Deck 10: Reporting and Interpreting Bond Securities

Question 1

On the company's 20A year-end statement of financial position, the liability related to this note should be reported as which of the following?

A) A $12,480 current liability.
B) A $12,000 current liability.
C) A $12,480 long-term liability.
D) A $12,000 long-term liability.

Answer 1

B

Question 2

Future income tax obligations should be reported on which of the following?

A) Statement of changes in equity.
B) A corporation's statement of financial position.
C) A corporation's income statement.
D) A corporation's income tax return.

Answer 2

B

Question 3

Freeman Inc. reported a profit of $40,000 for 20A. The income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 20B. Assuming a 30% income tax rate, this situation would cause a 20A future tax amount of which of the following?

A) $3,000 (debit)
B) $900 (credit)
C) $900 (debit)
D) $3,000 (credit)

Answer 3

B

Question 4

Income tax expense reported on the income statement is $45,000 for 20A, and the tax return for 20A (the first year) shows an income tax liability of $42,000 because of a deduction that cannot be taken until 20B. The future income tax amount on the statement of financial position at the end of 20A will be which of the following?

A) credit of $45,000
B) credit of $42,000
C) credit of $3,000
D) debit of $3,000

Question 5

Goodman Company borrowed $100,000 cash on September 1, 20B, and signed a one-year, 12%, interest-bearing note payable. What would be the required adjusting entry at the end of the accounting period, December 31, 20B?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 6

The current portion of long-term debt should be

A) removed from the long-term portion of debt with a journal entry.
B) classified as a current liability on the statement of financial position.
C) classified as a long-term liability on the statement of financial position.
D) paid immediately.

Question 7

In 2013, C Co reported a trade payables turnover ratio of 1.85 and a current ratio of 0.66. Their statement of financial position shows $2.1 billion in marketable securities not included in their current assets and cash flow from operations. Which of the following interpretations is most likely?

A) Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors in a timely manner.
B) C Co practices aggressive cash management policies including investing excess cash and using vendors to finance operations by making slow payment to them.
C) C Co must be carrying a low amount of current liabilities in comparison to its total liabilities.
D) Since the two ratios are fairly high, it indicates C Co has little difficulty paying its bills in a timely manner.

Question 8

A company receives $99, of which $9 is for PST (provincial sales tax). The journal entry to record the sale would include a

A) debit to Cash for $90.
B) debit to PST Expense for $9.
C) credit to PST Payable for $9.
D) debit to Sales for $99.

Question 9

Deferred revenue is another term for which of the following?

A) Trade payables
B) Sales revenue
C) Unearned revenue
D) Prepaid expenses

Question 10

GST (goods and services tax) collected by a retailer are expenses

A) of the customers.
B) of the government.
C) that are not recognized by the retailer until they are submitted to the government.
D) of the retailer.

Question 11

Situations which require that future income tax be reported involve a difference that is called which of the following?

A) A temporary difference.
B) A reversing tax inverse difference.
C) A permanent difference.
D) A contingent liability.

Question 12

A contingent liability is recorded in the accounting records

A) if it will possibly become an actual liability, and the exact amount is unknown.
B) if the contingency has not already been disclosed in the notes to the financial statements.
C) under no circumstances.
D) if a reasonable estimate of the expected loss can be determined and if it is probable.

Question 13

On January 1, 2013, Osler Limited, a calendar-year company, issued $160,000 of notes payable, of which $40,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is

A) Current Liabilities, $120,000; Long-term Debt, $40,000.
B) Long-term Debt, $160,000.
C) Current Liabilities, $160,000.
D) Current Liabilities, $40,000; Long-term Debt, $120,000.

Question 14

In 2013, Toys 4 U had a trade payables turnover ratio of 6.08; in 2012, 5.87; and 5.45 in 2011. Which statement is true about what the ratios indicate?

A) Toys 4 U is taking longer to pay its vendors in 2013 versus 2012.
B) Toys 4 U has been increasing its average payables at a faster rate than its cost of goods sold has increased.
C) Toys 4 U is taking less time to pay vendors in 2013 than it took in both 2012 and 2011.
D) Toys 4 U is taking less time to collect from its customers.

