Question 1

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2013. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?
A)$0.
B)$2,000.
C)$10,000.
D)$14,400.

Accepted Answer

The forfeited deposits amount to 12% of $100,000, which is $12,000. Since the deposits include a 20% markup, the cost of goods sold is $12,000 / 1.2 = $10,000.

Question 2

Of the following, which typically would not be classified as a current liability?
A)Estimated liability from cash rebate program.
B)A long-term note payable maturing within the coming year.
C)Rent revenue received in advance.
D)A six-month bank loan to be paid with the proceeds from the sale of common stock.

Accepted Answer

The answer of Of the following, which typically would not...

Question 3

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?
A)The long-term debt is callable by the creditor.
B)The creditor has the right to demand payment due to a contractual violation.
C)The long-term debt matures within the upcoming year.
D)All of the above require the current classification.

Accepted Answer

All the situations listed require the long-term liabilities to be classified as current liabilities because they involve either the debt being due within the year or conditions that allow the creditor to demand immediate payment.

Question 4

B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2013, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2013. B's employees earn an average of $200 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is B required to report?
A)$60,000.
B)$84,000.
C)$90,000.
D)$144,000.

Accepted Answer

The liability for compensated absences should include only the vacation days since employees can receive payment for them. With 300 vacation days at $200 per day, the liability is $60,000.

Question 5

Which of the following is not a current liability?
A)Accounts payable.
B)A note payable due in two years.
C)Accrued interest payable.
D)Sales tax payable.

Accepted Answer

A note payable due in two years is a long-term liability, not a current liability. Current liabilities are obligations that are due within a year or the operating cycle of a business, whichever is longer. Accounts payable, accrued interest payable, and sales tax payable are all current liabilities.

Question 6

On January 1, 2013, G Corporation agreed to grant all its employees two weeks paid vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2013, G's employees each earned an average of $800 per week. A total of 500 vacation weeks earned in 2013 were not taken during 2013. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2014. What is the amount of G's 2014 wages expense related to 2013 vacation time?
A)$0.
B)$20,000.
C)$400,000.
D)$420,000.

Accepted Answer

The answer of On January 1, 2013, G Corporation agreed...

Question 7

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2014. At December 31, 2013, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2013, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2013, balance sheet, Branch should classify the notes as follows:
A)$15,000,000 long-term and $3,000,000 current liabilities.
B)$4,500,000 short-term and $13,500,000 current liabilities.
C)$18,000,000 of current liabilities.
D)$18,000,000 of long-term liabilities.

Accepted Answer

The notes payable are classified as long-term liabilities because Branch has the ability to refinance the notes on a long-term basis.

Question 8

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:
A)Is callable by the creditor.
B)Is secured by adequate collateral.
C)Will be refinanced with stock.
D)Will be refinanced with debt.

Accepted Answer

A long-term liability should be reported as a current liability if it is callable by the creditor, meaning the creditor has the right to demand repayment in the upcoming year. This is because there is a significant risk that the liability will require payment in the near future, making it effectively a short-term obligation. The other options do not apply as they do not affect the classification of the liability.

Question 9

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:
A)A debit to a revenue and a credit to a liability account.
B)A debit to a revenue and a credit to an asset account.
C)A debit to an asset and a credit to a revenue account.
D)A debit to a liability and a credit to a revenue account.

Accepted Answer

The answer of When a product or service is delivered...

Question 10

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2013. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?
A)$0.
B)$7,500.
C)$9,000.
D)$45,000.

Accepted Answer

The forfeited deposits are 15% of $300,000, or $45,000. The cost of the containers is 80% of $45,000, or $36,000. The profit is the difference between the forfeited deposits and the cost of the containers, or $9,000.

Question 11

On December 31, 2013, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2014. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2014. In February 2014, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2014. On March 13, 2014, L issued its 2013 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2013, balance sheet?
A)$0.
B)$500,000.
C)$1,000,000.
D)$1,500,000.

Accepted Answer

The answer of On December 31, 2013, L Inc. had...

Question 12

Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2013, and sold $1,500 in gift cards on another special promotion on November 15, 2013. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2013, Peterson would show an unearned revenue account for the gift cards with a balance of:
A)$0.
B)$1,000.
C)$1,350.
D)$1,500.

Accepted Answer

The answer of Peterson Photoshop sold $1,000 in gift cards...

Question 13

Large, highly rated firms sometimes sell commercial paper:
A)To borrow funds at a lower rate than through a bank.
B)To earn a profit on the paper.
C)To avoid paperwork.
D)Because the interest rate is locked in by the Federal Reserve Board.

