Deck 10: Liabilities

Question 1

The withholding of taxes from an employee's pay is a liability to the company.

Answer 1

True

Question 2

An amortization table for a note payable shows decreasing amounts of interest and an increasing amount of unpaid balance each period.

Answer 2

False

Question 3

Since payment is due within one year,the current portion of long-term debt should be reported separately in the long-term liabilities section of the balance sheet.

Answer 3

False

Question 4

The unpaid balance column on an amortization table for a note payable shows the amount the debtor could pay to settle the liability at a particular point in time.

Question 5

Dividends paid by a corporation to its stockholders are tax deductible by the corporation but interest paid on bonds is not tax deductible.

Question 6

Junk bonds are attractive to investors because they carry a high rate of interest and are convertible into a specified number of shares of capital stock.

Question 7

Worker's compensation premiums are deducted from each employee's gross pay.

Question 8

The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly.

Question 9

Gross pay less withholding tax and less worker's compensation is considered net pay.

Question 10

Working capital is equal to current assets less current liabilities.

Question 11

Bonds secured by a pledge of specific assets are called debenture bonds.

Question 12

Current liabilities are obligations that must be repaid within the shorter of one year or the operating cycle.

Question 13

If a long-term debt is to be paid off in monthly installments over a 5-year period,the entire principal should be classified as a long-term debt.

Question 14

When a company sells bonds,the bondholders are permitted to vote for the board of directors.

Question 15

Accounts payable are often subdivided into the categories of trade accounts payable and notes payable.

Question 16

When bonds are sold by one investor to another,they sell at market price plus accrued interest since the last payment date.

Question 17

A liability that is known to exist but the precise dollar amount is not known is called a possible liability.

Question 18

Federal unemployment taxes apply to a set dollar amount of employee wages and tend to decline dramatically as the year progresses.

Question 19

The most common types of payroll deductions are taxes,insurance premiums,employee savings,and union dues.

Question 20

When money is borrowed by issuing a note payable,the borrower records a liability equal to the maturity value of the note.

Question 21

If a bond is issued at a premium,the company receives more money for the bond than it will have to pay back at the end of the bond's life,and as a result the company records no interest expense over the life of the bond.

Question 22

If a bond is callable,the call price is usually lower than the face value of the bond.

Question 23

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

Question 24

A bond with a $100,000 face value that is issued at a premium will have a higher maturity value than a bond with a $100,000 face value that is issued at a discount.

Question 25

A commitment,such as a contract to pay a baseball player $5,000,000 a year for five years,should be listed as a long-term liability.

Question 26

Sinking funds make a bond issue less attractive to the investor.

Question 27

The market value of a convertible bond tends to move inversely to the market value of an equivalent number of shares of common stock.

Question 28

Bonds payable are a means of dividing a very large,long-term liability among many creditors,some of whom may participate in the loan only for a short period of time.

Question 29

There is a tax advantage for a company to issue bonds in lieu of stocks.

Question 30

Convertible bonds can be exchanged for common stock at the option of the company.

Question 31

The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability.

Question 32

The amortization of bond discount by the issuing company decreases the carrying value of its bonds payable.

Question 33

When interest rates rise,the price of a given bond issue will fall.

Question 34

The underwriter guarantees the issuing corporation a specific price for the entire bond issue and sells the bonds to the investing public at a higher price.

Question 35

The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period.

Question 36

When bonds are issued at a discount,the borrower must pay more at maturity than the amount originally received.

Question 37

Estimated liabilities,contingencies,and commitments are usually reported in the long-term liability section of the financial statements.

Question 38

The future value will always be less than the present value.

Question 39

Loss contingencies stem from past events.

Question 40

A loss contingency is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known.

Question 41

A pension fund is an independent entity managed by a bank or insurance company.

Question 42

On November 1,Metro Corporation borrowed $55,000 from a bank and signed a 12%,90-day note payable in the amount of $55,000.The November 30 adjusting entry will be: (assume 360 days in year)

A)Debit Interest Expense $550 and credit Notes Payable $550.
B)Debit Interest Expense $550 and credit Interest Payable $550.
C)Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.
D)Debit Interest Expense $550 and credit Cash $550.

