Question 1

Notes payable usually require the borrower to pay interest.

Accepted Answer

Notes payable are typically loans that require the borrower to pay interest to the lender. This interest is a cost of borrowing money and is usually expressed as a percentage of the loan amount.

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.

Accepted Answer

False

Question 3

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

Accepted Answer

This is true because the HST collected is not considered revenue for the business but rather a tax that must be remitted to the government. Therefore, it is recorded as a current liability until it is paid to the government.

Question 4

Notes payable are sometimes used instead of accounts payable.

Accepted Answer

Notes payable are a form of short-term financing that a company agrees to repay at a future date, typically with interest. They are often used by businesses to finance purchases or operations and are recorded as a liability on the balance sheet. Accounts payable, on the other hand, represent amounts owed to vendors or suppliers for goods or services that have already been received or consumed. While they are both forms of short-term debt, notes payable typically involve a formal agreement and a set repayment schedule, while accounts payable are generally more informal and do not involve interest or a set repayment period.

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.

Accepted Answer

The separation of current and non-current debt on the statement of financial position is a matter of presentation and does not require a separate journal entry. However, proper classification of debt as current or non-current is important for financial analysis and decision-making.

Question 6

All long-term notes payable must be secured.

Accepted Answer

Long-term notes payable do not necessarily have to be secured. It depends on the agreement between the borrower and lender.

Question 7

Current liabilities are expected to be paid within one year.

Accepted Answer

Current liabilities are defined as obligations that are expected to be settled within one year or the normal operating cycle of the business, whichever is longer.

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.

Accepted Answer

"Current maturities of non-current debt" refers to the portion of long-term debt that must be paid within the coming year, not just the interest on notes payable.

Question 9

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

Accepted Answer

Unearned revenues should be classified as liabilities on the balance sheet until they are earned. When they are earned, they should be moved from the liability section to the revenue section on the income statement.

Question 10

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

Accepted Answer

Payroll liabilities include both the employee and employer portions 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.

Accepted Answer

Since the fiscal year and the calendar year used for property tax purposes are the same, there should be no need for a prepaid property tax on year-end financial statements. However, the company may still have a property tax liability that needs to be accounted for in their financial statements.

Question 12

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

Accepted Answer

Property tax payable is typically classified as a current liability because it is usually due within one year, regardless of the nature of the asset it is associated with.

Question 13

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

Accepted Answer

When a company draws on its operating line of credit and ends up with a negative cash balance, it is said to be in "bank indebtedness." This is a current liability that represents the amount of money the company owes to the bank.

Question 14

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

Accepted Answer

The answer of If interest is due at maturity, a...

Question 15

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

Accepted Answer

Operating lines of credit provide access to funds that can be drawn upon in the future as needed, therefore increasing a company's liquidity.

Question 16

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

Accepted Answer

A higher sales tax rate means that customers will have less money to spend on goods, which could potentially reduce sales for the retailer. Additionally, a high sales tax rate may incentivize customers to shop in neighboring areas with lower tax rates, further reducing the retailer's profit.

Question 17

A current liability must be paid out of current profit.

Accepted Answer

A current liability must be paid within a year, but it can be settled using current assets, not necessarily from current profit.

Question 18

Most notes and bank loans are not interest bearing.

Accepted Answer

Most notes and bank loans are interest bearing, meaning the borrower must pay back more than the principal amount borrowed in the form of interest.

Question 19

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

Accepted Answer

A mortgage payable is commonly secured by collateral such as real estate, which could be a building or other property.

Question 20

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

Accepted Answer

Interest expense on a bank loan payable is recorded periodically over the life of the loan as the interest accrues, not just at maturity. This is done in order to match the expense with the revenue earned during the same period.

Quiz 10: Reporting and Analyzing Liabilities