Question 1

The statement of financial position classification of a liability as current or non-current is important because it may affect the evaluation of a company's liquidity.

Accepted Answer

The classification of a liability as current or non-current has an impact on the calculation of key liquidity ratios, such as the current ratio and working capital. A higher proportion of current liabilities may indicate a greater risk of short-term liquidity issues for the company. Therefore, properly classifying liabilities as current or non-current is critical for assessing a company's ability to meet its short-term financial obligations.

Question 2

Metropolitan Symphony sells 200 season tickets for $60,000 that represents a five concert season.The amount of Unearned Ticket Revenue after the second concert is $24,000.

Accepted Answer

False

Question 3

A current liability must be paid out of current earnings.

Accepted Answer

A current liability is defined as a liability that is expected to be settled within one fiscal year or the operating cycle, whichever is longer, and can be paid out of current assets or by creating other current liabilities, not necessarily from current earnings.

Question 4

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

Accepted Answer

With an interest-bearing note, the amount of cash received upon issuance is typically equal to the note's face value; the interest accrues over time and is paid in addition to the face value at maturity or through periodic payments.

Question 5

If a retailer sells goods for a total price of €600, which includes an 11% sales tax, the amount of the sales tax is €59.46.

Accepted Answer

To calculate the amount of sales tax in this scenario, we can use the formula:

Sales tax = Total price x Tax rate

The total price is given as €600, and the tax rate is 11% or 0.11. Plugging these values into the formula, we get:

Sales tax = €600 x 0.11
Sales tax = €66

Therefore, the amount of the sales tax is €66, not €59.46 as stated in the statement.

Question 6

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.

Accepted Answer

The answer of During the month, a company sells goods...

Question 7

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

Accepted Answer

A company's current liabilities are debts that are due within one year, while its current assets are assets that can be converted to cash within one year. If its current liabilities exceed its current assets, the company may struggle to meet its financial obligations in the short-term, indicating a liquidity problem.

Question 8

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

Accepted Answer

Bondholders do not have voting rights for the board of directors. Only shareholders have voting rights in this regard.

Question 9

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

Accepted Answer

The higher the sales tax rate, the more expensive the products become for the consumer, which can decrease sales and ultimately decrease the profit earned by retailers.

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.

Accepted Answer

Current maturities of long-term debt refers to the portion of long-term debt that is due to be paid within the next year, not just the interest on the debt.

Question 11

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

Accepted Answer

A note payable and an account payable have different terms and due dates depending on the agreement made between the parties involved. There is no rule that a note payable must always be paid before an account payable.

Question 12

Unearned revenues should be classified as Other income and expense on the Income Statement.

Accepted Answer

Unearned revenues are not classified as other income and expense on the income statement. They are recorded as a liability on the balance sheet until the revenue is earned, at which point it is recognized as revenue on the income statement.

Question 13

A £2,000,000, 7%, 6-month note payable requires an interest payment of £140,000 at maturity.

Accepted Answer

If the note is for £2,000,000 at a 7% interest rate, the total interest owed for 6 months would be:

(£2,000,000) x (0.07) x (6/12) = £70,000

Therefore, the interest payment at maturity should be £70,000, not £140,000.

Question 14

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

Accepted Answer

Interest expense is typically reported separately as a deduction from revenue in the income statement, not under Other income and expense.

Question 15

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

Accepted Answer

The relationship between current liabilities and current assets, typically assessed through the current ratio, is important in evaluating a company's short-term liquidity, not directly its ability to pay off long-term debt.

Question 16

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

Accepted Answer

Interest expense on a note payable is recorded over the life of the loan, not just at maturity. This is typically done through amortization, where a portion of each loan payment is allocated to interest expense and a portion is allocated to reducing the principal balance.

Question 17

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

Accepted Answer

Current liabilities are those obligations that are due within one year, or one operating cycle (whichever is longer) from the date of the balance sheet.

Question 18

Notes payable usually require the borrower to pay interest.

Accepted Answer

Notes payable are loans that a company borrows from a lender, and usually require the borrower to pay interest in addition to the principal amount borrowed.

Question 19

A debt due within 6 months of the statement of financial position date which is expected to be paid out of cash will be classified as a current liability.

Accepted Answer

The definition of a current liability includes debts that are due within 12 months of the statement of financial position date, but if a debt is due within 6 months and is expected to be paid out of cash, it will still be classified as a current liability.

Question 20

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

Accepted Answer

The interest payment on the note is calculated as follows:

Interest = Principal x Rate x Time 
Interest = $30000 x 0.08 x (9/12) 
Interest = $1800

Therefore, the statement is true.

Quiz 10: Liabilities