Deck 10: Reporting and Analyzing Liabilities

Question 1

Notes payable usually require the borrower to pay interest.

Answer 1

True

Question 2

If any portion of a non-current liability is to be paid in the next year, the entire debt should be classified as a current liability.

Answer 2

False

Question 3

When a business sells an item and collects Harmonized Sales Tax (HST) on it, a current liability arises.

Answer 3

True

Question 4

Notes payable are sometimes used instead of accounts payable.

Question 5

Even though current and non-current debt must be shown separately on the statement of financial position, it is not necessary to prepare a journal entry to recognize this.

Question 6

All long-term notes payable must be secured.

Question 7

Current liabilities are expected to be paid within one year.

Question 8

"Current maturities of non-current debt" refers to the amount of interest on notes payable that must be paid in the current year.

Question 9

Unearned revenues should be classified as "other revenues and gains" on the income statement.

Question 10

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

Question 11

If a company's fiscal year is the same as the calendar year used for property tax purposes, there should be no prepaid property tax on its year-end financial statements but there may be a property tax liability.

Question 12

Property tax payable is classified as a non-current liability because it is related to property, which is a non-current asset.

Question 13

If drawing on an operating line of credit results in a negative cash balance, a current liability known as bank indebtedness results.

Question 14

If interest is due at maturity, a $50,000, 4%, 9-month note payable requires an interest payment of $1,500.

Question 15

Amounts available to be drawn in the future from an operating line of credit improve a company's liquidity.

Question 16

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

Question 17

A current liability must be paid out of current profit.

Question 18

Most notes and bank loans are not interest bearing.

Question 19

A mortgage payable is often secured by collateral such as a building.

Question 20

Interest expense on a bank loan payable is only recorded at maturity.

Question 21

Bonds are often traded on an organized exchange, such as the Toronto Stock Exchange (TSX).

Question 22

The face value of a bond is the amount of principal and interest due at the maturity date.

Question 23

Bonds are a form of interest-bearing notes payable.

Question 24

With blended principal and interest payments, the equal periodic payments result in the principal portion increasing each period.

Question 25

All transactions between bondholders and other investors must be recorded by the issuing corporation.

Question 26

While short-term notes are generally repayable in full at maturity, most long-term notes are repayable in a series of periodic payments called instalments.

Question 27

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

Question 28

The total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

Question 29

If bonds are redeemable, they can be retired by the issuer before they mature.

Question 30

With fixed principal payments on a long-term note payable, the principal portion increases each period.

Question 31

With fixed principal payments on a long-term note payable, the interest portion does not change each period.

Question 32

The present value of a bond is the amount at which it sells in the marketplace.

Question 33

The issue of bonds at a discount usually means the market has doubts about the financial strength of the issuer.

Question 34

A financial liability means there is a contractual obligation to pay cash in the future.

Question 35

If $150,000 face value bonds are issued at 102.5, the proceeds received will be $102,500.

Question 36

If a bond has a face value of $10,000 and a 6% coupon interest rate, then the semi-annual interest payment will be $600.

Question 37

The carrying amount of bonds issued at a discount will initially be higher than the face value.

Question 38

With fixed principal payments on a long-term note payable, the interest portion decreases each period.

Question 39

With blended principal and interest payments, the equal periodic payments result in the interest portion increasing each period.

Question 40

The calculation of interest to be paid each interest period for a bond payable is not influenced by any premium or discount upon issue.

Question 41

Amortization of a bond premium decreases interest expense recorded by the issuer.

Question 42

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

Question 43

Current liabilities are generally presented on the statement of financial position in order or liquidity, but IFRS allows presentation in reverse order of liquidity as well.

Question 44

Liabilities are classified on the statement of financial position as current or
(a)deferred.
(b)unearned.
(c)non-current.
(d)accrued.

Question 45

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

Question 46

The carrying amount of a bond is its face value less any unamortized premium or plus any unamortized discount.

Question 47

The effective-interest method is required for companies reporting under IFRS, but optional for companies using ASPE if other methods do not result in material differences.

Question 48

A contingent liability may materialize in the future because of something that happened in the past.

Question 49

Under the effective-interest method, the interest paid each year is the same but the interest expense recorded is different.

Question 50

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

Question 51

If $100,000 bonds with a carrying amount of $93,500 are redeemed at 98, a loss on redemption will be recorded.

Question 52

Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.

Question 53

"Off-balance-sheet financing" refers to a situation where liabilities are recorded in the income statement instead of the statement of financial position.

Question 54

The debt to total assets ratio measures the percentage of the total assets provided by creditors.

Question 55

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

Question 56

When a bond is retired early, a gain on redemption is recorded when the cash paid is less than the carrying amount.

Question 57

Provisions are liabilities of uncertain timing or amount, along with some uncertainty as to whether the liability will have to be paid.

Question 58

The times interest earned ratio is calculated by dividing net profit by interest expense.

