Deck 9: Reporting and Analysing Liabilities

Question 1

A current liability is an obligation that can reasonably be expected to be paid within the operating cycle of a business.

Answer 1

True

Question 2

Notes payable, accounts payable, revenue received in advance and accrued liabilities are all examples of non-current liabilities.

Answer 2

False

Question 3

A $15,000, 8%, 9-month note payable requires an interest payment of $900 at maturity.

Answer 3

True

Question 4

In Australia the taxation authority is the Australian Securities and Investments Commission (ASIC).

Question 5

An employer business is required by law to withhold tax from an employee's gross pay and remit it to the taxation authority (the ATO).

Question 6

Sydney Symphony sells 200 season tickets for $20,000 that includes a five-concert season. The amount of unearned ticket revenue after the third concert is $12,000.

Question 7

Non-current liabilities are obligations of a business that it expects to pay after one year.

Question 8

Notes that are secured over some of the issuer's assets are called debentures.

Question 9

Shareholder control is diminished by the issue of debt financing.

Question 10

Although interest expense reduces net profit, earnings per share is often higher under debt financing because no additional shares have been issued.

Question 11

The face value of a note is also the principal amount due at maturity of the note.

Question 12

If a company redeems notes and debentures, it adds debt to its statement of financial position.

Question 13

If a borrower is unable to repay a mortgage, the lender has no right to recover the debt against the mortgaged property.

Question 14

Each time a borrower makes a mortgage repayment, the borrower must allocate the amount between unearned revenue and revenue.

Question 15

To the extent that long-term debt is repayable within the same period as current liabilities, it should be classified as a current liability.

Question 16

Provisions are liabilities for which the amount of the future sacrifice is uncertain.

Question 17

A warranty is an obligation of the receiver of goods and services that a future claim will not be made against the supplier of the goods if the goods prove to be unsatisfactory.

Question 18

From a manufacturer's point of view, providing a warranty creates an obligation to repair or replace goods if certain faults arise within the warranty period.

Question 19

Warranties are not recognised as liabilities by manufacturers as the amount of any future claims is too uncertain and/or unlikely.

Question 20

Provisions for warranties may only be reported in the liabilities section of a statement of financial position as current liabilities.

Question 21

Notes payable usually require the borrower to pay:

A) revenue.
B) interest.
C) prepayments.
D) contingencies.

Question 22

Which of the following would not be classified as a current liability?

A) Accrued taxes payable
B) Revenue received in advance
C) Mortgage
D) Notes payable

Question 23

The account 'Revenue received in advance' is properly treated as a/an:

A) asset.
B) liability.
C) revenue.
D) payment to shareholders.

Question 24

Bondi Bank agrees to lend Tawonga Construction Company Ltd $200,000 on 1 January. Tawonga Construction Company Ltd signs a $200,000, 4%, 9-month note.

-The entry made by Tawonga Construction Company Ltd on 1 January to record the proceeds and issue of the note is:

A)
B)
C)
D)

Question 25

Bondi Bank agrees to lend Tawonga Construction Company Ltd $200,000 on 1 January. Tawonga Construction Company Ltd signs a $200,000, 4%, 9-month note.

-What is the adjusting entry required if Tawonga Construction Company Ltd prepares financial statements on 30 June?

A)
B)
C)
D)

Question 26

Bondi Bank agrees to lend Tawonga Construction Company Ltd $200,000 on 1 January. Tawonga Construction Company Ltd signs a $200,000, 4%, 9-month note.

-What entry will Tawonga Construction Company Ltd make to pay off the note and interest at maturity?

A)
B)
C)
D)

Question 27

Wayfarer Ltd withheld $54 000 of 'PAYG'. The entry to record payment of the tax to the Tax Office is:

A)
B)
C)
D)

Question 28

On 1 October, Simon's Solar Service borrows $150,000 from Statewide Bank on a 3 month, 4% note.

-What accrual entry must Simon's Solar Service make on 31 December before financial statements are prepared?

A)
B)
C)
D)

Question 29

On 1 October, Simon's Solar Service borrows $150,000 from Statewide Bank on a 3 month, 4% note.

-The entry by Simon's Solar Service to record payment of the note and accrued interest on 1 January is:

A)
B)
C)
D)

Question 30

Emerald Ltd has the following payroll deductions for the week ended 31 March: $20,000 medical fund deductions; $18,000 pay-as-you-go withheld tax deductions. What is the journal entry to record the obligation for these deductions?

