Deck 10: Current Liabilities

Question 1

An estimated liability is a liability that is known to exist but whose amount and timing are uncertain.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

As long as it is likely the company will have to settle the obligation, and the company can reasonably estimate the amount, the liability is recognized.

Question 7

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

Question 8

At its December 31, 2014 year end, Jamison Company recorded $200 interest payable on a $10,000, 3 month, 5% note payable. The company's financial statements will present notes payable of $10,200.

Question 9

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

Question 10

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

Question 11

A note payable must be payable within one year.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Warranty liabilities are estimated based on actual warranty costs incurred to date.

Question 18

A $15,000, 9-month, 8% note payable requires an interest payment of $900 at maturity if no interest was previously paid.

Question 19

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

Question 20

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

Question 21

Canadian Tire Money represents a liability to Canadian Tire.

Question 22

IFRS is generally regarded as having a higher threshold for recognizing liabilities.

Question 23

Contingencies are events with certain outcomes.

Question 24

An operating line of credit

A) is a non-current liability.
B) is required by all companies.
C) helps companies manage temporary cash shortages.
D) is usually required by the bank in case a company is unable to repay a loan.

Question 25

Most companies pay current liabilities

A) out of current assets.
B) by issuing interest-bearing notes payable.
C) by issuing common shares.
D) by creating non-current liabilities.

Question 26

Companies who are reporting under IFRS will have the choice to report current liabilities in a lower section of the Balance Sheet.

Question 27

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

A) within one year.
B) between 6 months and 18 months.
C) out of currently recognized revenues.
D) out of cash currently on hand.

Question 28

After the warranty liability has been established, the costs in the future will be recorded with a debit to Warranty Expense.

Question 29

A determinable liability is one which

A) has uncertainty with the timing of the due date.
B) has uncertainty about the amount which is owed.
C) has a known payee.
D) has an amount which is due within one year.

Question 30

When a company issues a gift card, the company will record the gift card in revenue in the period in which it is sold.

Question 31

Operating line of credit borrowings usually

A) are credited to a note payable account.
B) are reported as a non-current liability.
C) are debited to the cash account and result in a current liability.
D) are required by all companies.

Question 32

With an interest-bearing note, the amount of assets received upon issue 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 33

All of the following are definitely determinable liabilities EXCEPT

A) current maturities of long-term debt.
B) operating lines of credit.
C) a future commitment to purchase an asset.
D) accounts payable.

Question 34

Under IFRS, a provision is a liability of certain timing and amounts.

Question 35

ASPE considers a liability to be a contingent liability as long as its ultimate existence depends on the outcome of a future event, even if the event is likely to occur.

Question 36

With a customer loyalty program, the cost of the program is usually shown as a sales discount and reported as a contra sales account.

Question 37

Current Liabilities are usually listed in order of liquidity.

Question 38

Under ASPE, a contingent liability is defined as a liability that is contingent on the occurrence or non-occurrence of some future event.

Question 39

Determinable liabilities involve no uncertainty about all of the following EXCEPT

A) the existence of the liability.
B) the amount of the liability.
C) the eventual payment of the liability.
D) all of the above involve no uncertainty with respect to the determinable liability.

Question 40

Under ASPE, current liabilities are the first category reported in the liability section of the Balance Sheet.

Question 41

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 42

The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is:

A) Notes Payable Interest Payable
Cash
B) Notes Payable Interest Expense
Cash
C) Notes Payable Cash
D) Notes Payable Cash
Interest Payable

Question 43

A company has a negative (credit) balance in the Cash account at the end of the year. This amount can be called all of the following EXCEPT

A) bank indebtedness.
B) operating line of credit.
C) bank overdraft.
D) bank advances.

Question 44

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 45

The sales discount for redemptions rewards is recorded as a(n)

A) current asset.
B) current liability.
C) expense account.
D) contra sales account.

Question 46

Use the following information for questions 62-64.
Algonquin Provincial Bank agrees to lend Grimwood Brick Company $80,000 on January 1. Grimwood Brick Company signs an $80,000, 9-month, 5% note.
The entry made by Grimwood Brick Company on January 1 to record the proceeds and issue of the note is:

Question 47

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 48

Use the following information for questions 75-76.
Shediac Bay Marina had a customer loyalty program at its gas dock. For every litre of gasoline purchased, the customer would get a redemption award of $.015 which can be used to purchase products in the company's retail marine store. In July, the company sold 100,500 litres of gasoline.
The entry to record the liability for the July sales would a $______ credit to ________.

A) $1,507.50; Redemption Reward Liability
B) $1,507.50; Sales Discounts
C) $1507.50; Cash
D) $3,015; Cash

Question 49

Use the following information for questions 79-80.
Kim Company sells 2,000 units of its product for $500 each in 2014. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $100 per unit. In 2014, warranty contracts are honoured on 40 units for a total cost of $4,000.
What amount should Kim Company accrue on December 31, 2014 for estimated warranty expense?

A) $6,000
B) $4,000
C) $2,000
D) $30,000

Question 50

The entry to record the proceeds upon issuing an interest-bearing note is:

Question 51

The current portion of long-term debt should

A) be paid immediately.
B) be reclassified as a current liability.
C) be classified as a non-current liability.
D) not be separated from the non-current portion of debt.

Question 52

Use the following information for questions 62-64.
Algonquin Provincial Bank agrees to lend Grimwood Brick Company $80,000 on January 1. Grimwood Brick Company signs an $80,000, 9-month, 5% note.
What entry will Grimwood Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

Question 53

The accounting for warranty costs is based on the concept of matching expenses with revenues, which requires that the estimated cost of honouring warranty contracts should be recognized as an expense

A) when the product is brought in for repairs.
B) in the period in which the product was sold.
C) at the end of the warranty period.
D) only if the repairs are expected to be made within one year.

