Question 1

Which of the following is not a contingent liability?

Accepted Answer

Contingent liabilities are potential liabilities that may occur depending on the outcome of a future event. Environmental cleanup costs, lawsuits, and credit guarantees are all examples of contingent liabilities because they depend on the outcome of uncertain future events. However, a discount on notes payable is not a contingent liability; it is a financial accounting term that represents the difference between the face value of a note and the cash received (or receivable), and it is amortized over the life of the note.

Question 2

Which of the following liabilities is most likely an estimated amount rather than an amount known with certainty?

Accepted Answer

Income tax payable is often an estimated amount because it depends on the taxable income of the entity, which can involve estimates and judgments about allowable deductions, credits, and other tax provisions until the tax return is actually filed and assessed.

Question 3

A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts:

Accepted Answer

A contingent liability should be recorded in the accounts if the related future event will probably occur and the amount can be reasonably estimated.

Question 4

A current liability is an obligation that requires the use of an existing asset or the creation of another current liability:

Accepted Answer

A current liability is defined as an obligation that a company expects to pay within the coming year or within its operating cycle, whichever is longer. This definition allows for the inclusion of liabilities that may extend slightly beyond a year if the company's operating cycle is longer than one year.

Question 5

A contingent liability is an obligation that should be:

Accepted Answer

Contingent liabilities are recorded in the accounts if it is probable that the future event will occur and the amount can be reasonably estimated. This approach aligns with accounting principles that require recognition of obligations that are likely to affect the financial position of the entity.

Question 6

Modem Appliances, Inc. sells food processors for $150 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $25 per defective unit. Sales for August are $225,000.
What is the estimated liability for product warranties for units sold in August?

Accepted Answer

The estimated liability for product warranties for units sold in August is calculated by first determining the number of units sold, which is $225,000 / $150 = 1,500 units. Given that 5% of these are expected to be defective, the number of defective units is 1,500 * 5% = 75 units. The cost to repair each defective unit is $25, so the total estimated liability is 75 * $25 = $1,875.

Question 7

Becker, Inc. sells a single product for $450 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $35 per unit. During July, 800 units were sold. Five units were reported defective and repaired in July.
What amount should be added to the Estimated Liability for Product Warranties for July?

Accepted Answer

The answer of Becker, Inc. sells a single product for...

Question 8

Two-Wheel Products Company sells bicycles for $120, with a 60-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $16 per bicycle. Sales for May were $108,000; 20 units sold in May were found defective and repaired that month.
What is the estimated liability for product warranties on May 31?

Accepted Answer

The estimated liability is calculated by taking 6% of the total units sold in May, multiplying by the repair cost per unit, and subtracting the cost of repairs already made. Total units sold = $108,000 / $120 = 900 units. Estimated defects = 900 * 6% = 54 units. Estimated repair cost = 54 * $16 = $864. Repairs already made = 20 * $16 = $320. Estimated liability = $864 - $320 = $544.

Question 9

Video-Technical, Inc. was organized to sell a single product for $600 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $50 per unit. During September, total sales were $198,000; 9 units sold during September were found defective and repaired.
The accrued liability for product warranties at month-end should be:

Accepted Answer

The answer of Video-Technical, Inc. was organized to sell a...

Question 10

Working capital is defined as:

Accepted Answer

Working capital is defined as current assets minus current liabilities. This measure gives an indication of the financial health of a company in terms of its ability to cover its short-term obligations with its short-term assets.

Question 11

If Marshall Toys has a current ratio of 3.2 and working capital of $2,200,000, which of the following will cause both the current ratio and working capital to decrease?

Accepted Answer

Recording unpaid salaries increases current liabilities without affecting current assets, thus decreasing both the current ratio and working capital.

Question 12

Working capital is defined as:

Accepted Answer

Working capital is defined as current assets minus current liabilities, which represents the liquidity available to a business for day-to-day operations.

Question 13

Bluer Company has a current ratio of 3.00. Which of the following events would cause its current ratio to increase?

Accepted Answer

Paying off an account payable decreases current liabilities without affecting current assets, which increases the current ratio.

Question 14

The December 31, balance sheet of Jones Company includes the following information:
 What is Jones's quick ratio at December 31?

Accepted Answer

The answer of The December 31, balance sheet of Jones...

Question 15

The December 31 balance sheet of Occidental Company includes the following information:
 What is Occidental's quick ratio at December 31?

Accepted Answer

The answer of The December 31 balance sheet of Occidental...

Question 16

On November 1, Mead borrowed from Miller, giving him a $6,000, 3 month, 9% note, interest payable at maturity. Mead made no entry after November 1.
On December 31, the end of the accounting period, what is the amount of the interest accrual?

Accepted Answer

The answer of On November 1, Mead borrowed from Miller,...

Question 17

London Company paid Frankfurt Company for merchandise with a $3,200, 90-day, 8% note dated May 10. If London Company pays the note at maturity, what is the amount of cash paid at that time?

Accepted Answer

The amount of cash paid at maturity includes the principal plus interest. The interest can be calculated as follows: Interest = Principal × Rate × Time = $3,200 × 8% × (90/360) = $64. Therefore, the total amount paid at maturity is Principal + Interest = $3,200 + $64 = $3,264.

Question 18

On December 1, Edwards borrowed $6,000 from Barton, giving a 90-day, 10% note. On December 31, the end of the accounting period, what is the amount of accrued interest?

Accepted Answer

The answer of On December 1, Edwards borrowed $6,000 from...

Question 19

What does the current ratio measure?

Accepted Answer

The current ratio measures a company's ability to pay off its short-term liabilities with its short-term assets, indicating its short-term debt paying ability.

Question 20

On September 1, 2019, Donna Equipment signed a one-year, 8% interest bearing note payable for $100,000. Assuming Donna maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be (assume 12 months per calendar year):

Accepted Answer

Interest expense = Principal x Interest rate x Time= $100,000 x 8% x 1 year= $8,000Since the note was signed on September 1, 2019, only 4 months of interest expense should be recognized in 2019. The remaining 8 months of interest expense should be recognized in 2020.Therefore, the amount of interest expense that should be reported in the 2020 income statement for this note would be $8,000 x 8/12 = $5,333.

Quiz 9: Liabilities

Which of the following is not a contingent liability?

Which of the following liabilities is most likely an estimated amount rather than an amount known with certainty?

A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts:

A current liability is an obligation that requires the use of an existing asset or the creation of another current liability:

A contingent liability is an obligation that should be:

Working capital is defined as:

If Marshall Toys has a current ratio of 3.2 and working capital of $2,200,000, which of the following will cause both the current ratio and working capital to decrease?

Working capital is defined as:

Bluer Company has a current ratio of 3.00. Which of the following events would cause its current ratio to increase?

The December 31, balance sheet of Jones Company includes the following information: What is Jones's quick ratio at December 31?

The December 31 balance sheet of Occidental Company includes the following information: What is Occidental's quick ratio at December 31?

On November 1, Mead borrowed from Miller, giving him a $6,000, 3 month, 9% note, interest payable at maturity. Mead made no entry after November 1. On December 31, the end of the accounting period, what is the amount of the interest accrual?

London Company paid Frankfurt Company for merchandise with a $3,200, 90-day, 8% note dated May 10. If London Company pays the note at maturity, what is the amount of cash paid at that time?

On December 1, Edwards borrowed $6,000 from Barton, giving a 90-day, 10% note. On December 31, the end of the accounting period, what is the amount of accrued interest?

What does the current ratio measure?