Deck 10: Reporting and Analyzing Liabilities

Question 1

Unearned revenues should be classified as Other Revenues and Gains on the income statement.

Answer 1

False

Question 2

A note payable must always be paid before an account payable.

Answer 2

False

Question 3

The higher the sales tax rate, the more profit a retailer can earn.

Answer 3

False

Question 4

Notes payable usually require the borrower to pay interest.

Question 5

With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

Question 6

Interest expense on a note payable is only recorded at maturity.

Question 7

If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability.

Question 8

If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount of the sales tax is $9.52.

Question 9

During the month, a company sells goods for a total of $106,000, which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense.

Question 10

Payroll taxes include the employer's share of Social Security taxes as well as state and federal unemployment taxes.

Question 11

Current maturities of long-term debt refer to the amount of interest on a note payable that must be paid in the current year.

Question 12

A company whose current liabilities exceed its current assets may have a liquidity problem.

Question 13

Interest expense is reported under Other Expenses and Losses in the income statement.

Question 14

Notes payable are often used instead of accounts payable.

Question 15

Most notes are not interest bearing.

Question 16

A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.

Question 17

A current liability must be paid out of current earnings.

Question 18

Unearned revenues are received before goods are delivered or services are rendered.

Question 19

When a business sells an item and collects a state sales tax on it, a current liability arises.

Question 20

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

Question 21

The carrying value of a bond is equal to the market price on the date of sale.

Question 22

A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375.

Question 23

The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Question 24

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

Question 25

If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000.

Question 26

The face value is the amount of principal and interest due at the maturity date.

Question 27

The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued.

Question 28

An unsecured bond is one that is issued against the general credit of the borrower.

Question 29

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Question 30

Neither corporate bond interest nor dividends are deductible for tax purposes.

Question 31

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium.

Question 32

Generally, convertible bonds do not pay interest.

Question 33

If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60.

Question 34

The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 35

Convertible bonds are often called callable bonds.

Question 36

Bonds are a form of interest-bearing notes payable.

Question 37

The board of directors may authorize more bonds than are issued.

Question 38

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Question 39

Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season.The amount of Unearned Ticket Revenue after the third concert is $24,000.

Question 40

The current market value of a bond is equal to the present value of all future cash payments promised by the bond.

Question 41

If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will increase as the bonds approach maturity.

Question 42

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest.

Question 43

If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium.

Question 44

The times interest earned is computed by dividing net income by interest expense.

Question 45

If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

Question 46

Material losses on bond redemption are reported as operating expenses on the income statement.

Question 47

The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company's liquidity.

Question 48

If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 49

If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 50

The premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method.

Question 51

If $180,000, 6%, bonds are issued on January 1 and pay interest annually, the amount of interest paid will be $10,800.

Question 52

If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

Question 53

Discount on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method.

Question 54

When the effective-interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond's carrying value at the beginning of the given period.

Question 55

The debt to assets ratio measures the percentage of the total assets provided by creditors.

Question 56

Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond's life.

Question 57

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Question 58

If the straight-line method of amortization is used, the amount of yearly interest expense will increase as the bonds approach maturity.

Question 59

If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid.

Question 60

If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount.

Question 61

Which of the following is not a current liability on December 31, 2022?

A)A Note Payable due December 31, 2023
B)An Accounts Payable due January 31, 2023
C)A lawsuit judgment to be decided on January 10, 2023
D)Accrued salaries payable from 2022

Question 62

Most companies pay current liabilities

A)out of current assets.
B)by issuing interest-bearing notes payable.
C)by issuing stock.
D)by creating long-term liabilities.

Question 63

Failure to record a liability will probably

A)result in an overstated net income.
B)result in overstated total liabilities and owner's equity.
C)have no effect on net income.
D)result in overstated total assets.

Question 64

Current liabilities are due

A)but not receivable for more than one year.
B)but not payable for more than one year.
C)and receivable within one year.
D)and payable within one year.

Question 65

In a monthly mortgage payment, the same amount is recorded as interest expense as in the previous month's payment.

Question 66

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1.Sadowski Brick Company signs a $500,000, 6%, 9-month note.What entry will Sadowski Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

Question 67

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1.Sadowski Brick Company signs a $500,000, 6%, 9-month note.What is the adjusting entry required if Sadowski Brick Company prepares financial statements on June 30?

Question 68

A current liability is a debt that can reasonably be expected to be paid

A)within one year, or the operating cycle, whichever is longer.
B)between 6 months and 18 months.
C)out of currently recognized revenues.
D)out of cash currently on hand.

Question 69

Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1.Sadowski Brick Company signs a $500,000, 6%, 9-month note.The entry made by Sadowski Brick Company on January 1 to record the proceeds and issuance of the note is

Question 70

An installment note calling for equal total payments each period will result in a principal portion that decreases in each successive period.

Question 71

Which of the following most likely would be classified as a current liability?

A)Dividends payable
B)Bonds payable in 5 years
C)Three-year notes payable
D)Mortgage payable as a single payment in 10 years

Question 72

With an interest-bearing note, the amount of assets received upon issuance of the note is generally

A)equal to the note's face value.
B)greater than the note's face value.
C)less than the note's face value.
D)equal to the note's maturity value.

Question 73

Very often, failure to record a liability means failure to record a(n)

A)revenue.
B)asset conversion.
C)footnote.
D)expense.

Question 74

The effective-interest method produces a constant dollar amount of interest expense to be reported for each interest period.

Question 75

When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used.

Question 76

Liabilities are classified on the balance sheet as current or

A)deferred.
B)unearned.
C)long-term.
D)accrued.

Question 77

West County Bank agrees to lend Drake Builders Company $400,000 on January 1.Drake Builders Company signs a $400,000, 6%, 6-month note.The entry made by Drake Builders Company on January 1 to record the proceeds and issuance of the note is

Question 78

When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance.

Question 79

An installment note calling for equal total payments each period will result in an interest portion that decreases in each successive period.

Question 80

Liabilities are classified as current or long-term based on their

A)description.
B)payment terms.
C)due date.
D)amount.