Deck 13: Current Liabilities and Contingencies

Question 1

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

Answer 1

True

Question 2

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

Answer 2

True

Question 3

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

Answer 3

False

Question 4

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Question 5

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

Question 6

Magazine subscriptions and airline ticket sales both result in unearned revenues.

Question 7

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

Question 8

A company must accrue a liability for sick pay that accumulates but does not vest.

Question 9

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

Question 10

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

Question 11

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

Question 12

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

Question 13

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

Question 14

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

Question 15

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

Question 16

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

Question 17

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

Question 18

Paying a current liability with cash will always reduce the current ratio.

Question 19

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

Question 20

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis and demonstrates the ability to consummate the refinancing.

Question 21

Which of the following is not true about the discount on short-term notes payable?

A) The Discount on Notes Payable account has a debit balance.
B) The Discount on Notes Payable account should be reported as an asset on the balance sheet.
C) When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
D) Discount on Notes Payable is a contra account to Notes Payable.

Question 22

Where is debt callable by the creditor reported on the debtor's financial statements?

A) Long-term liability.
B) Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability.
C) Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
D) Current liability.

Question 23

Which of the following is a characteristic of a current liability but not a long-term liability?

A) Unavoidable obligation.
B) Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
C) Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
D) Transaction or other event creating the liability has already occurred.

Question 24

Which of the following is true about accounts payable?1. Accounts payable are also called trade accounts payable.2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.

A) 1
B) 2
C) 3
D) Both 2 and 3 are true.

Question 25

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

A) Intend to refinance the obligation on a long-term basis.
B) Obligation must be due with one year.
C) Demonstrate the ability to complete the refinancing.
D) Subsequently refinance the obligation on a long-term basis.

Question 26

Stock dividends distributable should be classified on the

A) income statement as an expense.
B) balance sheet as an asset.
C) balance sheet as a liability.
D) balance sheet as an item of stockholders' equity.

Question 27

What is the relationship between current liabilities and a company's operating cycle?

A) Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
B) Current liabilities are the result of operating transactions.
C) Current liabilities can't exceed the amount incurred in one operating cycle.
D) There is no relationship between the two.

Question 28

Which of the following is a current liability?

A) Preferred dividends in arrears
B) A dividend payable in the form of additional shares of stock
C) A cash dividend payable to preferred stockholders
D) All of these answers are correct.

Question 29

An account which would be classified as a current liability is

A) dividends payable in the form of a company's stock.
B) accounts payable-debit balances.
C) losses expected to be incurred within the next twelve months in excess of the company's insurance coverage.
D) none of these answers are correct.

Question 30

Which of the following items is a current liability?

A) Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B) Bonds due in three years.
C) Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
D) Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

Question 31

What is a discount as it relates to zero-interest-bearing notes payable?

A) The discount represents the lender's costs to underwrite the note.
B) The discount represents the credit quality of the borrower.
C) The discount represents the cost of borrowing.
D) The discount represents the allowance for uncollectible amounts.

Question 32

Which of the following may be a current liability?

A) Withheld Income Taxes
B) Deposits Received from Customers
C) Deferred Revenue
D) All of these answers are correct.

Question 33

Which of the following should not be included in the current liabilities section of the balance sheet?

A) Trade notes payable
B) Short-term zero-interest-bearing notes payable
C) The discount on short-term notes payable
D) All of these answers are correct.

Question 34

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as

A) current liabilities.
B) deferred charges.
C) long-term liabilities.
D) intermediate debt.

Question 35

Which of the following is a current liability?

A) A long-term debt maturing currently, which is to be paid with cash in a sinking fund
B) A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
C) A long-term debt maturing currently, which is to be converted into common stock
D) None of these answers are correct.

Question 36

Liabilities are

A) any accounts having credit balances after closing entries are made.
B) deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
C) obligations to transfer ownership shares to other entities in the future.
D) obligations arising from past transactions and payable in assets or services in the future.

Question 37

Which of the following is not considered a part of the definition of a liability?

A) Unavoidable obligation.
B) Transaction or other event creating the liability has already occurred.
C) Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
D) Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Question 38

Why is the liability section of the balance sheet of primary importance to bankers?

A) To evaluate the entity's credit quality.
B) To assist in understanding the entity's liquidity.
C) To better understand sources of repayment.
D) To evaluate operating efficiency.

