Deck 11: Liabilities

Question 1

When a liability increases which of the following is correct?

A) An expense may increase.
B) An asset may decrease.
C) Shareholders' equity may increase.
D) Revenue may increase.

Answer 1

A

Question 2

An employee earns $1000 a week and the following deductions are made: income tax $150, superannuation $90, union dues $20. The journal entry to record this transaction would include:

A) Dr Union dues due $20.
B) Dr Wages expense $740.
C) Cr Wages payable $1000.
D) Dr Wages expense $1000.

Answer 2

D

Question 3

Assume that on 1 January 2016 the company issued $100 000 10-year bonds with a 10 per cent coupon rate paid semi-annually. The bond is issued to yield a 12 per cent return to investors selling for $88 529. What would be the debit journal entry to record the sale of the bond on 1 January 2016?

A) Dr Cash $88 529
B) Dr Cash $100 000
C) Dr Bonds $88 529
D) Dr Bonds $100 000

Answer 3

A

Question 4

The company borrowed $1 million on 1 June 2015, with principal and interest to be repaid in three years' time. The interest rate is 12 per cent per annum. What is the interest expense for the year ended 30 June 2015?

A) $0
B) $10 000
C) $120 000
D) None of the answers provided

Question 5

Assume that on 1 January 2016 the company issued $100 000 10-year bonds with a 10 per cent coupon rate paid semi-annually. The bond is issued to yield a 12 per cent return to investors selling for $88 529. Which of the following would be part of the journal entry on 1 January 2016?

A) Dr Discount on bonds $11 471
B) Dr Premium on bonds $11 471
C) Cr Discount on bonds $11 471
D) Cr Premium on bonds $11 471

Question 6

Which of the following is a liability?

A) Unearned revenue
B) Sales revenue
C) Accrued revenue
D) Prepayments

Question 7

As a result of some major excavations this year for mining, PLM Ltd is obliged to carry out land restoration at the end of the excavations. This cost of the restoration will be shown in the balance sheet under:

A) accounts payable.
B) accruals.
C) provisions.
D) contingent liability.

Question 8

Jim Ltd owes $120 000 on its loan and during the next year must make 12 monthly payments of $1500 including interest. If the interest will amount to $10 800 over the next year, his balance sheet will show:

A) a current liability of $18 000.
B) accrued interest of $10 800.
C) a noncurrent liability of $102 000.
D) a current liability of $7200.

Question 9

Interest owed to the bank by MNO Ltd would appear on MNO's balance sheet as:

A) accounts payable.
B) an accrual on the balance sheet.
C) a provision on the balance sheet.
D) contingent liability.

Question 10

Amounts owing to an advertising company as per an invoice received would appear on the balance sheet as:

A) accounts payable.
B) accruals.
C) provisions.
D) contingent liability.

Question 11

Which of the following is NOT a liability?

A) Allowance for doubtful debts
B) Provision for employee entitlements
C) Accounts payable
D) Provision for warranties

Question 12

Which of the following is NOT a liability?

A) Provision for warranty
B) Prepayments
C) Accrued expenses
D) Revenue received in advance

Question 13

Assume that on 1 January 2016 the company issued $100 000 10-year bonds with a 10 per cent coupon rate paid semi-annually. The bond is issued to yield a 12 per cent return to investors selling for $88 529. What is the interest expense for the first six months?

A) $4426
B) $5000
C) $5312
D) $6000

Question 14

The company borrowed $1 million on 1 June 2015, with principal and interest to be repaid in three years' time. The interest rate is 12 per cent per annum. The effect on the 30 June 2016 financial statements was:

A) an increase in liabilities and a decrease in profit.
B) an increase in liabilities but no effect on profit.
C) an increase in profit but no effect on liabilities.
D) no effect on either profit or liabilities.

Question 15

Which of the following is NOT a liability?

A) Unearned revenue
B) Provision for employee entitlements
C) Accrued revenue
D) Accrued expenses

Question 16

Which of the following is a liability?

A) Revenue received in advance
B) Accrued revenue
C) Prepayments
D) None of the answers provided

Question 17

Future warranty costs related to this year's sales will appear in the balance sheet under:

A) an accrual on the balance sheet.
B) a provision on the balance sheet.
C) a contingent liability on the balance sheet.
D) a contingent liability in the notes to the accounts.

Question 18

Which of the following is NOT true? When a liability increases:

A) cash may increase.
B) revenue may increase.
C) another liability may decrease.
D) expenses may increase.

Question 19

When unearned revenue increases:

A) cash increases.
B) an expense increases.
C) an expense decreases.
D) revenue increases.

Question 20

Which of the following items would NOT be recognised as a liability?

A) Advances from customers for goods and services to be delivered later
B) Warranty on products sold during the year
C) Final dividend recommended by directors, prior to the annual meeting
D) A dispute with a customer where there is some possibility that the company could lose the dispute

Question 21

When a business collects GST from customers, it records:

A) a contra asset.
B) a liability.
C) an expense.
D) an asset.

Question 22

RST has been sued by a competitor for a potential copyright infringement. Legal advice is divided over the likelihood of the success of the claim and the likely damages, if any. It would be shown as:

A) an accrual on the balance sheet.
B) a provision on the balance sheet.
C) a contingent liability on the balance sheet.
D) a contingent liability in the notes to the accounts.

Question 23

A retailer buys 200 tables at $550 each (including GST of $50) and sells all of them for $880 each (including GST of $80). How much needs to be remitted to the tax department?

A) $6000
B) $16 000
C) $10 000
D) $15 000

Question 24

The auditors informed the company that the provision for long service leave was understated by $100 000 at 30 June 2016 and that the account should be adjusted. The company adjusted the account so that:

A) liabilities increase and profit decreases.
B) liabilities increase but profit is unaffected.
C) profit increases but there is no effect on liabilities.
D) there is no effect on either profit or liabilities.

Question 25

XYZ Ltd provides a service on credit, charging $2000 + $200 GST. The journal entry would include:

A) Dr Accounts receivable $2000.
B) Cr Sales $2000.
C) Dr GST Payable $200.
D) Cr Sales $2200.

Question 26

A contingent liability should be shown by way of a note to the accounts when:

A) there is significant uncertainty as to whether a sacrifice of future economic benefits will be required.
B) the amount of the obligation cannot be measured reliably.
C) estimation procedures were necessary to determine its amount.
D) there is significant uncertainty as to whether a sacrifice of future economic benefits will be required and the amount of the obligation cannot be measured reliably.

Question 27

Which of the following would NOT be shown as a contingent liability?

A) Estimated future cost of providing superannuation for work already carried out by employees
B) A dispute with the taxation department where legal advice suggests that the company will win the dispute
C) A company providing a guarantee to a lender for a loan taken out by a subsidiary company where a default on the loan is very unlikely
D) Company defending a claim for unspecified damages where the amount of the claim cannot be reliably measured

Question 28

Jones Ltd sold a machine on credit for $11 000 including GST of 10 per cent. The journal entry to record this transaction would include:

A) Dr Accounts receivable $11 000.
B) Cr Sales $11 000.
C) Dr GST Payable $1000.
D) Dr Accounts receivable $10 000.