Question 1

An operating line of credit is a credit that is set up by a major supplier to assist the company with their purchases online.

Accepted Answer

An operating line of credit is a pre-approved loan amount that a business can draw upon as needed for operational expenses, not specifically set up by a supplier for online purchases.

Question 2

A bank overdraft is the same as an operating line of credit.

Accepted Answer

While they are both forms of borrowing money, a bank overdraft is a short-term loan that allows an account holder to overdraw their account up to a certain limit, while an operating line of credit is a flexible, revolving credit facility that allows a business to borrow and repay funds as needed to finance their day-to-day operations.

Question 3

It is not necessary to prepare an adjusting entry to recognize the current maturity of long-term debt.

Accepted Answer

An adjusting entry is not necessary to recognize the current maturity of long-term debt because the maturity date is already recorded in the accounting records.

Question 4

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

Accepted Answer

The sales tax rate is a government-imposed tax that is passed on to the customer. A higher sales tax rate does not increase the retailer's profit as they do not earn any additional revenue from it. The retailer only acts as a collection agent for the government to collect and remit the tax on behalf of the customer.

Question 5

Money borrowed on a line of credit is normally borrowed on a long-term basis.

Accepted Answer

Money borrowed on a line of credit is typically short-term, meaning it must be paid back quickly (within a few months).

Question 6

Liabilities with a known amount, payee, and due date are often referred to as determinable liabilities.

Accepted Answer

This is true. Determinable liabilities are those where the amount, payee, and due date are all known and can be easily determined. Examples include accounts payable, notes payable, and salaries payable.

Question 7

Prime rate refers to the rate that banks charge their worst customers.

Accepted Answer

Prime rate refers to the interest rate that banks offer to their most creditworthy customers. This rate is typically lower than the rates offered to other customers.

Question 8

A future commitment is not considered a liability unless a present obligation also exists.

Accepted Answer

A liability is recognized when there is a present obligation resulting from past events, not just a future commitment.

Question 9

A note payable must be payable within one year.

Accepted Answer

A note payable can have a maturity date of either less than one year (short-term) or more than one year (long-term), depending on the terms agreed upon by the lender and borrower.

Question 10

Bank overdrafts will require a journal entry at the end of the year to record the amount.

Accepted Answer

The answer of Bank overdrafts will require a journal entry...

Question 11

Collateral is usually required by a bank as protection in case the company is unable to repay the bank.

Accepted Answer

Collateral is a form of security that is pledged by a borrower to a lender, typically a bank, in case the borrower is unable to repay the loan. It provides the lender with a legal claim on specific assets of the borrower should they default on their loan payments. Collateral serves as a form of protection for the lender and reduces their risk of financial loss.

Question 12

If a note payable is payable in a term longer than one year, it will be classified as a non-current liability.

Accepted Answer

This is because non-current liabilities are those obligations that are due for payment after one year from the balance sheet date. A note payable that has a term longer than one year falls under this category and must be classified as a non-current liability.

Question 13

A note payable must always have an interest rate attached to it.

Accepted Answer

A note payable may or may not have an interest rate attached to it. It depends on the agreement made between the borrower and the lender.

Question 14

A $ 15,000, nine-month, 8% note payable requires an interest payment of $ 900 at maturity if no interest was previously paid.

Accepted Answer

The interest payment is calculated as follows:Interest = Principal x Rate x TimeInterest = $15,000 x 8% x 9/12Interest = $900

Question 15

Sales taxes apply to all sales.

Accepted Answer

Sales taxes do not apply to all sales; certain items or services may be exempt depending on local laws and regulations.

Question 16

A note payable will result in more security of the debt obligation for the creditor than an account payable.

Accepted Answer

A note payable involves a written agreement specifying the terms of the debt obligation, including the interest rate and repayment schedule. This provides the creditor with more legal recourse in the event of non-payment by the debtor. An account payable, on the other hand, is simply an amount owed to a supplier for goods or services purchased on credit, without a specific written agreement outlining the terms of repayment.

Question 17

At its December 31 year end, Jamison Company recorded $ 200 interest payable on a $ 10,000, three-month, 5% note payable. The company's financial statements will present notes payable of $ 10,200.

Accepted Answer

The notes payable should be presented as $10,000, and the $200 interest payable should be recorded separately as a liability, not added to the notes payable.

Question 18

Current maturities of long-term debt refer 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 portion of a long-term debt that must be paid within the next 12 months, not just the interest.

Question 19

A liability is defined as a past obligation, arising from present events to make future payments of assets or services.

Accepted Answer

The answer of A liability is defined as a past...

Question 20

It is possible to have a prepaid property tax and a property tax expense recorded at the same time.

Accepted Answer

A prepaid property tax is recorded as an asset when paid in advance, while a property tax expense is recorded as an expense when the tax is incurred. Both can exist simultaneously in accounting records.

Quiz 2: Current Liabilities and Payroll