Deck 9: Reporting and Interpreting Liabilities

Question 1

Purchasing inventory on account increases the accounts payable turnover ratio.

Answer 1

False

Question 2

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Answer 2

True

Question 3

Income taxes payable is an example of an accrued liability.

Answer 3

True

Question 4

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Question 5

A liability that is estimated because the final settlement amount is unknown cannot be reported on the balance sheet.

Question 6

Wages expense is an example of an accrued liability account.

Question 7

The FICA (social security) tax is a matching tax with a portion paid by both the employer and the employee.

Question 8

A current liability is created when a customer pays cash for services to be provided in the future.

Question 9

A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated.

Question 10

The accrual of interest results in an increase liabilities and a decrease in cash.

Question 11

The accounts payable turnover ratio is difficult to manipulate.

Question 12

When a liability is initially recorded, it is recorded at the future amount of all payments.

Question 13

An employee has an obligation to pay his payroll taxes to the employer.

Question 14

A company borrowed $100,000 at 6% interest on September 1, 2014. Assuming adjusting entries have not been made during the year, the entry to record interest accrued on December 31, 2014 would include a debit to interest expense and a credit to interest payable for $2,000.

Question 15

The choice of inventory method has an impact on the accounts payable turnover ratio.

Question 16

A contingent liability is reported on the balance sheet if it is probable and can be estimated.

Question 17

The accrual of interest on a short-term note payable decreases working capital and current assets.

Question 18

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

Question 19

Cash received from customers may result in a current liability.

Question 20

Accounts payable and accrued liabilities are interchangeable account titles.

Question 21

When a company receives cash before providing any products or services are provided the following results:

A) Assets and stockholders' equity increase.
B) Assets and revenue increase.
C)Liabilities and revenues increase.
D)Liabilities and assets increase.

Question 22

Which of the following is not a current liability?

A) A liability due within one year for a business with a fifteen-month operating cycle.
B) A liability due within three months for a business with a two-month operating cycle.
C)A liability due within one year for a business with a nine-month operating cycle.
D)A liability due within fifteen months for a business with a one-year operating cycle.

Question 23

Working capital decreases when a company pays taxes payable.

Question 24

An annuity is a series of consecutive and unequal payments over time.

Question 25

An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year.

Question 26

Working capital increases when a company accrues sales revenue at year-end.

Question 27

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

Question 28

Which of the following describes an accrued liability?

A) It is an expense that has been both incurred and paid.
B) It is an expense that has been incurred but not yet paid.
C)It is an expense that has been prepaid but not yet consumed.
D)It is a liability where the cash flow has taken place but the revenue has yet to be earneD.An accrued liability is recorded when an expense is incurred but not yet paid.

Question 29

Which of the following statements is correct?

A) Social Security tax is paid only by the employer.
B) The pay period always ends in conjunction with the company's fiscal year-end.
C)Employee benefits such as vacation time and sick days should be recognized when the employees earn the benefit and not when they take the days off from work.
D)Unemployment taxes are paid by the employee only.

Question 30

For the present value of a single amount, the compounding period may only be once a year.

Question 31

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows.

Question 32

Working capital increases when a company purchases equipment and signs a 2-year note payable.

Question 33

Working capital is a measure of long-term liquidity and is calculated by subtracting the current liabilities from the current assets.

Question 34

Which of the following is correct?

A) Unearned revenues are considered increases to stockholders' equity.
B) Working capital is measured as current liabilities minus current assets.
C)Working capital increases when a company pays the principal on a long-term note.
D)Unearned revenues will eventually become revenue earneD.Unearned revenues are considered a liability account until the company has provided the services at which time the revenue will be recognized.

Question 35

A contingent liability cannot be disclosed in a note to the financial statements unless it can be estimated.

Question 36

Working capital decreases when accrued wages expense is recorded at year-end.

Question 37

Working capital is a measure of short-run liquidity and is measured by dividing current assets by current liabilities.

Question 38

In order to calculate the cost of a long-term asset that is financed with long-term debt, present values concepts would be used.

Question 39

Which of the following statements is correct?

A) Current liabilities are initially recorded at the amount of their principal plus interest.
B) Current liabilities are those liabilities due within one year.
C)Liquidity refers to the ability to pay all debts within one year.
D)Current liabilities affect working capital and the cash flows from operating activities.

Question 40

Which of the following is incorrect?

A) Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer.
B) Liquidity is the ability of the company to meet its total obligations.
C)Current liabilities impact a company's liquidity.
D)Working capital is equal to current assets minus current liabilities.

Question 41

Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2013. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2014 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2014, after the first payment is made?