Question 43

If a lease transfers ownership of the property to the lessee at the end of the lease term,it should be regarded as an operating lease.

Question 44

Deferred income taxes may be classified as assets.

Question 45

Loss contingencies should be recorded in the accounting records whenever it is probable that a loss has been incurred and the amount of loss might be material in amount.

Question 46

The quick ratio is a more stringent measure of solvency than the current ratio.

Question 47

A high interest coverage ratio is a sign of creditworthiness.

Question 48

Sanford Corporation borrowed $90,000 by issuing a 12%,six-month note payable,all due at the maturity date.After one month,the company's total liability for this loan amounts to:

A)$90,000.
B)$90,450.
C)$90,900.
D)$91,800.

Question 49

Assets that have been pledged as security for a loan:

A)Are reported as liabilities on the balance sheet.
B)Must be sold when the loan matures.
C)Become the property of the lender until the loan is paid in full.
D)Are disclosed in the notes to the financial statements.

Question 50

The two basic characteristics of estimated liabilities are:

A)Probable and reasonably estimated.
B)Known to exist and amount unable to be determined until a later date.
C)Probable and non-interest bearing.
D)Known to exist and interest bearing.

Question 51

When a company has a fully funded pension plan,they only need to record the present value of pension payments as a current liability.

Question 52

All of the following are examples of current liabilities except:

A)Accounts payable.
B)Pledged assets.
C)Unearned revenue.
D)Income taxes payable.

Question 53

On October 1,2015,Master's Co.borrows $500,000 from its bank for five years at an annual interest rate of 10%.According to the terms of the loan,the principal amount will not be due for five years.Interest is to be paid monthly on the first day of each month,beginning November 1,2015.With respect to this borrowing,Master's December 31,2015,balance sheet included only a long-term note payable of $500,000.As a result:

A)The December 31,2015,financial statements are accurate.
B)Liabilities are understated by $12,500 accrued interest payable.
C)Liabilities are understated by $4,167 accrued interest payable.
D)Liabilities are understated by the amount of interest for the five-year term of the note that has not yet been paiD.$500,000 × 10% × 1/12 = $4,167

Question 54

A measure of a company's liquidity is:

A)Assets divided by liabilities.
B)The current ratio.
C)The dollar amount of liabilities that bear interest.
D)The dollar amount of assets used as collateral for a loan.

Question 55

The debt ratio measures how quickly a company pays off the long-term liabilities it has incurred.

Question 56

Interest payable on a loan becomes a liability:

A)When the note payable is issued.
B)As it accrues.
C)At the maturity date.
D)When the borrowed money is received.

Question 57

On November 1 of the current year,Garcia Company borrowed $50,000 by issuing a 9%,six-month note payable,all due at maturity date.Interest expense on this note to be recognized during the current year amounts to:

A)$500.
B)$750.
C)$1,500.
D)$4,500.

Question 58

The current portion of long-term debt should be reported:

A)Separately in the long-term liabilities section of the balance sheet.
B)In the long-term liabilities section of the balance sheet,along with the other long-term debt.
C)In the current liabilities section of the balance sheet.
D)In a separate section of the balance sheet,between long-term liabilities and shareholders' equity.

Question 59

Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made.

Question 60

If a business ceases operations and liquidates,which of the following will be paid last?

A)Owners.
B)General creditors.
C)Employees.
D)Creditors who have collateral for their loans.

Question 61

Which of the following is not an accurate statement regarding the distinction between debt and equity?

A)Only equity is considered a source of financing for operations of the business,since debt must be repaid at a specified maturity date.
B)If a business ceases operations and liquidates,claims of all creditors have legal priority over claims of the stockholders.
C)Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment.
D)The providers of equity are owners of the business; the providers of borrowed funds are creditors.

Question 62

Employers are required to pay all of the following on the wages paid to each employee except:

A)Social security taxes.
B)Worker's compensation insurance.
C)Medicare taxes.
D)Health insurance benefits.

Question 63

An employer's total payroll-related costs always exceed the wages and salaries earned by employees by:

A)Amounts withheld from employees' pay.
B)Payroll taxes and mandated programs such as workers' compensation insurance.
C)50%.
D)Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees,because of amounts withheld from employees' checks.