Question 39

What is the relationship between present value and the concept of a liability?

A) Present values are used to measure certain liabilities.
B) Present values are not used to measure liabilities.
C) Present values are used to measure all liabilities.
D) Present values are only used to measure long-term liabilities.

Question 40

Of the following items, the only one which should not be classified as a current liability is

A) current maturities of long-term debt.
B) sales taxes payable.
C) short-term obligations expected to be refinanced.
D) unearned revenues.

Question 41

Under what conditions is an employer required to accrue a liability for sick pay?

A) Sick pay benefits can be reasonably estimated.
B) Sick pay benefits vest.
C) Sick pay benefits equal 100% of the pay.
D) Sick pay benefits accumulate.

Question 42

When is a contingent liability recorded?

A) When the amount can be reasonably estimated.
B) When the future events are probable to occur and the amount can be reasonably estimated.
C) When the future events are probable to occur.
D) When the future events will possibly occur and the amount can be reasonably estimated.

Question 43

What is a contingency?

A) An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
B) An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
C) An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
D) An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

Question 44

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

A) The obligation relates to the rights that vest or accumulate.
B) Payment of the compensation is probable.
C) The obligation is attributable to employee services already performed.
D) All of these are conditions for the accrual.

Question 45

Which of the following gives rise to the requirement to accrue a liability for the cost of compensated absences?

A) Payment is probable.
B) Employee rights vest or accumulate.
C) Amount can be reasonably estimated.
D) All of these answers are correct.

Question 46

What are compensated absences?

A) Unpaid time off.
B) A form of healthcare.
C) Payroll deductions.
D) Paid time off.

Question 47

Which of the following situations may give rise to unearned revenue?

A) Providing trade credit to customers.
B) Selling inventory.
C) Selling magazine subscriptions.
D) Providing manufacturer warranties.

Question 48

Which of these is not included in an employer's payroll tax expense?

A) F.I.C.A. (social security) taxes
B) Federal unemployment taxes
C) State unemployment taxes
D) Federal income taxes

Question 49

Which of the following statements is correct?

A) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
B) A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
C) A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
D) None of these answers are correct.

Question 50

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?

A) Management indicated that they are going to refinance the obligation.
B) Actually refinance the obligation.
C) Have capacity under existing financing agreements that can be used to refinance the obligation.
D) Enter into a financing agreement that clearly permits the entity to refinance the obligation.

Question 51

The amount of the liability for compensated absences should be based on1. the current rates of pay in effect when employees earn the right to compensated absences.2. the future rates of pay expected to be paid when employees use compensated time.3. the present value of the amount expected to be paid in future periods.

A) 1.
B) 2.
C) 3.
D) Either 1 or 2 is acceptable.

Question 52

Which of the following taxes does not represent a common employee payroll deduction?

A) Federal income taxes.
B) FICA taxes.
C) State unemployment taxes.
D) State income taxes.

Question 53

A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?

A) Record a liability for cumulative amount of preferred stock dividends not declared.
B) Disclose the amount of the dividends in arrears.
C) Record a liability for the current year's dividends only.
D) No disclosure or recognition is required.

Question 54

Which of the following statements is false?

A) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
B) Cash dividends should be recorded as a liability when they are declared by the board of directors.
C) Under the cash basis method, warranty costs are charged to expense as they are paid.
D) FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Question 55

Which of the following is not a correct statement about sales taxes?

A) Sales taxes are an expense of the seller.
B) Many companies record sales taxes in the sales account.
C) If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
D) Sales Taxes Payable is classified as a current liability.

Question 56

In accounting for compensated absences, the difference between vested rights and accumulated rights is that:

A) vested rights are normally for a longer period of employment than are accumu?lated rights.
B) vested rights are not contingent upon an employee's future service.
C) vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
D) vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

Question 57

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

A) be accrued during the period when the compensated time is expected to be used by employees.
B) be accrued during the period following vesting.
C) be accrued during the period when earned.
D) not be accrued unless a written contractual obligation exists.

Question 58

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

A) portion of FICA taxes and unemployment taxes.
B) and employer's portion of FICA taxes, and unemployment taxes.
C) portion of FICA taxes, unemployment taxes, and any union dues.
D) portion of FICA taxes and any union dues.

Question 59

The ability to consummate the refinancing of a short-term obligation may be demon- strated by

A) actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
B) entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
C) actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
D) all of these answers are correct.

