Deck 9: Liabilities

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

The journal entry to record salaries earned by 10 employees will:

A)debit Salary Expense and credit Salary Payable for the net pay.
B)debit Salary Expense and credit Salary Payable for the gross pay.
C)debit Salary Expense for the gross pay,credit FICA Tax Payable,credit Employee Income Tax Payable and credit Salary Payable for the net pay.
D)debit Salary Expense for the net pay,debit FICA Tax Payable,debit Employee Income Tax Payable,and credit Salary Payable for the gross pay.

Answer 3

C

Question 4

When a business receives cash from a customer before earning the revenue,they credit:

A)Accounts Receivable.
B)Sales Tax Payable.
C)Accounts Payable.
D)Unearned Revenue.

Question 5

When accruing interest expense on a short-term note payable,the Interest Payable account will decrease.

Question 6

A potential obligation that depends on the future outcome of past events is a contingent liability.

Question 7

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

Question 8

Purchasing merchandise inventory on account results in an accounts receivable.

Question 9

At the end of the year,a company has a short-term note payable outstanding that was entered into earlier in the current year.What accounts relating to the note payable will be reported on the financial statements at the end of the year?

A)Short-term notes payable will be reported on the balance sheet and interest payable will be reported on the income statement.
B)Interest receivable will be reported on the balance sheet.
C)Short-term notes payable and interest payable will be reported on the balance sheet.
D)Short-term notes payable,interest payable and interest expense will be reported on the balance sheet.

Question 10

Employee compensation is a major expense for most service companies.

Question 11

Accounts payable turnover is an important measure of liquidity for a retail business.

Question 12

All contingent liabilities should be reported as liabilities on the financial statements,even those that are unlikely to occur.

Question 13

At the end of the year,a company makes a journal entry to accrue the interest expense on a short-term note payable.As a result of this transaction:

A)current liabilities increase and current assets increase.
B)current liabilities increase and stockholders' equity increases.
C)current liabilities decrease and stockholders' equity decreases.
D)current liabilities increase and stockholders' equity decreases.

Question 14

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

Question 15

Which of the liability accounts below is usually NOT an accrued liability:

A)interest payable.
B)wages payable.
C)taxes payable.
D)notes payable.

Question 16

Failure to record an accrued liability for wages earned by employees causes a company to:

A)understate net income.
B)overstate assets.
C)overstate liabilities.
D)overstate stockholders' equity.

Question 17

All of the following are reported as current liabilities EXCEPT:

A)unearned revenues for services to be provided in 16 months.
B)sales tax payable.
C)accounts payable.
D)bonds payable due in 6 months.

Question 18

A note payable may require the borrower to accrue interest expense and interest payable at the end of the accounting period.

Question 19

A contingent liability should be disclosed in the notes to the financial statements if there is a reasonable possibility that a loss (or expense)will occur.

Question 20

Unearned revenue will be zero when a company has earned all of the revenue it had collected in advance.

Question 21

Aisha Company paid $1,500 cash to replace a wheel on equipment sold under a two-year warranty in the prior year.The entry to record the payment would be to:

A)debit Warranty Expense and credit Cash.
B)debit Repair Expense and credit Cash.
C)debit Estimated Warranty Payable and credit Cash.
D)debit Operating Expense and credit Cash.

Question 22

Montana Company sold merchandise with a retail price of $30,000 for cash.They only accept cash.Montana Company is required to collect 6% state sales tax.The total cash received from customers was:

A)$1,800.
B)$28,200.
C)$30,000.
D)$31,800.

Question 23

Michigan Bank lends Detroit Furniture Company $100,000 on December 1.Detroit Furniture Company signs a $100,000,9%,4-month note.The total cash paid for interest (only)at maturity of the note is:

A)$1,000.
B)$3,000.
C)$6,000.
D)$9,000

Question 24

Illinois Bank lends Lisle Furniture Company $100,000 on December 1.Lisle Furniture Company signs a $100,000,9%,4-month note.The total cash paid at maturity of the note is:

A)$100,000.
B)$103,000.
C)$104,500.
D)$109,000.

Question 25

Monthly sales are $500,000.Warranty costs are estimated at 4% of monthly sales.Warranties are honored with replacement products.No defective products are returned during the month.At the end of the month,the company should record a journal entry with a credit to:

A)Estimated Warranty Payable for $20,000.
B)Warranty Expense for $20,000.
C)Sales for $20,000.
D)Inventory for $20,000.

