Deck 10: Liabilities

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Notes payable usually require the borrower to pay interest.

Question 5

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 6

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

Question 7

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 8

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 Revenue and $8,000 in Sales Tax Expense.

Question 9

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 10

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

Question 11

A current liability must be paid out of current earnings.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

If $2,000,000 par value bonds with a carrying value of $1,990,400 are redeemed at 97, a loss on redemption will be recorded.

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

If HK$1,800,000, 5%, bonds are issued on January 1, 2014 and pay interest semi-annually on June 30 and December 31, the total amount of interest paid to bondholders in 2014 will be HK$90,000.

Question 39

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 40

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

Question 41

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

Question 42

51. Bond discounts must be amortized using the straight-line method.

Question 43

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 44

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

Question 45

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

Question 46

52. Payroll liabilities are reported on the statement of financial position as current liabilities.

Question 47

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

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

48. The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Question 50

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

Question 51

49. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Question 52

53. Every employer incurs liabilities relating to employees' salaries and wages.

Question 53

The times interest earned ratio is computed by dividing net income by interest expense.

Question 54

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

Question 55

50. Bond premiums must be amortized using the effective interest method.

Question 56

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

Question 57

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

Question 58

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

Question 59

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 60

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 61

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 62

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 63

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 64

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 65

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

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

Question 66

Admire County Bank agrees to lend Givens Brick Company $500,000 on January 1. Givens Brick Company signs a $500,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is

Question 67

On September 1, Joe's Painting Service borrows $250,000 from National Bank on a 4-month, $250,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is

Question 68

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 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 $500,000 on January 1. Givens Brick Company signs a $500,000, 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?

Question 71

On October 1, Steve's Carpet Service borrows €600,000 from First National Bank on a 3-month, €600,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

Question 72

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 73

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 74

Which of the following is usually not an accrued liability?

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

Question 75

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 76

All of the following are reported as current liabilities except

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

Question 77

On October 1, Steve's Carpet Service borrows €600,000 from First National Bank on a 3-month, €600,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is

Question 78

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 79

On September 1, Joe's Painting Service borrows $250,000 from National Bank on a 4-month, $250,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared?

Question 80

Admire County Bank agrees to lend Givens Brick Company $500,000 on January 1. Givens Brick Company signs a $500,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?