A)

B)

C)

D)

Question 31

On 1 January 2019 Bradley Ltd, a calendar-year company, issued $200,000 of notes payable of which $50,000 is due on 1 January for each of the next four years. The proper statement of financial position for presentation on 31 December 2019 is:

A) Current liabilities, $200,000
B) Non-current liabilities, $200,000
C) Current liabilities, $50,000; Non-current liabilities, $150,000
D) Current liabilities, $150,000; Non-current liabilities, $50,000

Question 32

Companies may find it attractive to issue debt instead of equity because:

A) interest on debt is tax deductible.
B) interest on debt has to be repaid by the shareholders, not the company.
C) interest on debt is always a cheaper form of finance than dividends on shares.
D) interest on debt is not locked in for repayment.

Question 33

The face value of a note is also known as the:

A) market value.
B) principal.
C) trading value.
D) unsecured amount.

Question 34

When a company repurchases its unsecured notes, the debt has been:

A) redeemed.
B) discounted.
C) revalued.
D) determined.

Question 35

A loan secured by a charge over a property is also known as a:

A) contingent liability.
B) warranty.
C) mortgage.
D) provision.

Question 36

Century Ltd has outstanding debentures with a face value of $50,000. If Century redeems the debentures for $55,000 it must record:

A) a gain of $5,000.
B) a gain of $55,000.
C) a loss of $5,000.
D) a loss of $50,000.

Question 37

A borrower must allocate mortgage repayments between:

A) interest expense and interest revenue.
B) interest expense and loan liability.
C) interest revenue and loan liability.
D) loan liability and shareholders' equity.

Question 38

When recording a mortgage payment made by a borrower, the borrower will:

A) debit cash, and credit interest expense.
B) debit mortgage payable, and credit interest expense.
C) debit both interest expense and mortgage payable, and credit cash.
D) debit cash, and credit both interest expense and mortgage payable.

Question 39

Liabilities for which the amount of the future sacrifice is uncertain are regarded as:

A) warranties.
B) withholdings.
C) redeemables.
D) provisions.

Question 40

Obligations to pay for goods or services that have been provided but for which a supplier's invoice has not yet been received are recorded as:

A) debentures.
B) accounts payable.
C) warranties.
D) contingencies.

Question 41

Obligations for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably are classified as:

A) warranties.
B) contingent liabilities.
C) provisions.
D) accruals.

Question 42

Which of the following is not an example of a provision?

A) Warranty for motor vehicle repairs
B) Employee long service leave entitlements
C) Debentures issued
D) Employee annual leave entitlements

Question 43

Which of the following is an example of a contingent liability?

A) Legal proceedings against the business for a damages claim
B) Warranties for repairs
C) Debentures payable
D) Mortgage owing

Question 44

Warranty obligations are classified as provisions because the:

A) amount of the future sacrifice is certain.
B) future cost of repairs is known with certainty.
C) amount of future claims is uncertain.
D) cost of future servicing is not able to be estimated reliably.

Question 45

Timeless Ltd produces clocks and sells them with a one-year warranty. The warranty provision account currently has a debit balance of $4,000. The estimated cost of repairing clocks that have already been sold is $18,000. The adjustment needed to update the warranty provision account is:

A) debit $18,000.
B) credit $18,000.
C) debit $22,000.
D) credit $22,000.

Question 46

Vagabond Ltd manufactures handbags and provides a six-month quality warranty. The provision for warranty account has a credit balance of $50,000 and the estimated future obligations for warranty work is $190,000. The adjustment necessary to update the provision account is a:

A) debit of $140,000.
B) debit of $240,000.
C) credit of $140,000.
D) credit of $240,000.

Question 47

A quick ratio is a measure of an entity's:

A) long-term liquidity.
B) medium-term liquidity.
C) short-term liquidity.
D) quickness at paying creditors.

Question 48

The quick ratio calculated by a business is also referred to as the:

A) solvency ratio.
B) acid test.
C) marketable test.
D) interest coverage ratio.

Question 49

The following information relates to Rangitata Ltd as at 30 June 2019.
The quick ratio is:

A) 2.
B) 9.
C) 14.
D) 0.14.

Question 50

Match (by letter) each of the following as being :

-3 months of revenues received in advance for an annual subscription to a magazine

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 51

Match (by letter) each of the following as being :

-Pay-as-you-go withholding tax payable

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 52

Match (by letter) each of the following as being :

-Unsecured notes with 9 months to maturity

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 53

Match (by letter) each of the following as being :

-20-year Mortgage

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 54

Match (by letter) each of the following as being :

-5 year debentures payable

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 55

Match (by letter) each of the following as being :

-Interest expense

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 56

Match (by letter) each of the following as being :

-Warranty expense

A) current liability (CL)
B) non-current liability (NCL)
C) neither (NA).

Question 57

The NZA Bank agrees to issue $180,000 of 3-month notes payable to Campbell Ltd on 1 March 2019. The notes are interest-bearing at the rate of 10%.
Prepare the journal entries to record:
(a) the notes on issue date
(b) the repayment of the notes including the interest, on due date.

