Question 1

If a company determines that the likelihood of a future obligation arising from a contingent liability is possible, the company must record a liability on its balance sheet.

Accepted Answer

A contingent liability that is only possible is disclosed in the notes to the financial statements, not recorded on the balance sheet.

Question 2

Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1, 2014. The stated interest rate on these bonds is 9%. If the effective interest rate is 10.33%, interest expense and the discount amortization in 2014 are

Accepted Answer

The interest expense is calculated using the effective interest rate on the carrying amount of the bonds. The carrying amount at issuance is $190,000 (95% of $200,000). The interest expense for 2014 is $190,000 * 10.33% = $19,627. The cash interest paid is $18,000 (9% of $200,000), so the discount amortization is $19,627 - $18,000 = $1,627.

Question 3

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

Accepted Answer

Loan amortization involves the repayment of a portion of the principal along with interest payments over the course of a long-term note payable.

Question 4

Rush Corporation borrowed $50,000 on January 1, 2014. The loan is for a five-year period and has an annual interest rate of 8%. At the end of each year, Rush will make a payment of $12,522.82, which includes both principal and interest. The amount of the payment for 2012 that is reduction of principal is $8,502.82.

Accepted Answer

The loan was borrowed in 2014, so there would be no payment in 2012. The payment schedule starts from 2014, and the principal reduction amount would be calculated based on the interest and principal for that specific year.

Question 5

Company T's operating cycle is approximately 2 years long. Company T's note payable maturing in 15 months should be classified as a long-term liability.

Accepted Answer

A note payable maturing in 15 months is a short-term liability as it will be paid off within Company T's operating cycle.

Question 6

If a company has a contingent liability where the likelihood of a future obligation is remote, the company need not record or disclose the liability.

Accepted Answer

According to accounting standards, if the likelihood of a future obligation is remote, the company need not record or disclose the liability.

Question 7

A company's obligation for product warranties is a contingent liability that generally must be recognized in the financial statements.

Accepted Answer

The answer of A company's obligation for product warranties is...

Question 8

A line of credit typically has an interest rate that is fixed (constant) for the length of the agreement.

Accepted Answer

A line of credit usually has a variable interest rate that fluctuates with market conditions.

Question 9

Installment notes are loans that require payment of interest at regular intervals and payment of principal at maturity.

Accepted Answer

Installment notes require regular payments that include both interest and principal, not just interest with principal due at maturity.

Question 10

Classified balance sheets are useful for assessing a company's liquidity and solvency.

Accepted Answer

Classified balance sheets separate assets and liabilities into current and non-current categories, allowing for a better understanding of a company's liquidity and solvency. Current assets and liabilities are those that are expected to be converted to cash or paid within one year, while non-current assets and liabilities are those with longer-term timelines. By analyzing the current and non-current categories separately, investors and analysts can assess a company's ability to meet short-term obligations and evaluate its long-term financial health.

Question 11

If a company's operating cycle is 90 days long, the company would use a period of one year to identify current assets and current liabilities.

Accepted Answer

The operating cycle determines the time frame within which a company's current assets are typically converted to cash. If the operating cycle is 90 days, the company would use a 12-month period to identify its current assets and liabilities. This is because the company may go through the operating cycle several times within a year, and it is important to capture all current assets and liabilities that are part of this cycle.

Question 12

Companies that offer warranties on their products record the warranty expense at the time they provide service to customers under the terms of the warranty.

Accepted Answer

Companies record warranty expenses at the time of sale, not when the service is provided, to match the expense with the revenue generated from the sale.

Question 13

Vacation pay and sick leave are examples of contingent liabilities that a company generally should recognize on its financial statements.

Accepted Answer

Vacation pay and sick leave are examples of contingent liabilities that a company is obligated to pay at some point in the future. Therefore, they should be recognized on the company's financial statements as they represent potential future expenses.

Question 14

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a premium?

Accepted Answer

The effective interest rate method results in interest expense that decreases over time as the carrying value of the bond decreases due to the amortization of the premium.

Question 15

Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1, 2014. The stated interest rate on these bonds is 9%. If the effective interest rate is 10.33%, interest expense in 2014 is equal to

Accepted Answer

The effective interest rate is greater than the stated interest rate, which means the interest expense will be greater than the interest paid.

First, we need to calculate the total interest expense for the bond over its lifetime:

total interest expense = face value x stated interest rate x time 
total interest expense = $200,000 x 9% x 5 
total interest expense = $90,000

Next, we need to calculate the annual interest expense using the effective interest rate:

interest expense in 2014 = carrying value of the bond x effective interest rate 
carrying value of the bond on Jan 1, 2014 = face value x issue price = $200,000 x 0.95 = $190,000

interest expense in 2014 = $190,000 x 10.33% 
interest expense in 2014 = $19,627

Therefore, the answer is D) $19,627.

Question 16

General uncertainties, such as the effect of competition on a business's operations, are not accounted for as contingent liabilities.

Accepted Answer

Contingent liabilities are specific potential liabilities that may or may not occur in the future, and their existence depends on certain conditions or external factors. General uncertainties or risks that are inherent in a business's operations, such as the impact of competition, are not considered contingent liabilities.

Question 17

Rush Corporation borrowed $50,000 on January 1, 2014. The loan is for a five-year period and has an annual interest rate of 8%. At the end of each year, Rush will make a payment of $12,522.82, which includes both principal and interest. With this loan, the amount of interest expense that Rush reports on its income statement will be the same for each year of the loan.

Accepted Answer

The interest expense will decrease each year as the principal balance of the loan decreases with each payment.

Question 18

Indicate whether each of the following statements is true or false:
1. Current liabilities are payable out of current assets within one year or the operating cycle, whichever is less
2. The going concern assumption says that, unless there is evidence to the contrary, accountants should assume a company will continue to operate
3. A company should report its liabilities at their net realizable value
4. The maker of a promissory note records a liability on its books
5. Issuing a promissory note is an asset source transaction

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 19

A bond is issued at a discount when its face value is greater than its issue price.

Accepted Answer

A bond is issued at a discount when the issue price is lower than its face value, meaning investors pay less than the bond's nominal value.

Question 20

Accounts payable and notes payable are reported on the balance sheet at net realizable value.

Accepted Answer

Accounts payable and notes payable are reported on the balance sheet at their full face value, not at net realizable value. Net realizable value refers to the amount a company expects to receive from the sale of an asset or the settlement of a liability, after deducting any associated selling costs or other expenses.

Quiz 7: Accounting for Liabilities