Question 1

Accounts payable is a short-term source of non-interest bearing financing.

Accepted Answer

Accounts payable amounts that arise from the purchase of goods and services usually do not carry any interest charges, and can represent a good source of short-term, inexpensive financing.

Question 2

Excessive 'leaning on the trade' by a company can often cause long-term profits.

Accepted Answer

Long-term leaning on the trade can lead to increased costs of purchased goods and services and damaging of the supply chain. It may also mask underlying cash flow problems.

Question 3

Companies typically delay paying accounts payable as it represents an inexpensive form of financing.

Accepted Answer

Since accounts payable is a form of interest-free financing, many companies hold off on payment for as long as possible.

Question 4

Accrued liabilities are considered long-term operating liabilities.

Accepted Answer

This is an example of a current operating liability. Accrued liabilities are actual and estimated amounts due for obligations other than those arising from inventory acquisitions.

Question 5

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Accepted Answer

Only 'probable' contingent liabilities are estimated and recorded on the balance sheet and the income statement. Anything less than 'probable,' (such as 'reasonably possible') is disclosed in the financial statement footnotes.

Question 6

Both cash received and interest accrued on short-term bank loans used to finance seasonal swings in working capital are reported on the balance sheet.

Accepted Answer

Cash received from a bank line of credit to finance seasonal swings in working capital should be recorded on the balance sheet as an increase in cash and liabilities. Interest accrued on the amount borrowed must be reported on the income statement as interest expense, and on the balance sheet as an increase in interest payable. As such both cash received and accrued interest are reported on the balance sheet.

Question 7

Security for debt in the form of mortgages on assets is known as covenants.

Accepted Answer

Collateral provides security for debt in the form of assets.

Question 8

Companies with current maturities of long-term debt are required to report an amortization schedule in their financial statements.

Accepted Answer

Companies are required to provide a schedule of long-term debt maturities in the financial statement footnotes. An amortization schedule is used to determine the correct interest expense and book value of the debt. The schedule itself is not part of the financial statements.

Question 9

A bond selling for an amount above face value is said to be selling at a discount.

Accepted Answer

This bond would sell at a premium, not a discount.

Question 10

Market prices of bonds fluctuate because the company's obligation (in the form of principal and interest payments) remains fixed.

Accepted Answer

Market prices on bonds fluctuate similar to stocks. The reasoning behind this is that bond maturity values and periodic interest payments remain fixed, and because they compete with other investments, the amount for which a bond is issued must change to adjust to the market amount.

Question 11

The bond issuing company can repurchase its bond at the bonds' issuing price if the bond indenture has a call provision allowing a call of the bonds.

Accepted Answer

A bond repurchase may occur only if a call provision is part of the bond indenture agreement. However, the repurchase price is at the call price specified.

Question 12

Debt ratings specify the amount at which investors can buy bonds from companies.

Accepted Answer

Debt ratings are published by companies such as Moody's, Fitch and S&P and aim to rate debt so that its default risk is more accurately determined and priced by the market.

Question 13

IFRS and U.S. GAAP are the same with reporting contingencies.

Accepted Answer

IFRS uses the term "provisions" to refer to contingent liabilities that are accrued and reported on the balance sheet, while an obligation that is disclosed in the notes is labeled contingent liability. U.S. GAAP labels them both contingent liabilities. Also, if the best estimate of the future payments required to settle an obligation is a range of values, IFRS requires that the midpoint of the range be used as the estimated value of the contingent liability or provision. U.S. GAAP requires that the low end of the range be used, with disclosure of the maximum.

Question 14

Which of the following does not affect the current liabilities section of the balance sheet?
A) Purchase of inventory on credit
B) Wages owed to employees but not yet paid
C) Insurance bill to be paid next month
D) Sale of goods on credit
E) A probable legal obligation, due within 12 months

Accepted Answer

The sale of goods on credit impacts current assets, accounts receivable. All the other items are liabilities that the company must pay within the next year, current liabilities.

Question 15

Wheat Inc. issued a 120-day note in the amount of $300,000 on October 31, 2016 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2016?
A) $3,000
B) $2,250
C) $9,000
D) $1,500
E) Zero. The interest is accrued at the end of the 120 day period.

