Deck 10: Liabilities

Question 1

Current liabilities are obligations that must be repaid within the shorter of one year or the operating cycle.

Answer 1

False

Question 2

When bonds are sold by one investor to another,they sell at market price plus accrued interest since the last payment date.

Answer 2

True

Question 3

An amortization table for a note payable shows decreasing amounts of interest and an increasing amount of unpaid balance each period.

Answer 3

False

Question 4

Federal unemployment taxes apply to a set dollar amount of employee wages and tend to decline dramatically as the year progresses.

Question 5

The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly.

Question 6

When a company sells bonds,the bondholders are permitted to vote for the board of directors.

Question 7

The unpaid balance column on an amortization table for a note payable shows the amount the debtor could pay to settle the liability at a particular point in time.

Question 8

The most common types of payroll deductions are taxes,insurance premiums,employee savings,and union dues.

Question 9

Junk bonds are attractive to investors because they carry a high rate of interest and are convertible into a specified number of shares of capital stock.

Question 10

If a long-term debt is to be paid off in monthly installments over a five-year period,the entire principal should be classified as a long-term debt.

Question 11

Worker's compensation premiums are deducted from each employee's gross pay.

Question 12

A liability that is known to exist but the precise dollar amount is not known is called a possible liability.

Question 13

Dividends paid by a corporation to its stockholders are tax deductible by the corporation,but interest paid on bonds is not tax deductible.

Question 14

Working capital is equal to current assets less current liabilities.

Question 15

Accounts payable are often subdivided into the categories of trade accounts payable and notes payable.

Question 16

Net pay equals gross pay minus withholding tax minus worker's compensation.

Question 17

Bonds secured by a pledge of specific assets are called debenture bonds.

Question 18

The withholding of taxes from an employee's pay is recorded as a liability to the company.

Question 19

When money is borrowed by issuing a note payable,the borrower records a liability equal to the maturity value of the note.

Question 20

Since payment is due within one year,the current portion of long-term debt should be reported separately in the long-term liabilities section of the balance sheet.

Question 21

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

Question 22

When bonds are issued at a discount,the borrower must pay more at maturity than the amount originally received.

Question 23

A bond with a $100,000 face value that is issued at a premium will have a higher maturity value than a bond with a $100,000 face value that is issued at a discount.

Question 24

Loss contingencies stem from past events.

Question 25

The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period.

Question 26

There is a tax advantage for a company to issue bonds in lieu of stocks.

Question 27

The underwriter guarantees the issuing corporation a specific price for the entire bond issue and sells the bonds to the investing public at a higher price.

Question 28

A commitment,such as a contract to pay a baseball player $5,000,000 a year for five years,should be listed as a long-term liability.

Question 29

If a bond is callable,the call price is usually lower than the face value of the bond.

Question 30

The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset;the account Premium on Bonds Payable has a credit balance and should be classified as a liability.

Question 31

A loss contingency is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known.

Question 32

If a bond is issued at a premium,the company receives more money for the bond than it will have to pay back at the end of the bond's life,and as a result the company records no interest expense over the life of the bond.

Question 33

The future value will always be less than the present value.

Question 34

The amortization of bond discount by the issuing company decreases the carrying value of its bonds payable.

Question 35

Sinking funds make a bond issue less attractive to the investor.

Question 36

Estimated liabilities,contingencies,and commitments are usually reported in the long-term liability section of the financial statements.

Question 37

The market value of a convertible bond tends to move inversely to the market value of an equivalent number of shares of common stock.

Question 38

When interest rates rise,the price of a given bond issue will fall.

Question 39

Bonds payable are a means of dividing a very large,long-term liability among many creditors,some of whom may participate in the loan only for a short period of time.

Question 40

Convertible bonds can be exchanged for common stock at the option of the company.

Question 41

[The following information applies to the questions displayed below.]
On November 1,Year 1,Noble Co.borrowed $80,000 from South Bank and signed a 12%,six-month note payable,all due at maturity.The interest on this loan is stated separately.
How much must Noble pay South Bank on May 1,Year 2,when the note matures?

A)$4,800
B)$80,000.
C)$89,600.
D)$84,800.

Question 42

A measure of a company's liquidity is:

A)Total assets divided by total equity.
B)The current ratio.
C)The dollar amount of liabilities that bear interest.
D)The dollar amount of assets used as collateral for a loan.

Question 43

All of the following are examples of current liabilities except:

A)Accounts payable.
B)Pledged assets.
C)Unearned revenue.
D)Income taxes payable.