A) $2 million in current liabilities and $8 million in long-term liabilities.
B) $2 million in current liabilities and $6 million in long-term liabilities.
C)Zero in current liabilities and $8 million in long-term liabilities.
D)Zero in current liabilities and $10 million in long-term liabilities.

Question 42

On October 1, 2014, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2015 income statement?

A) $1,000.
B) $2,000.
C)$3,000.
D)$4,000.

Question 43

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

A) When the loss is remote and the amount cannot be reasonably estimated.
B) When the loss is probable and the amount can be reasonably estimated.
C)When the loss is reasonably possible and the amount can be reasonably estimated.
D)When the loss is remote and the amount can be reasonably estimateD.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements.

Question 44

Which of the following best describes the accrual of interest?

A) Assets and stockholders' equity decrease.
B) Assets and liabilities decrease.
C)Net income and expenses decrease.
D)Expenses and liabilities increase.

Question 45

Miranda Company borrowed $100,000 cash on September 1, 2014, and signed a one-year 6%, interest-bearing note payable. Assume no adjusting entries have been made during the year. Which of the following would be the required adjusting entry at the end of the December 31, 2014 accounting period?

A) Option A
B) Option B
C)Option C
D)Option D

Question 46

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?

A) Liabilities and stockholders' equity would both be understated.
B) Net income would be overstated and assets would be understated.
C)Net income would be understated and liabilities would be understated.
D)Net income and stockholders' equity would be overstated and liabilities would be understateD.The adjusting entry increases interest payable and interest expense, which increases liabilities and decreases both net income and stockholders' equity. Failure to make the entry causes both net income and stockholders' equity to be overstated and liabilities to be understated.

Question 47

Which of the following would not be a result of the adjusting entry to record accrued interest on a note payable?

A) A decrease in net income.
B) A decrease in stockholders' equity.
C)An increase in liabilities.
D)A decrease in current assets.

Question 48

Melanie Corp. borrowed $100,000 cash on September 1, 2014, and signed a one-year 6%, interest-bearing note payable. The interest and principal are both due on August 31, 2015. Assume that the appropriate adjusting entry was made on December 31, 2014 and that no adjusting entries have been made during 2015. Which of the following would be the required journal entry to pay the note on August 31, 2015?

A) Option A
B) Option B
C)Option C
D)Option D

Question 49

Thomas Company decided to borrow $30,000 on March 1^st, 2014. Thomas signed a 2-year 6% interest-bearing note. What is the adjustment amount to accrue interest on December 31, 2015?

A) $1,800.
B) $3,600.
C)$300.
D)$1,200.

Question 50

Which of the following results in a decrease in working capital?

A) Supplies purchases with cash.
B) Purchase of a truck in exchange for factory machinery.
C)Acquisition of land in exchange for stock.
D)Purchase of equipment with cash.

Question 51

Which of the following statements about contingent liabilities is incorrect?

A) A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated.
B) A disclosure note is required when the loss is probable and the amount can be reasonably estimated.
C)A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated.
D)A disclosure note is required when the loss is remote and the amount can be reasonably estimateD.A disclosure note is not required when the loss probability is remote.

Question 52

Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $84 million for 2015. In 2014, cost of goods sold was $258 million and accounts payable was $72 million. Landseeker's accounts payable turnover ratio in 2015 is closest to:

A) 4.25
B) 4.13
C)3.45
D)3.31

Question 53

Which of the following statements is incorrect?

A) The currently maturing portion of long-term debt must be classified as a current liability.
B) The non-current portion of long-term debt will be correctly reported as a long-term liability.
C)Even when a company plans to refinance the currently maturing debt on a long-term basis, and has the ability to do so, it must still report the currently maturing debt as a current liability.
D)The currently maturing portion of long-term debt is a current liability if it is due within one year or from the date of the balance sheet, or within the operating cycle, whichever is longer.

Question 54

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

A) It must be recorded and reported as a liability.
B) It does not need to be recorded or reported as a liability.
C)It must only be disclosed as a note to the financial statements.
D)It must be reported as a liability, but not disclosed in a note.

Question 55

Phipps Company borrowed $25,000 cash on October 1, 2014, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2014 balance sheet is which of the following?

A) $250.
B) $300.
C)$500.
D)$750.

Question 56

The accrual of interest results in the following:

A) Increase in assets and liabilities.
B) Increase in assets and stockholders' equity.
C)Increase in liabilities and decrease in stockholders' equity.
D)Increase in liabilities and increase in stockholders' equity.

Question 57

Phipps Company borrowed $25,000 cash on October 1, 2014, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2015 is which of the following?