Question 15

Purchase of inventory for cash will:

A) increase the quick ratio.
B) increase the current ratio.
C) decrease the current ratio.
D) decrease the quick ratio.

Question 16

Site Company had the following account balances related to payroll at the end of the period: Without considering any employer payroll taxes, Site would record Salaries Payable for the pay period amounting to which of the following?

A) $75,000
B) $95,000
C) $61,000
D) $68,000

Question 17

Which of the following is not a typical current liability?

A) Unearned revenue
B) Income tax payable
C) Sales taxes payable
D) Bonds payable

Question 18

Liquidity ratios measure a company's

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

Question 19

Which of the following is correct with respect to a contingent liability that is "reasonably possible" but "cannot reasonably be estimated"?

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 be reported as a liability, but not recorded.
D) It must only be disclosed as a note to the financial statements.

Question 20

The journal entry required on the company's books to record the note payable on July 1, 20A would include which of the following?

A) A credit to notes payable for $12,960.
B) A debit to cash for $11,040.
C) A debit to interest expense for $960.
D) A credit to notes payable for $12,000.

Question 21

A cash register tape shows cash sales of $2,000 and provincial sales tax (PST) of $120. The journal entry to record this information is

A)

B)

C)
D)

Question 22

GST (goods and services tax) collected by a retailer is recorded by

A) crediting GST Revenue.
B) debiting GST Expense.
C) debiting GST Payable.
D) crediting GST Payable.

Question 23

Which of the following most likely would be classified as a current liability?

A) Three-year notes payable
B) Dividends payable
C) Mortgage payable
D) Bonds payable

Question 24

The amount of sales tax collected by a retail store when making sales is

A) a miscellaneous revenue for the store.
B) recorded as an operating expense.
C) not recorded because it is a tax paid by the customer.
D) a current liability.

Question 25

How should the amount of federal income tax that is withheld from employees' paychecks by the employer be recorded?

A) On the employer's books as revenue.
B) On the employer's books as a current liability.
C) On the employer's books as an asset.
D) It should not be recorded on the employer's books.

Question 26

On September 1, Linwell Corp. borrowed $70,000 from the Highland Bank for five months at 9%. Interest is due at maturity. The company's year-end is December 31, at which time any outstanding interest was accrued. The entry to record payment of the note and accrued interest on February 1, the due date, is:

A)
B)

C)
D)

Question 27

Most companies pay current liabilities

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

Question 28

The relationship between current assets and current liabilities is

A) called the matching principle.
B) useful in determining the amount of a company's long-term debt.
C) useful in determining profit.
D) useful in evaluating a company's liquidity.

Question 29

G Co and A Co are both in the biotechnology industry. In 2013, G Co reported a trade payables turnover of 7.71 and A Co reported a ratio of 3.06. Which of the following is an incorrect reason for the difference in ratios?

A) A Co has a lower average trade payables in comparison to G co.
B) G Co has a better payment record in terms of timely payment to vendors.
C) A Co is taking longer to pay vendors.
D) A Co has a higher average trade payables in comparison to G co.

Question 30

Alamo Autoworks, Inc. is involved in a lawsuit. Their lawyers state that it is probable that the jury will find in favour of the plaintiff and Alamo will owe two million dollars. Even though the lawsuit is not yet settled, Alamo should record a liability in the statement of financial position and which of the following?

A) A loss
B) A prepaid expense
C) Deferred revenue
D) A contra-asset

Question 31

A Co, a biotechnology company, reported cost of goods sold of $345.2 million and trade payables of $121.6 million for 2013. In 2012, cost of goods sold was $300.8 million and trade payable was $103.9 million. What was A Co's trade payables turnover ratio in 2013?

A) 2.90
B) 2.84
C) 3.06
D) 2.86

Question 32

Carly Design Inc. received its annual property tax bill for $8,400 in January. It was paid when due on March 31. Carly Design's year end is Dec 31. The Dec 31 account balances should be

A) $0 for Prepaid Property Tax, $0 for Property Tax Payable
B) $2,100 for Prepaid Property Tax, $6,300 for Property Tax Expense
C) $2,100 for Prepaid Property Tax, $2,100 for Property Tax Payable
D) $700 for Prepaid Property Tax, $7,700 for Property Tax Expense

Question 33

The federal government requires which of the following?