Question 44

The debt ratio measures how quickly a company pays off the long-term liabilities it has incurred.

Question 45

A pension fund is an independent entity managed by a bank or insurance company.

Question 46

If a lease transfers ownership of the property to the lessee at the end of the lease term,it should be regarded as an operating lease.

Question 47

[The following information applies to the questions displayed below.]
On November 1,Year 1,Noble Co.borrowed $80,000 from South Bank and signed a 12%,six-month note payable,all due at maturity.The interest on this loan is stated separately.
At December 31,Year 1,Noble Co.'s overall liability for this loan amounts to:

A)$80,000.
B)$81,600.
C)$83,200.
D)$84,800.

Question 48

Assets that have been pledged as security for a loan:

A)Are reported as liabilities on the balance sheet.
B)Must be sold when the loan matures.
C)Become the property of the lender until the loan is paid in full.
D)Are disclosed in the notes to the financial statements.

Question 49

Interest payable on a loan becomes a liability:

A)When the note payable is issued.
B)As it accrues.
C)At the maturity date.
D)When the borrowed money is received.

Question 50

Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made.

Question 51

If a business ceases operations and liquidates,which of the following will be paid last?

A)Owners.
B)General creditors.
C)Employees.
D)Creditors who have collateral for their loans.

Question 52

Loss contingencies should be recorded in the accounting records whenever it is probable that a loss has been incurred and the amount of loss might be material in amount.

Question 53

Deferred income taxes may be classified as assets.

Question 54

When a company has a fully funded pension plan,they only need to record the present value of pension payments as a current liability.

Question 55

The quick ratio is a more stringent measure of solvency than the current ratio.

Question 56

The two basic characteristics of estimated liabilities are:

A)Probable and reasonably estimated.
B)Known to exist and amount unable to be determined until a later date.
C)Probable and non-interest bearing.
D)Known to exist and interest bearing.

Question 57

[The following information applies to the questions displayed below.]
On November 1,Year 1,Noble Co.borrowed $80,000 from South Bank and signed a 12%,six-month note payable,all due at maturity.The interest on this loan is stated separately.
How much interest expense will Noble recognize on this note in Year 2?

A)$9,600.
B)$4,800.
C)$2,400.
D)$3,200.

Question 58

A high interest coverage ratio is a sign of creditworthiness.

Question 59

On October 1,2018,Master's Co.borrows $500,000 from its bank for five years at an annual interest rate of 10%.According to the terms of the loan,the principal amount will not be due for five years.Interest accrues monthly on the first day of each month,beginning November 1,2018.With respect to this borrowing,Master's December 31,2018,balance sheet included only a long-term note payable of $500,000.As a result:

A)The December 31,2018,financial statements are accurately presented.
B)Liabilities are understated by $12,500 accrued interest payable.
C)Liabilities are understated by $8,333 accrued interest payable.
D)Liabilities are understated by $4,167 accrued interest payable.

Question 60

On November 1,Metro Corporation borrowed $55,000 from a bank and signed a 12%,90-day note payable in the amount of $55,000.The November 30 adjusting entry will be (assume 360 days in year):

A)Debit Interest Expense $550 and credit Notes Payable $550.
B)Debit Interest Expense $550 and credit Interest Payable $550.
C)Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.
D)Debit Interest Expense $550 and credit Cash $550.

Question 61

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

Question 62

What is the amount of the interest expense Able will recognize on this note in 2019?

A)$18,000
B)$31,500
C)$36,000
D)$54,000

Question 63

[The following information applies to the questions displayed below.]
On September 1,2018,Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price.Interest on the note is stated at an annual rate of 9% and is paid at maturity.In its December 31,2018,balance sheet,Able correctly presented the note and interest payable as follows:

How much must Able pay Regal Corporation on September 1,2019,when the note matures?

A)$600,000
B)$618,000
C)$654,000
D)$636,000

Question 64

[The following information applies to the questions displayed below.]
The average employee of Girard Corporation earns gross pay of $75,000 per year.The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
In addition,Girard pays $425 per month per employee for group health insurance.
Which of the following represents the largest amount withheld from employees' paychecks?

A)Workers' compensation insurance.
B)Social Security and Medicare.
C)Personal income taxes.
D)Group health insurance.

Question 65

Employers are required to pay all of the following on the wages paid to each employee except:

A)Social security taxes.
B)Worker's compensation insurance.
C)Medicare taxes.
D)Pension plan benefits.