Question 26

Mariano Corporation sells 10,000 units of inventory during the first year of operations for $500 each.The selling price includes a one-year warranty on parts.It is estimated that 3% of the units will be defective and that repair costs are estimated to be $50 per unit.In the year of sale,warranty contracts are honored on 80 units for a total cost of $4,000.What amount will be reported as Estimated Warranty Liability at the end of the year?

A)$4,000
B)$6,000
C)$11,000
D)$15,000

Question 27

Nationwide Magazine sells 60,000 subscriptions on account in March.The subscription price is $15 each.The subscriptions start in April.The journal entry in March would include a:

A)debit to Cash for $900,000.
B)debit to prepaid subscriptions for $900,000
C)credit to Cash for $900,000.
D)credit to Unearned Subscription Revenue for $900,000.

Question 28

The accounting principle that requires a company to record warranty expense in the same period that it records sales revenue is the:

A)going concern principle.
B)expense recognition principle.
C)conservatism principle.
D)consistency principle.

Question 29

Notes payable due in six months are reported as:

A)a reduction to notes receivable on the balance sheet.
B)current assets on the balance sheet.
C)current liabilities on the balance sheet.
D)long-term liabilities on the balance sheet.

Question 30

Madison Bank lends Neenah Paper Company $100,000 on January 1,2014.Neenah Paper Company signs a $100,000,8%,6-month note.The journal entry made by Neenah Paper Company on January 1,2014 is:

A)debit Cash for $92,000 and credit Note Payable for $92,000.
B)debit Interest Expense for $8,000 and credit Cash for $8,000.
C)debit Cash for $100,000 and credit Notes Payable for $100,000.
D)debit Interest Expense for $8,000 and credit Interest Payable for $8,000.

Question 31

Wisconsin Bank lends Local Furniture Company $100,000 on November 1.Local Furniture Company signs a $100,000,8%,4-month note.The fiscal year end of Local Furniture Company is December 31.The journal entry made by Local Furniture Company on December 31 is:

A)debit Interest Expense and credit Interest Payable for $1,333.
B)debit Interest Payable and credit Interest Expense for $1,333.
C)debit Interest Expense and credit Cash for $1,333.
D)debit Interest Payable and credit Cash for $1,333.

Question 32

Kathy's Corner Store has total cash sales for the month of $36,000 excluding sales taxes.If the sales tax rate is 5%,what journal entry is needed? (Ignore Cost of Goods Sold.)

A)debit Cash $37,800,credit Sales $37,800
B)debit Cash $36,000 and credit Sales $36,000
C)debit Cash $34,200,debit Sales Tax Receivable for $1,800 and credit Sales for $36,000
D)debit Cash $37,800,credit Sales $36,000 and credit Sales Tax Payable $1,800

Question 33

Hoover Company has a note payable for $300,000 on January 31,2014.Starting on February 1,2014,the company is required to pay $75,000 on the note each month.The first payment is on February 1,2014,the second payment is on March 1,2014,the third payment is on April 1,2014 and the final payment is on May 1,2014.How will this note be reported on the balance sheet at January 31,2014?

A)Long-term liability,$300,000
B)Long-term liability,$225,000
C)Current liability,$75,000; long-term liability,$225,000
D)Current liability,$300,000

Question 34

Mike's Pharmacy sold merchandise with a selling price of $2,500 to customers for cash.They also collected sales taxes of $300 for the day.The pharmacy uses the perpetual inventory system but ignore Cost of Goods Sold.The journal entry to record this information has:

A)debit to Cash of $2,800.
B)debit to Sales Tax Expense $300.
C)credit to Sales $2,800.
D)debit to Sales Tax Payable $300.

Question 35

Unearned Service Revenue relating to services to be provided in one month is reported on the balance sheet as:

A)a revenue account.
B)a current liability.
C)a component of stockholders' equity.
D)a long-term liability.

Question 36

The current ratio is current assets:

A)minus current liabilities.
B)divided by current liabilities.
C)plus current liabilities.
D)multiplied by current liabilities.

Question 37

The journal entry to record accrued interest on a short-term note payable must include a debit to:

A)Interest Payable and a credit to Cash.
B)Interest Expense and a credit to Cash.
C)Interest Expense and a credit to Interest Payable.
D)Interest Payable and a credit to Notes Payable.