A) Only the employer to pay CPP contributions.
B) Only the employee to pay CPP contributions.
C) Neither the employer nor the employee to pay CPP contributions.
D) Both the employer and the employee to pay CPP contributions.

Question 34

A customer paid a total of $84,000 for a purchase, including 5% PST (provincial sales tax). What was the PST amount?

A) $4,000
B) $4,200
C) $84,000
D) $80,000

Question 35

In 2013, Toys 4 U reported inventory of $1,902 million and trade payables of $1,415 million. In 2012, the company reported inventory of $2,464 million and trade payables of $1,280 million. What was the effect on the 2013 cash flow from operating activities?

A) A decrease in cash of $427 million.
B) A decrease in cash of $697 million.
C) An increase in cash of $697 million.
D) An increase in cash of $427 million.

Question 36

Cress Company is involved in a lawsuit. Note disclosure of the contingent liability which could arise does NOT have to be presented if the probability of Cress owing money as a result of the lawsuit is which of the following?

A) Reasonably possible and the amount cannot be reasonably estimated.
B) Probable and the amount cannot be reasonably estimated.
C) Reasonably possible and the amount can be reasonably estimated.
D) Remote and the amount cannot be reasonably estimated.

Question 37

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

A) An understatement of liabilities and shareholders' equity.
B) An overstatement of profit, an understatement of liabilities, and an overstatement of shareholders' equity.
C) Profit to be understated and liabilities to be understated.
D) Profit to be overstated and assets to be understated.

Question 38

A 9% six-month note for $10,000 was recorded on October 1. What journal entry would be recorded at the year end of December 31 if interest is payable at maturity?

A)
B)

C)
D)

Question 39

Which of the following method of ordering is normally used to present current liabilities on the statement of financial position?

A) In alphabetical order
B) In order of their magnitude
C) In order of their liquidity (due date)
D) In order of reverse liquidity

Question 40

Interest rates on notes are usually stated as a(n)

A) semi-annual rate.
B) annual rate.
C) monthly rate.
D) daily rate.

Question 41

Notes payable usually require the borrower to pay interest.

Question 42

When a company increases trade payables from one year to the next, what is the effect on cash flows?

A) An increase in cash because we have not paid cash for all the inventory and services purchased on credit during the period.
B) A decrease to cash because we will have to pay these liabilities in the future.
C) A decrease in cash caused by paying down our debt to vendors.
D) An increase to cash because we have received cash from vendors.

Question 43

The "trade payables" account should generally be used only for trade payables (obligations owed to suppliers in the normal course of business) which relate to the purchase of goods and services.

Question 44

An employee receives a bi-weekly gross salary of $2,000. Income tax is $218, CPP is $99, EI is $36, and union dues are $50. What is the amount of the employee's take home pay (net pay) on a bi-weekly basis?

A) $2,000
B) $1,732
C) $1,782
D) $1,597

Question 45

Match the liabilities with their usual classification on the statement of financial position by entering the appropriate letters in the spaces.
Usual Classification
A. Current liability
B. Long-term liability
C. Current or long-term liability
D. None of the above Liabilities

Question 46

An accrued expense arises because an expense item has been prepaid, but the related expense has not been incurred as yet.

Question 47

A company's quick ratio:

A) indicates the length of time the company takes to pay its short-term creditors.
B) indicates how quickly the company converts its current assets to cash.
C) is computed by dividing current assets by current liabilities, excluding accounts payable for inventory purchases.
D) can never be larger than its current ratio at the same date.

Question 48

The following is a partial list of account balances from the books of Ellsworth Enterprise at the end of 20B:
Based solely upon these balances, what amount of current liabilities should appear on Ellsworth's 20B year-end statement of financial position?

A) $5,400
B) $4,800
C) $4,300
D) $3,900

Question 49

Bison Corp. issues a 5 year 8%, $60,000 note payable on March 1. The terms of the note include monthly blended principal and interest payments of $1,217. The entry to record the second instalment payment will show a:

A) debit to Interest Expense for $400.
B) credit to Interest Expense for $395.
C) debit to Notes Payable of $822.
D) debit to Cash for $1,217.

