Deck 9: Current Liabilities and Long-Term Debt

Question 1

An obligation resulting from an event that has not yet occurred is an example of a(n) __________.

Answer 1

contingent liability

Question 2

Accrued liabilities, such as interest payable, would be considered a(n) __________.

Answer 2

known liability

Question 3

A liability, such as warranties payable, would be an example of a(n) __________.

Answer 3

estimated liability

Question 4

Which of the following would be considered a known liability?

A) Federal income tax payable
B) Warranties payable
C) Pending litigation
D) Notes payable
E) Both federal income tax payable and notes payable

Question 5

The majority of a company's liabilities are estimated liabilities.

Question 6

A company receives a note payable for $3,500 at 9% for 45 days. How much interest (to the nearest cent) will the customer owe using a 360-day year?

Question 7

Accounts payable would be an example of a(n) __________.

Question 8

A company receives a note payable for $5,000 at 10% for 50 days. How much interest (to the nearest cent) will the customer owe?

A) $10.00
B) $500.00
C) $68.49
D) $1.36
E) $86.49

Question 9

A contingent liability arises because of a past event, but is dependent upon a future event.

Question 10

Journalize the following transactions for Alpha Company:
May 13 Purchased inventory on account from ABC for $4,000.
May 22 Purchased inventory on account from Sara for $2,500.
May 27 Paid off the account from ABC.

Question 11

Which of the following would be considered an estimated liability?

A) Notes payable
B) Warranties payable
C) Pending litigation
D) Sales tax payable
E) Federal tax payable

Question 12

Which of the following would be considered a contingent liability?

A) Federal income tax payable
B) Warranties payable
C) Pending litigation
D) Contingency payable
E) Sales tax payable

Question 13

Unearned revenues are typically classified as current liabilities.

Question 14

The largest portion of accounts payable for most merchandising companies is related to the purchase of inventory on account.

Question 15

If a liability is not properly classified, it will have an effect on the:

A) quick ratio.
B) current ratio.
C) both the quick and current ratio.
D) total dollars of liabilities.
E) total dollars of current assets.

Question 16

Does the amount of an obligation need to be known in order for a liability to exist? Explain.

Question 17

A past transaction or event must have occurred for a __________ to exist.

Question 18

Identify the general ledger accounts that would be debited and credited when making a payment on account, such as a telephone bill.

Question 19

What is a major difference between an account payable and a note payable?

Question 20

Notes payable would be an example of a known liability.

Question 21

A mortgage is a secured note because the building serves as collateral.

Question 22

There are times when contingent liabilities are never recorded.

Question 23

Tim Hortons is a public company and prepares its financial statements in accordance to IFRS. The company has a contingent liability estimated at $232,000. The likelihood of the obligation occurring is remote or < 5%. What is the appropriate accounting treatment for the company?

Question 24

A mortgage is a special type of long-term note payable.

Question 25

Bonds are interest-bearing notes that are issued to a single lender.

Question 26

When the likelihood of an obligation occurring is virtually certain, what is the accounting treatment under IFRS and Canadian ASPE?

Question 27

Record the following sales transactions for Meranda Company:
Oct 3 Had sales of $3,500 in cash and $6,000 in credit. The harmonized
sales tax (HST) is 13%.
Oct 8 Had cash sales of $12,000 plus 13% HST.
Nov 15 Paid HST for Oct. 3 and Oct. 8 sales.
Nov 30 Received customer payment for Oct. 3 outstanding accounts receivable.

Question 28

Journalize the following transactions:
A magazine sells a 12-month magazine subscription for $60 per year. The company has collected cash for 1,200 subscriptions. Record the journal entries for:
Receipt of cash for the subscriptions (Feb 13).
Amount of revenue earned after mailing out 7 months of magazines (Sept 13).

Question 29

Which of the following would be considered a contingent liability?

A) Sales tax obligation
B) Mortgage obligation
C) Accounts payable obligation
D) Pending legal action
E) Notes obligation

Question 30

Are estimated liabilities generally classified as current or long-term liabilities?

Question 31

Even liabilities of unknown amounts are required to be placed on the balance sheet.

Question 32

Bonds payable are supported by a promissory note.

Question 33

Under IFRS, a __________ is a liability that has an uncertain timing or an uncertain amount.

Question 34

Amanda Industries, a private company, has a contingent liability estimated at $125,000 with a 70%-95% likelihood of the obligation occurring What is the appropriate accounting treatment for the company?

Question 35

A warranty is an example of a(n):

A) contingent liability.
B) known liability.
C) estimated liability.
D) settled liability.
E) unknown obligation.

Question 36

Contingent liabilities represent actual and not potential obligations.

Question 37

When the likelihood of an obligation occurring is possible, under Canadian ASPE what is the accounting treatment?

Question 38

A person or business who pays another party for the use of an asset is a lessee.

Question 39

Casey Company purchases inventory for $100,000, paying $40,000 in cash and signing a 3-year, 5% note payable for the remainder. The company has $90,000 sales in the month of March and estimates that 5% of product sales will require warranty repairs. Journalize the transactions below and identify which accounts are known liabilities and which are estimated liabilities.
Inventory purchase
Sales for March (25% on account, 75% in cash).
Estimated dollars for warranties.

Question 40

Disclosure is required under IFRS when the likelihood of the outcome (measurement) is:

A) virtually certain: > 95%.
B) possible: 5% - 50%.
C) remote: < 5%.
D) probable: 50% - 95%.
E) likely: 70% - 95%.

Question 41

The rate of interest that is printed on the bond is called the __________ rate of interest.

Question 42

The rate of interest at which investors are willing to pay for similar bonds of equal risk at the current time is the __________ rate of interest.

Question 43

A $300,000 issue of bonds that sold at 105 will cost __________.

Question 44

A lessor is a person who gives/ grants a lease.

Question 45

A $10,000 bond issue with a stated rate of interest of 7%, when the market rate of interest is 8%, means that the bond will be sold for:

A) $10,000.
B) $10,800.
C) less than $10,000.
D) the maturity value.
E) $10,700.

Question 46

If a bond's stated rate of interest is equal to the market rate of interest, the bond will be issued at __________.

Question 47

The amount that a borrower must pay back to the bondholders on the maturity date is the __________.

Question 48

Bonds that are backed by collateral are __________ bonds.

Question 49

If a $6,000, 10% , 10-year bond was issued at 104 on October 1, 2011, how much interest will accrue on December 31 if interest payments are made annually?

A) None
B) $104
C) $150
D) $500
E) $105

Question 50

Rental agreements are typically:

A) capital leases.
B) operating leases.
C) expense leases.
D) revenue leases.
E) financial leases.

Question 51

On October 31, 2011, Isaiah Industries recorded its semi-annual bond interest expense, which contained a credit to discount on bonds payable of $1,200. The adjusting entry on December 31, 2011 will show a credit to discount on bonds payable of:

A) $1,200.
B) $800.
C) $600.
D) $400.
E) $200.

Question 52

Debenture bonds are the same as __________ bonds.

Question 53

A $25,000 bond issue with a stated interest rate of 5%, when the market rate of interest is 4%, means that the bond will sell for:

A) $25,000.
B) more than $25,000.
C) $24,000
D) $24,750.
E) $23,750.

Question 54

Leases that are treated as financed purchases are called:

A) capital leases.
B) operating leases.
C) expense leases.
D) revenue leases.
E) non-financial leases.

Question 55

Which of the following is NOT a requirement of a capital lease?

A) There is no transfer of ownership at the end of the lease.
B) The agreement has a bargain purchase option.
C) The lease must cover at least 75% of asset's useful life.
D) The present value of lease payments must be 90% or more of market value of asset.
E) The present value of lease payments equals substantially all of the fair value of the leased property at the inception of the lease.

Question 56

Operating lease payments are expenses to the lessee and revenue to the lessor.

Question 57

Bonds that can be exchanged for stock are called __________ bonds.

Question 58

If the bond's stated rate of interest is greater than the market rate of interest, the bond will be issued at __________.