Question 38

On December 31,2015,Estimated Warranty Payable is reported on the balance sheet for White Decker Company.The liability pertains to products sold in 2015 with five year warranties.How should the Estimated Warranty Payable be reported on the balance sheet at December 31,2015?

A)stockholders' equity.
B)a long-term liability only.
C)a current liability only.
D)a current liability and a long-term liability.

Question 39

Sales taxes collected from customers are sent to the state government at the end of each month.What journal entry is prepared?

A)debit Accounts Receivable and credit Sales
B)debit Sales Tax Payable and credit Sales
C)debit Accounts Payable and credit Cash
D)debit Sales Taxes Payable and credit Cash

Question 40

The total earned wages of an employee for the payroll period is the ________.The amount of earned wages the employee takes home is _________.

A)gross pay; withholding amount
B)gross pay; net pay
C)net pay; gross pay.
D)net pay; taxes withheld amount

Question 41

A company reports Cost of Goods Sold of $305,000,Ending Inventory of $100,000,Beginning Inventory of $10,000,Ending Accounts Payable of $90,000 and Beginning Accounts Payable of $60,000.What is the accounts payable turnover? (Round calculations to one decimal place.)

A)3.4
B)4.1
C)4.4
D)5.3

Question 42

A company reports Cost of Goods Sold of $400,000,Ending Inventory of $50,000,Beginning Inventory of $30,000,Ending Accounts Payable of $40,000 and Beginning Accounts Payable of $32,000.What is the days' payable outstanding?

A)31.2 days
B)32.9 days
C)36.5 days
D)45.6 days

Question 43

Potential liabilities that depend on future events arising out of past events are called:

A)long-term liabilities.
B)estimated liabilities.
C)contingent liabilities.
D)current liabilities.

Question 44

Corporations borrow large amounts of money by issuing (selling)bonds to the public.

Question 45

The following information is available for a retail store for the month of February:
1.Wahlberg Computers sells computers for $2,500 each on account.On February 1,Wahlberg sold 20 computers.The cost of each computer sold was $1,000.The store uses the perpetual inventory system.
2.It is estimated that the warranty expense is 5% of gross sales.A journal entry is prepared on February 1.
3.During February,Wahlberg replaced two computers due to product warranty complaints for products purchased in a prior month.
4.A customer fell in the store and is seeking $100,000 in damages.Wahlberg's attorney believes the case is frivolous because the customer has similar lawsuits pending against other retail stores.
5.A customer is suing Wahlberg Computers for $100,000 because the customer's computer purchased from Wahlberg Computers started on fire and destroyed the customer's residence.Wahlberg's attorney believes the customer will probably win the case and receive $100,000.
Required: Prepare the journal entries to record the transactions above.Omit explanations.

Question 46

Devin's Animal Shop has the following information for the pay period of March 15 to March 31:
Required:
Prepare the journal entry to record the accrued payroll on March 31 and the journal entry to remit the payroll taxes to the government on April 15.Omit explanations.

Question 47

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 interest periods prior to the bond's maturity date.

Question 48

At January 1,2015,the Estimated Warranty Payable is $1,000.During 2015,the company recorded Warranty Expense of $17,500.During 2015,the company replaced defective products in accordance with product warranties at a cost of $10,000.What is the Estimated Warranty Payable at December 31,2015?

A)$7,500
B)$8,500
C)$9,000
D)$17,500

Question 49

What is the accounts payable turnover?

A)a measure of liquidity
B)a measure of the number of times a year a company is able to pay off its accounts payable
C)purchases on account from suppliers divided by average accounts payable
D)all of the above

Question 50

A company reports Cost of Goods Sold of $400,000,Ending Inventory of $50,000,Beginning Inventory of $30,000,Ending Accounts Payable of $40,000 and Beginning Accounts Payable of $32,000.What is the accounts payable turnover?

A)8.0
B)10.0
C)11.1
D)11.7

Question 51

A company has a pending lawsuit that has a remote possibility of being settled in favor of the plaintiff who is a former employee.What should the company do?

A)Nothing.
B)Prepare a note to the financial statements.
C)Prepare a journal entry.
D)Prepare a note to the financial statements and a journal entry.

Question 52

A company reports Cost of Goods Sold of $305,000,Ending Inventory of $100,000,Beginning Inventory of $10,000,Ending Accounts Payable of $90,000 and Beginning Accounts Payable of $60,000.What is the days' payable outstanding? (Round calculations to one decimal place.)