Accepted Answer

Accrued November and December: $300,000 × 6% × 2/12 = $3,000

Question 16

Which of the following corporate debt ratings are listed in an increasing level of risk?
A) AAA, A, BB, C
B) A, AAA, BB, C
C) BB, C, A, AAA
D) C, BB, A, AAA

Accepted Answer

As debt quality moves from AAA to C, the default risk increases. Thus, market interest rate required increases.

Question 17

For what is the coupon rate used to compute?
A) Rate that investors expect to earn on this investment
B) Interest payments paid to bondholders during the life of the bond issue
C) Bond issue price
D) Fee paid to an underwriter for determining the bond price

Accepted Answer

Coupon rates are used to compute the dollar amount of interest payments paid to the bondholder semi-annually. This rate is often stated in the bond contract and, therefore, remains fixed. Answer A describes the market rate, a continuously fluctuating number, which is used to price the bond issue. Answer C equals the present value of the expected cash flows to the bondholder. Answer D is a fee set by the underwriters, which prepare and sell the bond issue.

Question 18

Which of the following transactions that impact current liabilities has a corresponding entry on the income statement? A) Purchase inventory on credit from Company XYZ on January 1 B) Payment to XYZ on February 1for a January 1 purchase C) Interest accrued on a note payable D) Payment to employees in March for wages earned in February

Accepted Answer

The purchase of inventory on credit is recorded as an increase in both inventory (noncash asset) and accounts payable (liability) on the balance sheet. Payment of accounts payable is recorded as a decrease in cash and accounts payable on the balance sheet. Interest accrued on a note payable is recorded as an increase in current liabilities (interest payable). An increase in interest expense is recorded on the income statement. Payment of accrued wages is recorded as a decrease in both cash and wages payable (liability).

Question 19

Which one of the following is not correct?
A) For debt issued at par, its interest expense reported on the income statement equals the cash interest payment.
B) For bond repurchases: Net bonds payable = Repurchase payment + Gain (loss) on bond repurchase.
C) For debt issued at a discount, interest expense reported on the income statement consists of the following two components: cash interest paid less the amortization of a discount.
D) None of the above

Accepted Answer

For debt issued at a discount, interest expense reported on the income statement consists of the following two components: cash interest paid plus amortization of the discount.

Question 20

Which one of the following would be considered a contingent liability?
A) A company owes $44,000 on inventories purchased on credit
B) A company has $980,000 worth of bonds outstanding
C) A company estimates that it will probably have to pay $48,000 to the Department of Environment Protection for a chemical spill
D) The company has access to a line of credit with a bank in the amount of $576,000
E) The company believes that it is reasonably possible it will lose a lawsuit but is unable to determine the possible damages

Accepted Answer

For a liability to be a contingent liability, the amount must be able to be estimated and must be probable.

Quiz 9: Reporting and Analyzing Liabilities

Accounts payable is a short-term source of non-interest bearing financing.

Excessive 'leaning on the trade' by a company can often cause long-term profits.

Companies typically delay paying accounts payable as it represents an inexpensive form of financing.

Accrued liabilities are considered long-term operating liabilities.

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Both cash received and interest accrued on short-term bank loans used to finance seasonal swings in working capital are reported on the balance sheet.

Security for debt in the form of mortgages on assets is known as covenants.

Companies with current maturities of long-term debt are required to report an amortization schedule in their financial statements.

A bond selling for an amount above face value is said to be selling at a discount.

Market prices of bonds fluctuate because the company's obligation (in the form of principal and interest payments) remains fixed.

The bond issuing company can repurchase its bond at the bonds' issuing price if the bond indenture has a call provision allowing a call of the bonds.

Debt ratings specify the amount at which investors can buy bonds from companies.

IFRS and U.S. GAAP are the same with reporting contingencies.

Which of the following does not affect the current liabilities section of the balance sheet?

Wheat Inc. issued a 120-day note in the amount of $300,000 on October 31, 2016 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2016?

Which of the following corporate debt ratings are listed in an increasing level of risk?

For what is the coupon rate used to compute?

Which of the following transactions that impact current liabilities has a corresponding entry on the income statement?

Which one of the following is not correct?

Which one of the following would be considered a contingent liability?