Question 54

Which of the following is NOT considered an estimated liability?

A) accrued wages
B) gift card promotions
C) warranties
D) customer loyalty programs

Question 55

Use the following information for questions 62-64.
Algonquin Provincial Bank agrees to lend Grimwood Brick Company $80,000 on January 1. Grimwood Brick Company signs an $80,000, 9-month, 5% note.
What is the adjusting entry required if Grimwood Brick Company prepares financial statements on June 30?

Question 56

Use the following information for questions 75-76.
Shediac Bay Marina had a customer loyalty program at its gas dock. For every litre of gasoline purchased, the customer would get a redemption award of $.015 which can be used to purchase products in the company's retail marine store. In July, the company sold 100,500 litres of gasoline.
By the end of the August, customers redeemed 25,000 of the rewards. Shediac should make which of the following entries to record the redemption?

Question 57

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 58

Use the following information for questions 67-68.
On October 1, Jacob's Auto Service borrows $75,000 from Provincial Bank on a $75,000, 3-month, 6% note.
The entry by Jacob's Auto Service to record payment of the note and accrued interest on January 1 is:

Question 59

Examples of determinable current liabilities include all of the following EXCEPT

A) current maturities of long-term debt.
B) bank indebtedness from operating lines of credit.
C) unearned revenues.
D) contingencies.

Question 60

Use the following information for questions 67-68.
On October 1, Jacob's Auto Service borrows $75,000 from Provincial Bank on a $75,000, 3-month, 6% note.
What entry must Jacob's Auto Service make on December 31 before financial statements are prepared?

Question 61

If a liability is dependent on a future event, it is called a

A) potential loss.
B) hypothetical loss.
C) probabilistic loss.
D) contingent loss.

Question 62

The warranty liability account will be carried from year to year and will be increased by

A) current years repairs to non-warranty products.
B) current years estimated warranty expense.
C) prior years estimated warranty expense.
D) current years actual warrant expense.

Question 63

The following are general risk contingencies that can affect anyone who is operating a business and are not reported in the notes to the financial statements, EXCEPT

A) war.
B) strike.
C) lawsuit.
D) recession.

Question 64

Under IFRS, a liability is recorded if the chance of occurrence is

A) likely.
B) probable.
C) unlikely.
D) undeterminable.

Question 65

Loyalty programs are designed to

A) decrease sales.
B) increase inventory levels.
C) increase sales.
D) decrease cost of goods sold.

Question 66

Under IFRS, the term used for an uncertain liability is

A) contingent liability.
B) undeterminable liability.
C) provision.
D) estimated liability.

Question 67

The Redemption Reward Liability account is reported as a

A) current asset.
B) contra sales account.
C) current liability.
D) non-current liability.

Question 68

Accountants have decided that when a loyalty program results in a reduced future selling price, it should be accounted for as a decrease in

A) revenue.
B) expenses.
C) assets.
D) liabilities.

Question 69

If it is likely that a company will lose a lawsuit and the amount can be reliably estimated then the company must

A) record the asset.
B) disclose only in the notes to the financial statements.
C) not record or disclose any information.
D) record the loss and the liability.

Question 70

Under ASPE, the following should NOT be disclosed in notes to the financial statements.

A) If the contingency is unlikely and the chance of occurrence is small.
B) If the contingency is likely but the amount of the loss cannot be reasonably estimated.
C) If the existence of the contingent liability is not determinable.
D) If the contingency is unlikely but it could have a substantial negative effect on the company's financial position.

Question 71

Under ASPE, a contingent liability must be accrued in the financial statements if

A) it can be reasonably estimated and unlikely to occur.
B) it can be reasonably estimated and likely to occur.
C) it is likely to occur but cannot be reasonably estimated.
D) the amount of the potential loss is greater than the balance in the cash account.

Question 72

Under ASPE, a liability for a contingent loss is recorded if both of the following conditions are met:

A) occurrence is high and amount cannot be estimated.
B) amount is reasonably estimated and occurrence is low.
C) occurrence is low and amount is determinable.
D) occurrence is high and amount can be reasonable estimated.

Question 73

Warranties are also known as

A) determinable liabilities.
B) customer loyalty programs.
C) contingencies.
D) guarantees.

Question 74

Use the following information for questions 79-80.
Kim Company sells 2,000 units of its product for $500 each in 2014. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $100 per unit. In 2014, warranty contracts are honoured on 40 units for a total cost of $4,000.
What amount will be reported on Kim Company's balance sheet as Estimated Warranty Liability on December 31, 2014?

A) $4,000
B) $6,000
C) $2,000
D) cannot be determined

Question 75

Under the expense approach, the warranty liability is measured using

A) the estimated future cost of servicing the product warranty.
B) actual costs of past years repairs.
C) the estimated sales of past years.
D) the estimated future returns of products.

Question 76

The relationship between current liabilities and current assets is

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

Question 77

Under ASPE, a contingency that is NOT likely to occur

A) should be disclosed in the financial statements.
B) must be accrued as a loss.
C) does not need to be disclosed unless the loss would result in a substantial negative effect on the company's financial position.
D) is recorded as a contingent loss.

Question 78

Under ASPE, only ________________contingent losses are recognized.

A) highly likely
B) probable
C) more likely than not
D) unlikely

Question 79

Product warranties are promises made by the ________ to repair or replace the product if it is defective or does not perform as intended.

A) buyer
B) employees
C) manufacturer
D) government

Question 80

Disclosure of a contingent loss is usually made

A) parenthetically, in the body of the balance sheet.
B) parenthetically, in the body of the income statement.
C) in a note to the financial statements.
D) in the management discussion section of the financial statement.