Question 50

Jake Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should be recorded on the books if the probability of Jake owing money as a result of the lawsuit is which of the following?

A) Probable and the amount can be reasonably estimated.
B) Reasonably possible and the amount can be reasonably estimated.
C) Probable and the amount cannot be reasonably estimated.
D) Remote and the amount can be reasonably estimated.

Question 51

In 2013, P Co reported an increase in trade receivables of $303 million, and an increase in inventory of $284 million. They also experienced an increase in short-term borrowings of $3,921 million and an increase in trade payables of $253 million. Calculate the net cash effect of these changes.

A) $4,761 million decrease
B) $4,761 million increase
C) $3,587 million increase
D) $3,587 million decrease

Question 52

Future Income taxes are caused by which of the following?

A) Differences in IFRS and ITA rules pertaining to when revenue and expenses should be recognized.
B) Accounting errors.
C) The fact that the value of one country's currency relative to that of another can change over time.
D) A company's inability to pay income tax due in a particular tax year.

Question 53

Current liabilities are short-term obligations that will be paid within the current operating cycle of the business or within two years of the statement of financial position date, whichever is longer.

Question 54

On September 1, Hauser Corp. borrowed $70,000 from the Metro Bank for five months at 9%. Interest is payable at maturity. The entry Hauser must make on December 31, its year-end, assuming no prior accruals is:

A)
B)

C)
D)

Question 55

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

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

Question 56

Changes in trade payables and accrued liabilities affect cash flows from operating activities.

Question 57

Property tax payable is classified as a long-term liability because it is related to property, a noncurrent asset.

Question 58

If a company intends to refinance a liability that is due within one year, that liability should not be classified as a current liability.

Question 59

In 2013, P Co reported a trade payables turnover ratio of 2.49 and C Co reported a turnover ratio of 1.74 for that same year. Which of the following statements is true?

A) On a comparative basis to cost of goods sold, P Co carries more in average payables than does C Co.
B) C Co pays their vendors in a more timely manner than P Co pays their vendors.
C) It is unclear if P Co pays their vendors in a more timely manner than C Co.
D) P Co took approximately 147 days while C Co took about 210 days to pay vendors.

Question 60

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

Question 61

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

Question 62

A commitment is a contractual agreement to enter into a transaction with another party in the future.

Question 63

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

Question 64

G Co, a biotechnology company, reported current assets of $1,326.5 million and current liabilities of $484.1 million in 2013 and in 2012, current assets of $1,242.0 million and
$291.3 million of current liabilities. Therefore, working capital for G Co. increased from 2012 to 2013.

Question 65

A low trade payables turnover ratio caused by an aggressive cash management strategy, while the quick ratio is adequate, would be perceived by analysts as a weakness.

Question 66

When the current assets of a company such as trade receivables or inventory increase during the year, the increase provides additional cash inflow from operating activities.

Question 67

All contingent liabilities should be classified as either current or long-term liabilities on the statement of financial position for the current period.

Question 68

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

Question 69

A current liability must be paid out of current earnings.

Question 70

Simple interest is calculated as: Principal x Time.

Question 71

Most notes are not interest bearing.

Question 72

A contingent liability that is "probable" and can be "reasonably estimated" must be accrued and reported as a liability.

Question 73

A contingent liability that has a remote probability of occurrence must be disclosed in a note to the financial statements.

Question 74

A company that sells primarily on a cash basis could support a lower quick ratio because their cash inflow is faster than a company selling on credit.

Question 75

The amount of salary expense that a company records for a pay period will usually be less than the amount of salary payable that it records.

Question 76

The time value of money refers to the fact that interest accrues on borrowed money with the passage of time.

Question 77

Analysts use the quick ratio to assess the profitability of a company.

Question 78

Notes payable are sometimes used instead of trade payables.

Question 79

Liabilities represent an obligation to pay that the company must satisfy.

Question 80

Payroll liabilities include the employer's share of CPP contributions and EI premiums.