Deck 10: Liabilities

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.

Question 5

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

Question 6

Notes payable usually require the borrower to pay interest.

Question 7

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

Question 8

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

Question 9

Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000.

Question 10

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

Question 11

A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.

Question 12

A current liability must be paid out of current earnings.

Question 13

The current ratio permits analysts to compare the liquidity of different sized companies.

Question 14

Most notes are not interest bearing.

Question 15

During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.

Question 16

Working capital is current assets divided by current liabilities.

Question 17

FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

Question 18

The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.

Question 19

Notes payable are often used instead of accounts payable.

Question 20

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

Question 21

If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.

Question 22

The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

Question 23

If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 24

Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

Question 25

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Question 26

The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 27

If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.

Question 28

A debenture bond is an unsecured bond which is issued against the general credit of the borrower.

Question 29

If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.

Question 30

The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Question 31

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Question 32

Bonds are a form of interest-bearing notes payable.

Question 33

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 34

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Question 35

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

Question 36

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Question 37

The board of directors may authorize more bonds than are issued.

Question 38

Neither corporate bond interest nor dividends are deductible for tax purposes.

Question 39

Bonds that the issuing company can redeem at a stated dollar amount prior to maturity are convertible bonds.

Question 40

If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

Question 41

Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.

Question 42

Bonds that permit bondholders to convert them into common stock at their option are known as callable bonds.

Question 43

When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.

Question 44

The times interest earned ratio is computed by dividing net income by interest expense.

Question 45

Premium on Bonds Payable is a contra account to Bonds Payable.

Question 46

Gains and losses are not recognized when convertible bonds are converted into common stock.

Question 47

48. The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

Question 48

49. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Question 49

The relationship between current liabilities and current assets is

A)useful in determining income.
B)useful in evaluating a company's liquidity.
C)called the matching principle.
D)useful in determining the amount of a company's long-term debt.

Question 50

Notes payable usually are issued to meet long-term financing needs.

Question 51

A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.

Question 52

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Question 53

Generally, convertible bonds do not pay interest.

Question 54

The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

Question 55

Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

Question 56

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Question 57

All of the following are reported as current liabilities except

A)accounts payable.
B)bonds payable.
C)notes payable.
D)unearned revenues.

Question 58

Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

Question 59

The terms of the bond issue are set forth in a formal legal document called a bond indenture.

Question 60

A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

Question 61

The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's

A)maturity value.
B)market value.
C)face value.
D)cash realizable value.

Question 62

The interest charged on a $400,000, 90-day note payable, at the rate of 8%, would be

A)$32,000.
B)$17,776.
C)$8,000.
D)$2,666.

Question 63

The interest charged on a $90,000, 3-month note payable, at the rate of 8%, would be

A)$7,200.
B)$3,600.
C)$1,800.
D)$1,200.

Question 64

Sales taxes collected by a retailer are recorded by

A)crediting Sales Taxes Revenue.
B)debiting Sales Tax Expense.
C)crediting Sales Taxes Payable.
D)debiting Sales Taxes Payable.

Question 65

A note payable is in the form of

A)a contingency that is reasonably likely to occur.
B)a written promissory note.
C)an oral agreement.
D)a standing agreement.

Question 66

Sales taxes collected by the retailer are recorded as a(n)

A)revenue.
B)liability.
C)expense.
D)asset.

Question 67

As interest is recorded on an interest-bearing note, the Interest Expense account is

A)increased; the Notes Payable account is increased.
B)increased; the Notes Payable account is decreased.
C)increased; the Interest Payable account is increased.
D)decreased; the Interest Payable account is increased.

Question 68

Unearned Rent Revenue is

A)a contra account to Rent Revenue.
B)a revenue account.
C)reported as a current liability.
D)debited when rent is received in advance.

Question 69

Liabilities are classified on the balance sheet as current or

A)deferred.
B)unearned.
C)long-term.
D)accrued.

Question 70

In most companies, current liabilities are paid within

A)one year through the creation of other current liabilities.
B)the operating cycle through the creation of other current liabilities.
C)one year or the operating cycle out of current assets.
D)the operating cycle out of current assets.

Question 71

The relationship of current assets to current liabilities is used in evaluating a company's

A)operating cycle.
B)revenue-producing ability.
C)short-term debt paying ability.
D)long-range solvency.

Question 72

From a liquidity standpoint, it is more desirable for a company to have current

A)assets equal current liabilities.
B)liabilities exceed current assets.
C)assets exceed current liabilities.
D)liabilities exceed long-term liabilities.

Question 73

With an interest-bearing note, the amount of assets received upon issuance of the note is generally

A)equal to the note's face value.
B)greater than the note's face value.
C)less than the note's face value.
D)equal to the note's maturity value.

Question 74

Which of the following is usually not an accrued liability?

A)Interest payable
B)Wages payable
C)Taxes payable
D)Notes payable

Question 75

The interest charged on a $70,000, 2-month note payable, at the rate of 6%, would be

A)$4,200.
B)$2,100.
C)$1,050.
D)$700.

Question 76

Most companies pay current liabilities

A)out of current assets.
B)by issuing interest-bearing notes payable.
C)by issuing stock.
D)by creating long-term liabilities.

Question 77

When an interest-bearing note matures, the balance in the Notes Payable account is

A)less than the total amount repaid by the borrower.
B)the difference between the maturity value of the note and the face value of the note.
C)equal to the total amount repaid by the borrower.
D)greater than the total amount repaid by the borrower.

Question 78

The interest charged on a $50,000, 60-day note payable, at the rate of 6%, would be

A)$3,000.
B)$1,667.
C)$750.
D)$500.

Question 79

Interest expense on an interest-bearing note is

A)always equal to zero.
B)accrued over the life of the note.
C)only recorded at the time the note is issued.
D)only recorded at maturity when the note is paid.

Question 80

A current liability is a debt that can reasonably be expected to be paid

A)within one year or the operating cycle, whichever is longer.
B)between 6 months and 18 months.
C)out of currently recognized revenues.
D)out of cash currently on hand.