Question 59

Gains or losses on bond redemption are reported separately as a non-operating item in the income statement.

Question 60

If the market interest rate at the date of a bond issue is greater than the coupon interest rate, the bond will be issued at a premium.

Question 61

A company receives $297, of which $27 is for PST (provincial sales tax). The journal entry to record the sale would include a
(a)credit to Sales Tax Expense for $27.
(b)credit to Sales Tax Payable for $27.
(c)credit to Sales for $297.
(d)debit to Cash for $270.

Question 62

As interest is recorded on a bank loan payable, the Interest Expense account is
(a)increased; the Bank Loan Payable account is increased.
(b)increased; the Bank Loan Payable account is decreased.
(c)increased; the Interest Payable account is increased.
(d)decreased; the Interest Payable account is increased.

Question 63

Use the following information for questions
On October 1, 2012, Carla's Carpet Service Limited borrows $80,000 from Regional Bank by signing a 3-month, $80,000, 4% bank loan. Interest is due the first of each month.
What adjusting entry is required at December 31, 2012?

Question 64

The total interest charged on a 5%, $300,000 four-month bank loan payable would be
(a)$15,000.
(b)$ 5,000.
(c)$4,500.
(d)$1,250.

Question 65

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 66

Failure to record a liability will probably
(a)result in overstated profit.
(b)result in overstated total liabilities and shareholders' equity.
(c)have no effect on profit.
(d)result in overstated total assets.

Question 67

Most companies pay current liabilities
(a)out of current assets.
(b)by issuing notes payable.
(c)by issuing common shares.
(d)by creating non-current liabilities.

Question 68

Dream Design Inc. received its annual property tax bill for $16,800 in January. It was paid when due on March 31. Dream Design's year end is Dec 31. The Dec 31 balances should be
(a)$4,200 for Prepaid Property Tax, $12,600 for Property Tax Expense.
(b)$4,200 for Prepaid Property Tax , $4,200 for Property Tax Payable.
(c)$0 for Prepaid Property Tax, $0 for Property Tax Payable.
(d)$1,400 for Prepaid Property Tax, $15,400 for Property Tax Expense.

Question 69

Current liabilities are
(a)not receivable for more than one year.
(b)not payable for more than two years.
(c)receivable within one year.
(d)payable within one year.

Question 70

Which of the following would most likely be classified as a current liability?
(a)Mortgage payable
(b)Bonds payable
(c)Operating lease
(d)Dividends payable

Question 71

A customer paid a total of $8,960 for a purchase, including 12% HST (Harmonized Sales Tax). How much was the HST?
(a)$8,960
(b)$8,000
(c)$1,075
(d)$960

Question 72

Layton Inc. had an operating line of credit of $100,000 and overdrew its bank balance to result in a negative cash balance of $15,000 at year-end. This would be reported in the statement of financial position as
(a)a current liability of $15,000.
(b)a non-current liability of $85,000.
(c)a current asset of $85,000.
(d)a current asset of $(15,000).

Question 73

Use the following information for questions
On October 1, 2012, Carla's Carpet Service Limited borrows $80,000 from Regional Bank by signing a 3-month, $80,000, 4% bank loan. Interest is due the first of each month.
The entry by Carla's Carpet Service to record payment of the loan and accrued interest on January 1, 2013 is

Question 74

GST (goods and services tax) collected by a retailer is recorded by
(a)crediting Sales Tax Revenue.
(b)debiting Sales Tax Expense.
(c)crediting Sales Tax Payable.
(d)debiting Sales Tax Payable.

Question 75

Use the following information for questions
On January 1 of this year, Saratoga Bank agrees to lend Tilbury Corp. $150,000. Tilbury Corp. signs a $150,000, 4%, 9-month loan. Interest is due at maturity.
The entry made by Tilbury Corp on January 1 to record the receipt of the loan is

Question 76

Very often, failure to record a liability means failure to record a(n)
(a)revenue.
(b)asset.
(c)note.
(d)expense.

Question 77

Use the following information for questions
On January 1 of this year, Saratoga Bank agrees to lend Tilbury Corp. $150,000. Tilbury Corp. signs a $150,000, 4%, 9-month loan. Interest is due at maturity.
What is the adjusting entry required if Tilbury Corp prepares financial statements on June 30?

Question 78

Interest expense on a note payable, with interest due at maturity, 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 79

Sales tax collected by a retail store when making sales is
(a)a miscellaneous revenue for the store.
(b)a current liability.
(c)not recorded because it is a tax paid by the customer.
(d)recorded as an operating expense.

Question 80

Use the following information for questions
On January 1 of this year, Saratoga Bank agrees to lend Tilbury Corp. $150,000. Tilbury Corp. signs a $150,000, 4%, 9-month loan. Interest is due at maturity.
What entry will Tilbury Corp make to repay the loan on September 30, assuming no further adjusting entries have been made since June 30?