Question 58

Beach Ltd's payroll for June 2019 was $20,000. The pay week ended on 30 June and was paid on the 1 July. Payroll deductions from amounts paid during June were as follows:
Required:
(a) State the current liabilities relating to Beach Ltd's payroll at 30 June 2019.
(b) Prepare the journal entry to record the payroll for the pay week ended 30 June.

Question 59

The Candy Company Ltd has the following selected accounts after posting adjusting entries:
Required:
(a) Prepare the current liability section of The Candy Company's statement of financial position, assuming $25,000 of the mortgage is payable next year.
(b) Comment on The Candy Company's liquidity, assuming total current assets are $400,000.

Question 60

On 1 March, Marcel Ltd borrows $90,000 from the Eastward Bank by signing a 6-month, 9%, interest-bearing note.
Instructions: Prepare the necessary entries below associated with the note payable on the books of Marcel Ltd.
(a) Prepare the entry on 1 March when the note was issued.
(b) Prepare any adjusting entries necessary on 30 June in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.

Question 61

On May 31, Pearl Ltd borrows $20,000 from their bank by signing a 2 month, 12%, interest-bearing note.
Instructions: Prepare the necessary entries below associated with the note payable on the books of Pearl Ltd.
(a) Prepare the entry on June 1 when the note was issued.
(b) Prepare any adjusting entries necessary on 30 June in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.

Question 62

The Mainland group of hotels billed its customers a total of $1,060,000 for the month of November. The total includes a 6% goods and services tax (GST).
Instructions :
(a) Determine the proper amount of revenue to report for the month.
(b) Prepare the general journal entry to record the revenue and related liabilities for the month.

Question 63

March Ltd had cash sales of $44,000 for the month of June. Sales are subject to 10% goods and services tax (GST). Prepare the entry to record the sale.

Question 64

Seagull Publications publishes a golf magazine for women. The magazine sells for $5.00 a copy on newsstands. Yearly subscriptions to the magazine cost $50 per year (12 issues). During December 2019, Seagull Publications sells 5,000 copies of the golf magazine at news-stands and receives payment for 6,000 subscriptions for 2020. Financial statements are prepared monthly.
Instructions:
(a) Prepare the December 2019 journal entries to record the newsstand sales and subscriptions received.
(b) Prepare the necessary adjusting entry on 31 January, 2020. The January 2020 issue has been mailed to subscribers.

Question 65

On 1 January 2019 the Guildford Group Ltd issued $800,000, 8%, 10-year unsecured notes at face value. Interest is payable semi-annually on 1 July and 1 January. Guildford Group has a calendar year end.
Instructions: Prepare all entries related to the unsecured note issue for 2019.

Question 66

The following information is available from the annual reports of 2 clothing retailers
Required:
(a) Based on the preceding information, compute the following ratios for each company:
1. liabilities to total assets
2. times interest earned.
(b) What conclusion concerning the companies' long-run solvency can be drawn from these ratios?

Question 67

Complete the following statements:
-Liabilities are classified on the statement of financial position as being _______________ liabilities or ______________ liabilities.

Question 68

Complete the following statements:
-Goods and services tax (GST) collected from customers are a(n) ______________ of the business until they are remitted to the tax office.

Question 69

Complete the following statements:
-The ______________ ratio is a measure of a company's immediate short-term liquidity.

Question 70

Complete the following statements:
-The ________ value of a note payable is the amount of ____________ due at maturity date.

Question 71

Match the descriptions with their terms:

-The amount paid by the investor on issue of a debenture or unsecured note

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 72

Match the descriptions with their terms:

-The value today of an amount to be paid or received at some date in the future after taking into account current interest rates

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 73

Match the descriptions with their terms:

-Costs of borrowing money

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 74

Match the descriptions with their terms:

-An obligation that is not classified as a current liability

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 75

Match the descriptions with their terms:

-A measure of an entity's immediate short-term liquidity, also called the acid-test

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 76

Match the descriptions with their terms:

-A liability for which the amount is uncertain but able to be measured reliably by estimation

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 77

Match the descriptions with their terms:

-Rate used to determine the amount of interest the borrower pays and the investor receives

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 78

Match the descriptions with their terms:

-An obligation of the supplier of goods and services to the purchased that the product will be functional or that work performed will remain satisfactory for a period after the sale of goods

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 79

Match the descriptions with their terms:

-A loan that is secured by a charge over property

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision

Question 80

Match the descriptions with their terms:

-An obligation than can reasonably be expected to be paid within one year or the operating cycle of a business

A) Non-current liability
B) Present value
C) Warranty
D) Issue price
E) Current liability
F) Borrowing costs
G) Contract interest rate
H) Mortgage
I) Quick ratio
J) Provision