Accepted Answer

Large, highly rated firms sometimes sell commercial paper to borrow funds at a lower rate than through a bank. This is because they can often obtain lower interest rates in the commercial paper market than they would receive from a bank loan.

Question 14

In May of 2013, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2013, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of:
A)$770,000.
B)$900,000.
C)$970,000.
D)$1,170,000.

Accepted Answer

The environmental attorney indicated that an unfavorable outcome was probable, which means that a liability should be accrued. The estimated amount of the penalty was between $770,000 and $1,170,000, but before the financial statements were issued, Raymond accepted a settlement offer of $900,000. Therefore, the accrued liability should be reported as the settlement amount of $900,000. Choice A is incorrect because it represents the lower end of the estimated range and does not reflect the settlement amount. Choice C is incorrect because it adds the estimated penalty to the settlement amount, which would result in double-counting the liability. Choice D is incorrect because it represents the upper end of the estimated range and does not reflect the settlement amount.

Question 15

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:
A)Higher working capital and a higher inventory turnover.
B)Lower working capital and a higher current ratio.
C)Higher working capital and a higher current ratio.
D)Higher working capital and a lower debt to equity ratio.

Accepted Answer

Reporting liabilities as noncurrent increases working capital (current assets minus current liabilities) and also increases the current ratio (current assets divided by current liabilities). This is because the liability will not become due within the next 12 months and therefore will not affect the company's ability to pay short-term debts. Higher working capital and current ratio are generally seen as positive indicators of a company's financial health.

Question 16

Revenue associated with gift card sales should be recognized:
A)When the gift card is sold.
B)No later than the last day of the operating period in which the gift card is delivered to the customer.
C)When the probability of gift card redemption is viewed as remote.
D)Under no circumstances, as gift cards are not themselves a delivered product, but rather a selling technique.

Accepted Answer

Revenue from gift card sales should be recognized when the gift card is redeemed or when the probability of redemption becomes remote, as this reflects the actual earning of revenue.

Question 17

Short-term obligations can be reported as long-term liabilities if:
A)The firm has a long-term line of credit.
B)The firm has tentative plans to issue long-term bonds.
C)The firm intends to and has the ability to refinance as long-term.
D)The firm has the ability to refinance on a long-term basis.

Accepted Answer

Short-term obligations can be reported as long-term liabilities if the firm intends to and has the ability to refinance as long-term. This means that the company has a plan and the capability to refinance its short-term obligations as long-term obligations in the future, which makes them qualify as long-term liabilities. The other options, such as having a long-term line of credit, tentative plans to issue long-term bonds, or the ability to refinance on a long-term basis, do not necessarily mean that the short-term obligations can be reported as long-term liabilities without the intent and ability to refinance them as such.

Question 18

All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?
A)Large increase, because unearned revenue becomes revenue when revenue is earned.
B)Large decrease, because unearned revenue implies that less revenue has been earned, which reduces future revenue.
C)No effect, because unearned revenue is a liability, so payment will use assets rather than providing revenue.
D)Large decrease, because unearned revenue indicates collection problems that will reduce net revenues in future periods.

Accepted Answer

Unearned revenue represents an advance payment for goods and services that will be delivered in the future. When the goods or services are delivered, the unearned revenue is recognized as revenue in the income statement. Therefore, a large increase in unearned revenue in the current period suggests a promising future stream of revenue, and revenue in a future period is expected to increase.

Question 19

Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline's fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?
A)In the "mezzanine" between current and noncurrent liabilities.
B)Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances.
C)As a noncurrent liability.
D)As a current liability.

Accepted Answer

Under IFRS, debt is classified as current if it is due to be repaid within 12 months. Since Kline refinanced its current debt as long-term debt on January 5, 2014, it can be assumed that the debt was due to be repaid within the next 12 months. Therefore, it should have been classified as a current liability on Kline's December 31, 2013 balance sheet.

Question 20

Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under:
A)US GAAP.
B)IFRS.
C)Either U.S.GAAP and IFRS.
D)Neither U.S.GAAP and IFRS.

Accepted Answer

The answer of Liabilities payable within the coming year are...

Quiz 13: Current Liabilities and Contingencies

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2013. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

Of the following, which typically would not be classified as a current liability?

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

Which of the following is not a current liability?

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2013. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?

Large, highly rated firms sometimes sell commercial paper:

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

Revenue associated with gift card sales should be recognized:

Short-term obligations can be reported as long-term liabilities if:

All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?

Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline's fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?

Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under: