Deck 10: Current Liabilities and Fair Value Accounting

Question 1

The product warranty liability is an example of an estimated liability.

Answer 1

True

Question 2

Unearned revenue arises from the acceptance of payment in advance for a service to be performed.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Accrued liabilities often arise as a result of the passage of time.

Question 5

Product warranties are an expense of the period in which the product is sold.

Question 6

When a business sells an item and collects a state sales tax on it,a current liability to the state arises.

Question 7

Commercial paper normally is issued by companies with poor credit ratings.

Question 8

At the time a company signs a contract to pay an employee a certain salary in the future,it records a liability.

Question 9

Wages are compensation of employees at a yearly or monthly rate.

Question 10

Current liabilities are classified as either definitely determinable liabilities or contingent liabilities.

Question 11

Lines of credit from the bank need not be disclosed in the financial statements or in the notes.

Question 12

The FUTA tax rate most often actually paid by employers is 0.8 percent.

Question 13

Because failure to record a liability generally leads to failure to record an expense,it usually results in an overstatement of income.

Question 14

There is no limit to the amount of income subject to the FUTA tax.

Question 15

A liability for dividends exists only when the board of stockholders requests them.

Question 16

Liabilities generally arise from expected future transactions.

Question 17

The classification of a liability as current or long-term is not important to the evaluation of a company's liquidity.

Question 18

A liability must never be classified as current if it is due in more than one year.

Question 19

Because accounting measures should be verifiable,liabilities should not be estimated.

Question 20

If an accrued liability for salaries is not recorded,income for the following period will be overstated.

Question 21

The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.

Question 22

If the amount of a liability cannot be exactly determined,it should not be recorded.

Question 23

An estimated liability is not a definite obligation of the firm because the amount cannot be definitely determined.

Question 24

The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal Unemployment Tax Payable and State Unemployment Tax Payable.

Question 25

Interest on a promissory note is recognized when the note is issued.

Question 26

Only the unused portion of a line of credit is recognized as a liability.

Question 27

Based on past experience,it should be possible to estimate the amount that a product warranty will cost the company in the future.

Question 28

Gross earnings minus deductions equal take-home pay.

Question 29

Unearned revenue is an example of a definitely determinable liability.

Question 30

Both the employee and the employer must bear the tax burden for unemployment benefits.

Question 31

Vacation pay is charged properly as an expense in the month in which the employee takes a vacation.

Question 32

The term salaries refers to the compensation of employees who are paid at an hourly rate.

Question 33

Product warranties are an expense of the period in which the related product is sold.

Question 34

The costs associated with coupons and rebates are usually reflected in contra-revenue accounts.

Question 35

If a state unemployment tax is imposed,then the federal unemployment tax is not imposed.

Question 36

Social Security and Medicare taxes are borne entirely by the employee.

Question 37

The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to Social Security Tax Payable and Medicare Tax Payable.

Question 38

Expected obligations arising from programs,such as frequent flyer miles,are usually recorded as a reduction in sales (in a contra-sales account)with a related liability.

Question 39

Property Taxes Expense is recorded only in the month it is paid.

Question 40

The amount of property tax payable is usually an estimated liability for a portion of the year.

Question 41

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

Question 42

The declaration of dividends is solely the decision of the corporation's board of directors.

Question 43

An ordinary annuity is a series of equal payments made at the end of equal intervals of time.

Question 44

Common examples of commitments are leases and purchase agreements.

Question 45

A contingent liability should be entered into the accounting records if it is both probable and reasonably estimable.

Question 46

Present value refers to an amount that must be invested today at a given rate of interest to produce a given future value.

Question 47

Lawsuits against a company in connection with an industrial accident would not be listed in the contingent liabilities section on the balance sheet.

Question 48

All factors in a present value of a single sum table are less than 1.000.

Question 49

All factors in a future value table must be less than or equal to 1.000.

Question 50

For notes payable whose interest is stated separately,the adjusting entry would consist of a debit to Interest Expense and a credit to Interest Payable.

Question 51

Potential vacation pay should be accounted for as a commitment.

Question 52

When a company discounts a note receivable at the bank,it has a contingent liability.

Question 53

A commitment is a legal obligation that meets the technical requirements for recognition as a liability.

Question 54

Decision makers rely on the future values,rather than on the present values of future cash flows.

Question 55

Commercial paper consists of secured loans that are sold to the public.

Question 56

The lower the interest rate,the lower the future value factor.

Question 57

There is no limit to the amount of income subject to the Medicare tax.

Question 58

A contingent liability eventually becomes either a true liability or no liability at all.

Question 59

The current portion of long-term debt is classified as a current liability only if it is due within the next year and is to be paid from current assets.

Question 60

The lower the interest rate,the higher the present value factor.

Question 61

To calculate payables turnover,an increase in merchandise inventory must be added to cost of goods sold before dividing by average accounts payable.

Question 62

To determine the payables turnover,one first calculates the days' payable.

Question 63

The days' payable shows the maximum time a company takes to pay its accounts payable.

Question 64

Payables turnover is measured in number of days.

Question 65

The annual interest earned on an amount deposited into a bank account will increase each year when simple interest is used.

Question 66

The theoretical value of an asset is the future value of its expected benefits.

Question 67

The annual interest earned on an amount deposited into a bank account will be the same each year when compound interest is used.

Question 68

On January 2,2014,Lionel Company issued $40,000 of notes payable,of which $10,000 is due on January 2 for each of the next four years.The proper balance sheet presentation on December 31,2014,is

A)Current Liabilities,$40,000.
B)Current Liabilities,$10,000;Long-Term Liabilities,$30,000.
C)Long-Term Liabilities,$40,000.
D)Current Liabilities,$30,000;Long-Term Liabilities,$10,000.

Question 69

When compound interest is used,interest accumulates less quickly than when simple interest is used.

Question 70

The proposed purchase price of an asset should be compared to the present value of the benefits it will generate over its useful life.

Question 71

If the present value of the net cash flows expected from a machine is less than its purchase price,the investment should not be made.

Question 72

Assets purchased under a deferred payment plan should be recorded at the present value of the installment payments.

Question 73

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

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

Question 74

In a deferred payment arrangement,interest is charged only if it is stated.

Question 75

Working capital equals current assets divided by current liabilities.

Question 76

Current liabilities are debts that are expected to be satisfied within

A)one year or the normal operating cycle,whichever is shorter.
B)one year or the normal operating cycle,whichever is longer.
C)one year.
D)the normal operating cycle.

Question 77

The payables turnover is the number of times,on average,that a company pays its accounts payable in an accounting period.

Question 78

Failure to record a liability probably will

A)result in an overstated net income.
B)result in overstated total liabilities and stockholders' equity.
C)have no effect on net income.
D)result in overstated total assets.

Question 79

A liability is recognized when

A)the exact due date is known.
B)it is paid for.
C)an obligation has arisen.
D)the exact amount of the liability is known.

Question 80

An asset purchased according to a deferred payment plan should be recorded based on the total cash paid over the life of the plan.