A) $1,000.
B) $300.
C)$500.
D)$750.

Question 58

Which of the following statements incorrectly describes the accounts payable turnover ratio?

A) A high ratio indicates that suppliers are being paid in a timely manner.
B) The ratio increases when inventory is sold on account regardless of the sales price.
C)The ratio can be manipulated by aggressively paying off accounts payable at year-end.
D)The ratio is not affected by the choice of inventory accounting methods.

Question 59

Which of the following transactions will decrease the accounts payable turnover ratio?

A) Using cash to pay an accounts payable balance.
B) Selling inventory on account.
C)Selling inventory for cash.
D)A customer returning inventory sold on account.

Question 60

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

A) When the loss probability is remote and the amount can be reasonably estimated.
B) When the loss is probable and the amount can be reasonably estimated.
C)When the loss probability is reasonably possible and the amount can be reasonably estimated.
D)When the loss is probable regardless of whether the loss can be reasonably estimateD.A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet.

Question 61

Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years. The first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. Each of the annual payments is closest to:

A) $65,098.
B) $86,821.
C)$55,098.
D)$44,000.

Question 62

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the liability reported is closest to:

A) $100,000.
B) $38,550.
C)$61,446.
D)$71,446.

Question 63

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The liability reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made, is closest to:

A) $44,633.
B) $50,000.
C)$54,633.
D)$60,000.

Question 64

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made, is closest to:

A) $45,000.
B) $33,664.
C)$38,664.
D)$40,000.

Question 65

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements is correct?

A) The inventory purchase on account increased working capital.
B) Collecting an account receivable increases working capital.
C)The equipment purchase decreases working capital.
D)The inventory purchase on account decreases working capital.

Question 66

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the above transactions resulted in an increase in working capital?

A) The inventory purchase on account.
B) Collecting an account receivable.
C)The purchase of equipment using cash.
D)None of the transactions resulted in an increase in working capital.

Question 67

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to:

A) $123,255.
B) $130,000.
C)$80,000.
D)$73,255.

Question 68

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The liability reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made, is closest to:

A) $326,500.
B) $460,000.
C)$287,950.
D)$416,500.

Question 69

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and one payment of $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The building reported on the balance sheet as of the purchase date is closest to:

A) $326,500.
B) $460,000.
C)$287,950.
D)$416,500.

Question 70

Rocket Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash payment of a six-month note payable.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

A) The accrual of wages and salaries expense decreases working capital.
B) The cash payment of the note payable decreases working capital.
C)The purchase of the insurance policy increases working capital.
D)The cash payments for the note and insurance both decrease working capital.

Question 71

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The vehicle reported on the balance sheet as of the purchase date is closest to:

A) $44,633.
B) $50,000.
C)$54,633.
D)$60,000.

Question 72

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the above transactions resulted in an increase in working capital?

A) The accrual of interest expense.
B) Collecting cash for services to be provided in the future.
C)The reclassification of short-term debt to long-term debt.
D)Both the reclassification of short-term debt to long-term debt and the collection of cash for future services.

Question 73

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

A) $100,000.
B) $38,550.
C)$110,000.
D)$71,446.

Question 74

Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on the purchase date, and agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. Each of the payments is closest to:

A) $55,041.
B) $61,112.
C)$36,694.
D)$32,400.

Question 75

Black Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash sale of equipment for a loss.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's cash flows from operating activities on the statement of cash flows?

A) The accrual of wages and salaries expense is subtracted from net income.
B) The loss on the equipment sale is subtracted from net income.
C)The cash payment to purchase the insurance policy is subtracted from net income.
D)The accrual of wages and the equipment loss are both subtracted from net income.

Question 76

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

A) $45,000.
B) $38,664.
C)$33,664.
D)$40,000.

Question 77

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows?

A) The increase in interest payable for the accrual of interest expense is added to net income.
B) Collecting cash for services to be provided in the future is subtracted from net income.
C)The reclassification of short-term debt to long-term debt is subtracted from net income.
D)Collecting cash for services to be provided in the future does not require an adjustment to net income.

Question 78

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the above transactions resulted in a decrease in working capital?

A) The accrual of interest expense.
B) Collecting cash for services to be provided in the future.
C)The reclassification of short-term debt to long-term debt.
D)Both the accrual of interest expense and the reclassification of short-term debt to long-term debt.

Question 79

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The machine reported on the balance sheet as of the purchase date is closest to:

A) $123,255.
B) $130,000.
C)$80,000.
D)$73,255.

Question 80

Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. Each of the payments is closest to:

A) $28,000.
B) $66,940.
C)$37,981.
D)$33,608.