. The interest and principal are both due on August 31, 2017. Assume that the appropriate adjusting entry was made on December 31, 2016 and that no adjusting entries have been made during 2017. Which of the following would be the required journal entry to pay the note on August 31, 2017?

A)
B)
C)
D)

Question 53

Miranda Company borrowed $100,000 cash on September 1, 2016, and signed a one-year 6%, interest-bearing note payable. Assume no adjusting entries have been made during the year. Which of the following would be the required adjusting entry at the end of the December 31, 2016 accounting period?

A)
B)
C)
D)

Question 54

Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2015. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2016 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2016, after the first payment is made?

A)$2 million in current liabilities and $8 million in long-term liabilities.
B)$2 million in current liabilities and $6 million in long-term liabilities.
C)Zero in current liabilities and $8 million in long-term liabilities.
D)Zero in current liabilities and $10 million in long-term liabilities.

Question 55

Thomas Company decided to borrow $30,000 on March 1^st, 2016. Thomas signed a 2-year 6% interest-bearing note. What is the adjustment amount to accrue interest on December 31, 2017?

A)$1,800.
B)$3,600.
C)$300.
D)$1,200.

Question 56

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?

A)Liabilities and stockholders' equity would both be understated.
B)Net income would be overstated and assets would be understated.
C)Net income would be understated and liabilities would be understated.
D)Net income and stockholders' equity would be overstated and liabilities would be understateD.The adjusting entry increases interest payable and interest expense, which increases liabilities and decreases both net income and stockholders' equity.Failure to make the entry causes both net income and stockholders' equity to be overstated and liabilities to be understated.

Question 57

Which of the following transactions will decrease the accounts payable turnover ratio?

A)Using cash to pay an accounts payable balance.
B)Selling inventory on account.
C)Selling inventory for cash.
D)A customer returning inventory sold on account.

Question 58

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2017 is which of the following?

A)$1,000.
B)$300.
C)$500.
D)$750.

Question 59

On October 1, 2016, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2017 income statement?

A)$1,000.
B)$2,000.
C)$3,000.
D)$4,000.

Question 60

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. Assume that the appropriate adjusting entry was made on December 31, 2016 and that no adjusting entries have been made during 2017. What is the amount of interest expense to be recorded when the interest and principal are paid on March 31, 2017?

A)$6,000.
B)$4,500.
C)$4,000.
D)$1,500.

Question 61

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the transactions for SRJ Corporation resulted in a decrease in working capital?

A)The accrual of interest expense.
B)Collecting cash for services to be provided in the future.
C)The reclassification of short-term debt to long-term debt.
D)Both the accrual of interest expense and the reclassification of short-term debt to long-term debt.

Question 62

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows?

A)The increase in interest payable for the accrual of interest expense is added to net income.
B)Collecting cash for services to be provided in the future is subtracted from net income.
C)The reclassification of short-term debt to long-term debt is subtracted from net income.
D)Collecting cash for services to be provided in the future does not require an adjustment to net income.

Question 63

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

A)When the loss is remote and the amount cannot be reasonably estimated.
B)When the loss is probable and the amount can be reasonably estimated.
C)When the loss is reasonably possible and the amount can be reasonably estimated.
D)When the loss is remote and the amount can be reasonably estimateD.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements.

Question 64

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the transactions for SRJ Corporation resulted in an increase in working capital?

A)The accrual of interest expense.
B)Collecting cash for services to be provided in the future.
C)The reclassification of short-term debt to long-term debt.
D)Both the reclassification of short-term debt to long-term debt and the collection of cash for future services.

Question 65

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements about Smith's transactions is correct?

A)The inventory purchase on account increased working capital.
B)Collecting an account receivable increases working capital.
C)The equipment purchase decreases working capital.
D)The inventory purchase on account decreases working capital.

Question 66

With regard to reporting of contingent liabilities, U.S. GAAP and International Financial Reporting Standards (IFRS) differ in defining the term "probable". Which of the following is correct with regard to defining "probable"?

A)Under U.S.GAAP, "probable" means an event is more likely than not to occur.
B)Under IFRS, "probable" means an event is likely to occur.
C)Under IFRS, "probable" means an event is more likely than not to occur.
D)Under U.S.GAAP, "probable" means an event is more than likely to occur.

Question 67

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

A)$100,000.
B)$38,550.
C)$110,000.
D)$71,446.

Question 68

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is incorrect?

A)A disclosure note is required for lawsuit A.
B)A disclosure note is required for lawsuit B.
C)A disclosure note is required for lawsuit C.
D)Lawsuit A is reported on the balance sheet as a liability.

Question 69

Which of the following results in a decrease in working capital?

A)Supplies purchases with cash.
B)Purchase of a truck in exchange for factory machinery.
C)Acquisition of land in exchange for stock.
D)Purchase of equipment with cash.

Question 70

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the liability reported is closest to:

A)$100,000.
B)$38,550.
C)$61,446.
D)$71,446.

Question 71

Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin: • Lawsuit A: The loss is probable and the loss can be reasonably estimated.
• Lawsuit B: The loss is reasonably possible and the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
Which of the following statements is incorrect?

A)A disclosure note is required for lawsuit A.
B)A disclosure note is required for lawsuit C.
C)A disclosure note is not required for lawsuit B.
D)Lawsuit A is reported on the balance sheet as a liability.

Question 72

Which of the following statements about contingent liabilities is incorrect?

A)A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated.
B)A disclosure note is required when the loss is probable and the amount can be reasonably estimated.
C)A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated.
D)A disclosure note is required when the loss is remote and the amount can be reasonably estimateD.A disclosure note is not required when the loss probability is remote.

Question 73

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made, is closest to:

A)$45,000.
B)$33,664.
C)$38,664.
D)$40,000.

Question 74

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

A)It must be recorded and reported as a liability.
B)It does not need to be recorded or reported as a liability.
C)It must only be disclosed as a note to the financial statements.
D)It must be reported as a liability, but not disclosed in a note.

Question 75

Black Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash sale of equipment for a loss.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Black's cash flows from operating activities on the statement of cash flows?

A)The accrual of wages and salaries expense is subtracted from net income.
B)The loss on the equipment sale is subtracted from net income.
C)The cash payment to purchase the insurance policy is subtracted from net income.
D)The accrual of wages and the equipment loss are both subtracted from net income.

Question 76

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?

A)A disclosure note is required for each of the three lawsuits.
B)A disclosure note is required only for lawsuits A & C.
C)A disclosure note is required only for lawsuit A.
D)A disclosure note is required only for lawsuits B & C.

Question 77

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

A)When the loss probability is remote and the amount can be reasonably estimated.
B)When the loss is probable and the amount can be reasonably estimated.
C)When the loss probability is reasonably possible and the amount can be reasonably estimated.
D)When the loss is probable regardless of whether the loss can be reasonably estimateD.A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet.

Question 78

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the transactions for Smith Corporation resulted in an increase in working capital?

A)The inventory purchase on account.
B)Collecting an account receivable.
C)The purchase of equipment using cash.
D)None of the transactions resulted in an increase in working capital.

Question 79

Rocket Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash payment of a six-month note payable.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

A)The accrual of wages and salaries expense decreases working capital.
B)The cash payment of the note payable decreases working capital.
C)The purchase of the insurance policy increases working capital.
D)The cash payments for the note and insurance both decrease working capital.

Question 80

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

A)$45,000.
B)$38,664.
C)$33,664.
D)$40,000.