A)68.9 days
B)83 days
C)89 days
D)107.4 days

Question 53

A company has a lawsuit pending with regard to patent infringement.The amount of the loss can be estimated and has a probable chance of occurrence.What journal entry is required?

A)debit Lawsuit Loss and credit Cash
B)debit Estimated Lawsuit Loss and credit Cash
C)debit Cash and credit Estimated Lawsuit Liability
D)debit Estimated Lawsuit Loss and credit Estimated Lawsuit Liability

Question 54

A company has days' payable outstanding of 70 days.If credit terms of purchases are 2/10,net 30,is the company paying accounts payable on a timely basis?

A)Yes,days' payable outstanding exceeds the net period of 30 days.
B)Yes,days' payable outstanding exceeds the discount period of 10 days and the net period of 30 days.
C)No,days' payable outstanding exceeds the discount period of 10 days and the net period of 30 days.
D)There is not enough information to make an assessment.

Question 55

On December 31,2014,a note payable of $200,000 has installments of $50,000 due yearly,beginning on December 31,2015.On December 31,2014,how will the note payable be reported on the balance sheet?

A)$50,000 current liability and $100,000 long-term liability
B)$200,000 long-term liability
C)$200,000 current liability
D)$50,000 current liability and $150,000 long-term liability

Question 56

Company A has an accounts payable turnover of 9.5.Company B has an accounts payable turnover of 7.3.Which company is more liquid?

A)Company A is more liquid.
B)Company B is more liquid.
C)Both are equally liquid.
D)None of the above are correct.

Question 57

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

Question 58

Davies Accessories Company entered into the following transactions relating to notes payable:
Required:
Prepare journal entries to record the above transactions.Also,prepare journal entries needed on December 31,the company's fiscal year end.Omit explanations.

Question 59

On December 1,2014,Goliath Corporation borrowed $120,000 on a 120-day,10% note.Goliath Corporation's year end is December 31.
Required:
1.Prepare the journal entries in 2014 and 2015 for Goliath Corporation.Round all numbers to the nearest dollar.Omit explanations.
2.At December 31,2014,what is reported on the balance sheet for the note?

Question 60

At December 31,2014,Lansing Company's general ledger shows the following balances after posting adjusting entries:
Additional information:
1.$50,000 of the 8% note due December 31,2019 is due on December 31,2015.
2.The Estimated Warranty Liability relates to a multiple year product warranty.One-half of the liability will be honored in 2015,and one-half in 2016.
3.The Unearned Service Revenue pertains to a service contract to be performed in 2016.
Required:
Prepare the liability section of Lansing Company's balance sheet at December 31,2014.

Question 61

The effective-interest method of amortization results in changing amounts of interest expense for every interest payment over the bond's life.

Question 62

If a bond is redeemed before maturity,the journal entry to record the redemption will credit Cash.

Question 63

The carrying value of bonds decreases over the term of the bonds if the bonds were issued at a discount.

Question 64

Callable bonds allow the issuer to pay off the bonds whenever the issuer chooses.

Question 65

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

Question 66

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

Question 67

Bonds which are backed only by the good faith of the borrower are referred to as:

A)junk bonds.
B)uncertified bonds.
C)debenture bonds.
D)callable bonds.

Question 68

If $500,000,6% bonds are issued on January 1 and pay interest semiannually,the amount of interest paid on July 1 will be $15,000.

Question 69

If the market interest rate is greater than the stated interest rate on bonds,bonds will sell:

A)at face value.
B)at a discount.
C)at a premium.
D)at market value.

Question 70

Premium on bonds payable is a contra account to bonds payable.

Question 71

If the stated interest rate on a bond is 8% and the market interest rate is 7%,the bond will be issued at a price above the par value of the bond.

Question 72

The straight-line amortization method keeps interest expense at the same dollar amount for every interest payment over the bond's life.

Question 73

At maturity,the premium on bonds payable will have been amortized to zero,and the bonds' carrying value will be the face value of the bond.

Question 74

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

Question 75

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

Question 76

Bonds that are secured by real estate are called:

A)term bonds.
B)secured bonds.
C)mortgage bonds.
D)B and C.

Question 77

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

Question 78

If $120,000 face value bonds are issued at 104,the proceeds received will be $104,000.

Question 79

Bonds in a particular issue which mature in installments over a period of time are called:

A)serial bonds.
B)term bonds.
C)callable bonds.
D)convertible bonds.

Question 80

The account Premium on Bonds Payable increases the issuer's liabilities.