Question 66

The current portion of long-term debt should be reported:

A)Separately in the long-term liabilities section of the balance sheet.
B)In the long-term liabilities section of the balance sheet,along with the other long-term debt.
C)In the current liabilities section of the balance sheet.
D)In a separate section of the balance sheet,between long-term liabilities and shareholders' equity.

Question 67

What is the total cash (including interest)paid for the building purchased by Able?

A)$800,000
B)$836,000
C)$854,000
D)$816,000

Question 68

[The following information applies to the questions displayed below.]
The average employee of Girard Corporation earns gross pay of $75,000 per year.The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
In addition,Girard pays $425 per month per employee for group health insurance.
Which of the following is the largest payroll-related expense incurred by Girard?

A)Group health insurance premiums.
B)Income taxes expense.
C)The employer's share of social security taxes.
D)Wages and salaries expense.

Question 69

An employer's total payroll-related costs always exceed the wages and salaries earned by employees by:

A)Amounts withheld from employees' pay.
B)Payroll taxes plus mandated programs such as workers' compensation insurance.
C)50%.
D)Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees,because of amounts withheld from employees' checks.

Question 70

Which of the following payroll costs are shared equally by the employer and the employee?

A)State unemployment taxes.
B)Workers' compensation.
C)Social security.
D)Federal unemployment taxes.

Question 71

[The following information applies to the questions displayed below.]
The average employee of Girard Corporation earns gross pay of $75,000 per year.The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
In addition,Girard pays $425 per month per employee for group health insurance.
Which of the following payroll taxes do not stop once an employee reaches a certain level of income:

A)Medicare taxes.
B)Social security taxes.
C)Unemployment taxes.
D)Medicare,Social security,and unemployment taxes.

Question 72

[The following information applies to the questions displayed below.]
The average employee of Girard Corporation earns gross pay of $75,000 per year.The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):
In addition,Girard pays $425 per month per employee for group health insurance.
Which of the following represents the second largest payroll related expense incurred by Girard?

A)Group health insurance premiums.
B)Income taxes expense.
C)The employer's share of social security taxes and Medicare taxes.
D)Wages and salaries expense.

Question 73

The amounts that a business withholds as taxes from an employee's earnings:

A)Represent payroll taxes expense to the employer.
B)Are deposited in an interest-bearing account until the employee is terminated.
C)Represent miscellaneous revenue to the employer.
D)Represent current liabilities to the employer.

Question 74

The adjusting entry at December 31,2018,with respect to this note included:

A)A debit to Interest Expense for $18,000.
B)A credit to Cash for $18,000.
C)A credit to Notes Payable for $18,000.
D)A credit to Interest Expense for $18,000.

Question 75

Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31,2018.What is the effect of this error on the financial statements for 2018?

A)Total liabilities are overstated.
B)Net income is overstated.
C)Owners' equity is understated.
D)Interest Payable is overstated.

Question 76

[The following information applies to the questions displayed below.]
Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year.The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition,Stone provides group health insurance for its entire workforce.The cost of this insurance is $350 per month per employee.
In addition,Stone provides group health insurance for its entire workforce.The cost of this insurance is $350 per month per employee.
The company's annual payroll-related expenses amount to approximately:

A)$1,085,600.
B)$1,181,850.
C)$1,250,700.
D)$900,000.

Question 77

On November 1 of the current year,Garcia Company borrowed $50,000 by issuing a 9%,six-month note payable,all due at maturity date.Interest expense on this note to be recognized during the current year amounts to:

A)$500.
B)$750.
C)$1,500.
D)$4,500.

Question 78

At December 31,Year 1,the adjusting entry with respect to this note includes a:

A)Credit to Interest Payable for $1,600.
B)Credit to Notes Payable for $1,600.
C)Debit to Interest Expense for $3,200.
D)Credit to Cash for $3,200.

Question 79

The Social Security tax paid by an employer is:

A)Greater than the amount paid by the employee.
B)Less than the amount paid by the employee.
C)Equal to the amount paid by the employee.
D)The employer does not pay Social Security tax,only the employee pays the tax.

Question 80

[The following information applies to the questions displayed below.]
On September 1,2018,Select Company borrowed $600,000 from a bank and signed a 12%,six-month note payable,with interest on the note due at maturity.
The total amount of the current liability (including interest payable)for this loan that appears in Select Company's balance sheet at December 31,2018,is:

A)$600,000.
B)$624,000.
C)$636,000.
D)$672,000.