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.

Accepted Answer

Companies are required to withhold social security taxes from employee salaries and also match them. These amounts are recorded as current liabilities until they are paid to the government.

Question 2

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

Accepted Answer

According to the generally accepted accounting principles (GAAP), all long-term debt that is expected to be paid off or refinanced within the next year must be classified as a current liability on the balance sheet. This is because the company will be required to use its current assets or obtain additional financing to meet the upcoming payment obligations.

Question 3

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

Accepted Answer

Under the expense warranty approach, companies charge warranty costs to the period in which the sale is made, not just when they comply with the warranty. This approach matches the warranty expense with the revenue it helps to generate.

Question 4

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

Accepted Answer

This is in accordance with generally accepted accounting principles (GAAP). Compensated absences include vacation time, personal days, sick leave, and other paid time off accruals. The expense and liability should be recognized in the year earned, even if the employee takes the time off in a later year. This ensures that the financial statements accurately reflect the company's obligations to its employees.

Question 5

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

Accepted Answer

Dividends in arrears on cumulative preferred stock are not recorded as a liability until they are declared by the company's board of directors. Until then, they are generally disclosed in the notes to the financial statements.

Question 6

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

Accepted Answer

Magazine subscriptions and airline ticket sales both result in unearned revenues because the revenue is received before the service is provided. The company has an obligation to deliver the service at a later date, which means the revenue is not yet earned. Once the service is provided, the revenue becomes earned.

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.

Accepted Answer

The expected profit from a sales type warranty should be recognized over the life of the warranty as expenses are incurred and revenue is recognized. This is known as the matching principle, which requires expenses to be recognized in the same period as the revenue they help to generate.

Question 8

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

Accepted Answer

A company is not required to accrue a liability for sick pay that accumulates but does not vest because it does not represent an obligation that the company is certain to settle, as employees may not use the accumulated sick pay if it does not vest.

Question 9

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

Accepted Answer

Prepaid insurance is considered a non-current asset and does not quickly convert to cash, so it is not included in the numerator when computing the acid-test (quick) ratio, which focuses on the most liquid assets.

Question 10

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

Accepted Answer

The answer of Accumulated rights exist when an employer has...

Question 11

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

Accepted Answer

Although a zero-interest-bearing note is issued at a discount and does not explicitly charge interest, the discount is amortized over the life of the note, which is recognized as interest expense in the issuer's financial statements.

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.

Accepted Answer

According to accounting principles, companies should accrue an estimated loss from a loss contingency if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. "Reasonably possible" is a lower threshold and does not require accrual.

Question 13

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

Accepted Answer

Current liabilities are typically recorded and reported at their full maturity value, which is the amount that the company owes and is obligated to pay within a year or the operating cycle, whichever is longer. This includes items such as accounts payable, short-term loans, and accrued expenses.

Question 14

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

Accepted Answer

The fair value of an asset retirement obligation is recorded as both an increase to the related asset (usually property, plant, and equipment) and a liability, reflecting the obligation to perform the asset retirement activity in the future. This creates a net impact of zero on total assets and total liabilities, but it does affect the composition of those balances.

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.

Accepted Answer

This is known as the "Incurred But Not Reported" (IBNR) concept, which states that a liability should be recognized in the financial statements if the cause for litigation occurred on or before the date of the financial statements, even if the company has not yet been notified or assessed damages.

Question 16

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

Accepted Answer

Discount on Notes Payable is a contra account to Notes Payable, meaning it reduces the value of Notes Payable on the balance sheet. Therefore, it is classified as a liability account.

Question 17

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

Accepted Answer

According to the accounting principle of conservatism, gain contingencies should not be recognized until they are certain, but if the possibility of gain is reasonably possible, then it should be disclosed in the notes to the financial statements. Therefore, companies disclose 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.

Accepted Answer

Paying a current liability with cash will decrease both the current asset and current liability balances by the same amount, resulting in no change to 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.

Accepted Answer

This is true. Many companies do not separate the sales tax collected and the amount of the sale at the time of the sale, which can make it difficult to accurately track and report on tax liabilities.

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.

Accepted Answer

This is known as the "long-term debt exclusion" and is allowed under GAAP (Generally Accepted Accounting Principles) if certain criteria are met. The purpose of this exclusion is to reflect a more accurate picture of a company's long-term debt obligations, as opposed to short-term obligations that are intended to be refinanced.

Quiz 13: Current Liabilities and Contingencies