Question 1

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, at which point they can be classified as revenues on the income statement.

Question 2

A company whose current liabilities exceed its current assets may have a liquidity problem.

Accepted Answer

A company with current liabilities greater than current assets may have difficulty meeting its short-term obligations and may face cash flow issues, making it a liquidity problem.

Question 3

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

Accepted Answer

When a business collects a state sales tax on an item, they are collecting it on behalf of the state government. The business then owes that tax to the state government, creating a current liability.

Question 4

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Accepted Answer

Current liabilities are defined as debts that are expected to be paid off within one year or the company's operating cycle, whichever is longer. This includes obligations such as accounts payable, short-term loans, and accrued expenses.

Question 5

With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

Accepted Answer

With an interest-bearing note, the amount of cash received upon issuance is typically equal to the note's face value; the interest accrues over time and is paid in addition to the face value at maturity or through periodic payments.

Question 6

Interest expense on a note payable is only recorded at maturity.

Accepted Answer

Interest expense on a note payable is recorded throughout the life of the note.

Question 7

Notes payable are often used instead of accounts payable.

Accepted Answer

Notes payable are a type of financing where the borrower agrees to repay the lender with interest over a specific time period. They are typically used for larger amounts of money and longer repayment terms than accounts payable, making them a common alternative to accounts payable for financing business operations.

Question 8

Payroll taxes include the employer's share of Social Security taxes as well as state and federal unemployment taxes.

Accepted Answer

Payroll taxes typically include the employer's share of Social Security taxes (6.2% of employee wages up to a certain amount) and Medicare taxes (1.45% of all employee wages). In addition, employers may be required to pay state and federal unemployment taxes, which fund unemployment benefits for eligible workers.

Question 9

A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.

Accepted Answer

The answer of A $20,000, 8%, 9-month note payable requires...

Question 10

During the month, a company sells goods for a total of $106,000, which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense.

Accepted Answer

The answer of During the month, a company sells goods...

Question 11

Notes payable usually require the borrower to pay interest.

Accepted Answer

Notes payable are a type of debt obligation where the borrower is required to pay interest over a specified period of time until the principal is repaid.

Question 12

Most notes are not interest bearing.

Accepted Answer

Many notes, especially those related to loans or credit, are interest-bearing as they include terms for interest payments in addition to the principal amount.

Question 13

Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.

Accepted Answer

Current maturities of long-term debt refer to the principal portion of long-term debt that is due within the current year, not the interest.

Question 14

A note payable must always be paid before an account payable.

Accepted Answer

An account payable is money owed to a supplier for goods or services received but not yet paid for, while a note payable is a written promise to repay a specific amount of money by a certain date. Therefore, a note payable may have a specific repayment timeline and be prioritized over an account payable, but it is not always the case. The order of payment also depends on various factors, such as the terms of the agreements and the available cash flow.

Question 15

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

Accepted Answer

The sales tax is a government-imposed tax on the final sale of goods and services, and it is not a revenue source for retailers. High sales tax rates can actually discourage consumer spending, and thus reduce a retailer's profit.

Question 16

A current liability must be paid out of current earnings.

Accepted Answer

A current liability is defined as a liability that is expected to be settled within one fiscal year or the operating cycle, whichever is longer, and can be paid out of current assets or by creating other current liabilities, not necessarily from current earnings.

Question 17

If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount of the sales tax is $9.52.

Accepted Answer

The answer of If a retailer sells goods for a...

Question 18

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

Accepted Answer

The answer of If any portion of a long-term debt...

Question 19

Unearned revenues are received before goods are delivered or services are rendered.

Accepted Answer

Unearned revenues are also known as deferred revenues and are received in advance of delivering goods or services. Examples include prepaid subscriptions, rent, and insurance premiums.

Question 20

Interest expense is reported under Other Expenses and Losses in the income statement.

Accepted Answer

Interest expense is a type of expense and is therefore reported under Other Expenses and Losses in the income statement.

Quiz 10: Reporting and Analyzing Liabilities