Question 59

If the market rate of interest is greater than the bond's stated rate of interest, the bond will be issued at __________.

Question 60

A $150,000 issue of bonds that sold at 93.8 will cost __________.

Question 61

Journalize the following annual bond interest payments on June 30:
June 30 a. 10-year 8% $250,000 bond that sold for $300,000.
June 30 b. 5-year 5% $300,000 bond that sold for $280,000.
June 30 c. 5-year 10% $500,000 bond that sold for $500,000.

Question 62

Having liabilities classified incorrectly will have a big impact on the company's current and quick ratios.

Question 63

John Company has current assets of $59,000; long term assets of $129,000; current liabilities of $31,000, and long-term liabilities of $83,000. Calculate John Company's current ratio and debt ratio.

Question 64

Journalize the following semi-annual bond interest payments on June 30:
June 30 a. 10-year 8% $250,000 bond that sold for $300,000.
June 30 b. 5-year 5% $300,000 bond that sold for $280,000.
June 30 c. 15-year 10% $500,000 bond that sold for $500,000.

Question 65

According to the text, which current liability is generally listed first?

Question 66

Using the information below, write the journal entry to record the payment of the bond on the maturity date.
A $400,000 issue of bonds that sold for $363,000 matures on August 1, 2015.

Question 67

Using the information below, write the journal entry to record the payment of the bond on the maturity date.
A $250,000 issue of bonds that sold for $275,000 matures on June 25, 2020.

Question 68

Journalize the following bond issues:
June 12 Issued $500,000 at 98.
June 18 Issued $250,000 at 106.
June 22 Issued $350,000 at 100.

Question 69

Bill Company had total assets of $560,000; total liabilities of $250,000; and total shareholders' equity of $310,000. Bill Company's debt ratio is:

A) 55.4%.
B) 80.6%.
C) 44.6%.
D) 28.7%.
E) 66.4%.

Question 70

Jewell Company has current assets of $56,000; long-term assets of $135,000; current liabilities of $44,000; and long-term liabilities of $90,000. Jewell Company's debt ratio is:

A) 127.3%.
B) 78.6%.
C) 239.3%.
D) 70.2%.
E) 20.7%.

Question 71

The September 30, 2012 semi-annual interest entry for Casey Company's bond interest expense was:

Journalize the December 31, 2012 adjusting entry.

Question 72

Both the formulas for current ratio and debt ratio use current liabilities in the computation.

Question 73

Amanda Industries had total assets of $600,000; total liabilities of $175,000; and total shareholders' equity of $425,000. Calculate Amanda Industries' debt ratio.

Question 74

Mackey Company has a 5-year mortgage for $100,000. In the first year of the mortgage, Mackey will report this liability as a:

A) current liability of $100,000.
B) long-term liability of $100,000.
C) current liability of $80,000 and a long-term liability of $20,000.
D) current liability of $20,000 and a long-term liability of $80,000.
E) current liability of $80,000 and a long-term debt of $20,000.

Question 75

Is a high debt ratio a bad thing? Explain.

Question 76

Casey Industries issues a $250,000, 6%, 20-year mortgage note to finance the purchase of a new building on Jan. 1, 2012. Payments of $9,375 are made on June 30 and December 31 of each year. Prepare the amortization schedule for the first 5 payments of this mortgage note. (Round amounts to nearest dollar when necessary.)

Question 77

Journalize the following bond issues:
Dec. 17 $175,000 at 100.
Dec. 28 $425,000 at 96.7.
Dec. 30 $710,000 at 103.4.

Question 78

Journalize the following annual bond interest payments on Apr 30:
April 30 a. 10-year 7% $250,000 bond that sold for $250,000.
April 30 b. 8-year 9% $450,000 bond that sold for $426,000.
April 30 c. 15-year 10% $500,000 bond that sold for $410,000.

Question 79

What effect will there be on reported liabilities and net income if a company does NOT accrue warranty expense?

Question 80

The percentage of total assets of a company that it would take to pay off all of the company's liabilities is called the debt ratio.