Question 64

The amounts that a business withholds as taxes from an employee's earnings:

A)Represent payroll taxes expense to the employer.
B)Are deposited in an interest-bearing account until the employee is terminated.
C)Represent miscellaneous revenue to the employer.
D)Represent current liabilities to the employer.

Question 65

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:

A)The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
B)Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.
C)A corporation must pay tax on the sales price of stock issued,but is not taxed on the amount received when bonds are issued.
D)Both interest and dividends paid are deductible in computing taxable income,but since interest must be paid annually,the corporation usually gets a larger tax deduction over the life of the bonds payable.

Question 66

The term "junk bonds" describes bonds with:

A)Low interest rates.
B)Indefinite maturity dates.
C)Low maturity values.
D)High risk.

Question 67

In preparing an amortization table,it is necessary to include:

A)The original amount of the liability,the amount of periodic payments,and the interest rate.
B)The original amount of the liability,the amount of periodic payments,and the amount of past payments.
C)The monthly payment,the total amount of past payments,and the original amount of the liability.
D)The total amount of past payments,the interest rate,and the amount of periodic payments.

Question 68

When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):

A)The portion of each payment allocated to interest expense is the same each month.
B)The sum of the monthly payments is equal to the amount of the installment note (mortgage).
C)The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.
D)The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

Question 69

Which of the following payroll taxes do not stop once an employee reaches a certain level of income:

A)Medicare taxes.
B)Social security taxes.
C)Unemployment taxes.
D)Medicare,Social security,and unemployment taxes.

Question 70

A company issues $50 million of bonds at par on January 1,2015.The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years.The journal entry when the bonds are sold is:

A)
B)
C)
D)

Question 71

The Social Security tax paid by an employer is:

A)Greater than the amount paid by the employee.
B)Less than the amount paid by the employee.
C)Equal to the amount paid by the employee.
D)The employer does not pay Social Security tax,only the employee pays the tax.

Question 72

Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result,the prices of bonds payable increased.What would be the likely impact on market interest rates?

A)Market interest rates will be unaffected.
B)Market interest rates will increase.
C)Market interest rates will fall.
D)Although interest rates will change,it is impossible to predict the direction of change.

Question 73

When a corporation has a right to redeem bonds in advance of the maturity date,the bond is considered a:

A)Convertible bond.
B)Callable bond.
C)Junk bond.
D)Debenture bond.

Question 74

If a bond is issued at par and between interest dates:

A)The cash received by the corporation will be less than the face value of the bond.
B)The cash received by the corporation will be greater than the face value of the bond.
C)The cash received by the corporation will be the same as the face value of the bond.
D)Interest receivable will be debited.

Question 75

Sinking funds usually appear on the balance sheet as:

A)Current asset.
B)Long-term investment.
C)Current liability.
D)Appropriation of retained earnings.

Question 76

Which of the following payroll costs are shared equally by the employer and the employee?

A)State unemployment taxes.
B)Workers' compensation.
C)Social security.
D)Federal unemployment taxes.

Question 77

Bonds which may be exchanged for a specified number of shares of capital stock are called:

A)Junk bonds.
B)Convertible bonds.
C)Debenture bonds.
D)Mortgage bonds.

Question 78

Temple Corporation purchased a piece of real estate,paying $400,000 cash and financing $700,000 of the purchase price with a 10-year,15% installment note.The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year.In this situation:

A)The aggregate amount of the monthly payments is $700,000.
B)Each monthly payment is greater than the amount of interest accruing each month.
C)The portion of each payment representing interest expense will increase over the 10-year period,since principal is being paid off,yet the payment amount does not decrease.
D)The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

Question 79

One advantage of issuing bonds instead of stock is that:

A)Interest is tax deductible,whereas dividends are not.
B)Bonds have a longer maturity date.
C)Interest rates are lower than dividend rates.
D)The issuance of bonds does not affect earnings per share.

Question 80

When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

A)An amount less than the stated interest rate times the principal.
B)An amount more than the stated interest rate times the principal.
C)An amount equal to the stated interest rate times the principal.
D)The company may skip the first interest payment date since the appropriate time has not passed.