Question 60

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

A) a general description of the financing arrangement.
B) the terms of the new obligation incurred or to be incurred.
C) the terms of any equity security issued or to be issued.
D) the number of financing institutions that refused to refinance the debt, if any.

Question 61

A company is legally obligated for the costs associated with the retirement of a long-lived asset

A) only when it hires another party to perform the retirement activities.
B) only if it performs the activities with its own workforce and equipment.
C) whether it hires another party to perform the retirement activities or performs the activities itself.
D) when it is probable the asset will be retired.

Question 62

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

A) accrued.
B) disclosed but not accrued.
C) neither accrued nor disclosed.
D) classified as an appropriation of retained earnings.

Question 63

Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

A) the Darren Company admits guilt.
B) the court will decide the case within one year.
C) the damages appear to be material.
D) the cause for action occurred during the accounting period covered by the financial statements.

Question 64

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty

A) should be reported as long-term.
B) should be reported as current.
C) should be reported as part current and part long-term.
D) need not be disclosed.

Question 65

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

A) Amount of loss is reasonably estimable and event occurs infrequently.
B) Amount of loss is reasonably estimable and occurrence of event is probable.
C) Event is unusual in nature and occurrence of event is probable.
D) Event is unusual in nature and event occurs infrequently.

Question 66

To record an asset retirement obligation (ARO), the cost associated with the ARO is

A) expensed.
B) included in the carrying amount of the related long-lived asset.
C) included in a separate account.
D) capitalized over the asset's useful life.

Question 67

Which of the following terms is associated with recording a contingent liability?

A) Possible.
B) Likely.
C) Remote.
D) Probable.

Question 68

Which of the following contingencies need not be disclosed in the financial statements or the related notes?

A) Probable losses not reasonably estimable
B) Environmental liabilities that cannot be reasonably estimated
C) Guarantees of indebtedness of others
D) All of these must be disclosed.

Question 69

Use of the accrual method in accounting for product warranty costs

A) is required for federal income tax purposes.
B) is frequently justified on the basis of expediency when warranty costs are immaterial.
C) finds the expense account being charged when the seller performs in compliance with the warranty.
D) represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Question 70

Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2014. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

A) No recognition
B) Note disclosure only
C) Operating expense of $800,000 and liability of $800,000
D) Appropriation of retained earnings of $800,000

Question 71

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?

A) The reduction in sales price attributed to the coupon is recognized as premium expense.
B) The difference between the cost of the video game and the cash received is recognized as premium expense.
C) Premium expense is not recognized.
D) The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

Question 72

A loss contingency can be accrued when

A) it is certain that funds are available to settle the disputed amount.
B) an asset may have been impaired.
C) the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred.
D) it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

Question 73

Which of the following is the proper way to report a gain contingency?

A) As an accrued amount.
B) As deferred revenue.
C) As an account receivable with additional disclosure explaining the nature of the contingency.
D) As a disclosure only.

Question 74

A contingent liability

A) definitely exists as a liability but its amount and due date are indeterminable.
B) is accrued even though not reasonably estimated.
C) is not disclosed in the financial statements.
D) is the result of a loss contingency.

Question 75

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

A) Estimated liability under warranties.
B) Warranty expense.
C) Unearned warranty revenue.
D) Warranty revenue.

Question 76

Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2014, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Brown had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroad's offer. The Railroad's 2014 financial statements should include the following related to the incident:

A) recognition of a loss and creation of a liability for the value of the land.
B) recognition of a loss only.
C) creation of a liability only.
D) disclosure in note form only.

Question 77

Which of the following best describes the accrual method of accounting for warranty costs?

A) Expensed when paid.
B) Expensed when warranty claims are certain.
C) Expensed based on estimate in year of sale.
D) Expensed when incurred.

Question 78

Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

A) zero.
B) the minimum of the range.
C) the mean of the range.
D) the maximum of the range.

Question 79

Which of the following best describes the cash-basis method of accounting for warranty costs?

A) Expensed based on estimate in year of sale.
B) Expensed when liability is accrued.
C) Expensed when warranty claims are certain.
D) Expensed when incurred.

Question 80

Which of the following is an example of a contingent liability?

A) Obligations related to product warranties.
B) Possible receipt from a litigation settlement.
C) Pending court case with a probable favorable outcome.
D) Tax loss carryforwards.