Deck 10: Reporting and Analyzing Liabilities

Question 1

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

Answer 1

True

Question 2

If a company's fiscal year is the same as the calendar year used for property tax purposes, there should be no prepaid property tax on its year-end financial statements but there may be a property tax liability.

Answer 2

True

Question 3

Provisions are liabilities of uncertain timing or amount, along with some uncertainty as to whether the liability will have to be paid.

Answer 3

False

Question 4

When a business sells an item and collects Harmonized Sales Tax (HST) on it, a current liability arises.

Question 5

A financial liability means there is a contractual obligation to pay cash in the future.

Question 6

While short-term notes are generally repayable in full at maturity, most long-term notes are repayable in a series of periodic payments called instalments.

Question 7

If drawing on an operating line of credit results in a negative cash balance, a current liability known as bank indebtedness results.

Question 8

Payroll liabilities include the employer's share of CPP contributions and EI premiums.

Question 9

Unsecured notes are issued against the general credit of the borrower.

Question 10

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

Question 11

Instalment payments consist of a mix of interest on the unpaid balance of the loan and a reduction of the loan principal.

Question 12

Property tax payable is classified as a non-current liability because it is related to property, which is a non-current asset.

Question 13

Under IFRS, contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will occur.

Question 14

A contingent liability may materialize in the future because of something that happened in the past.

Question 15

Long-term notes payable can only have floating interest rates.

Question 16

Interest expense on a bank loan payable is only recorded at maturity.

Question 17

Amounts available to be drawn in the future from an operating line of credit improve a company's liquidity.

Question 18

Interest (finance) expenses are separately reported in the "other gain and revenues" section of the statement of income.

Question 19

Secured notes are often also referred to as mortgages.

Question 20

Deferred revenue is a financial liability.

Question 21

Failure to record a liability will probably
(a)result in overstated net income.
(b)result in overstated total liabilities and shareholders' equity.
(c)have no effect on net income.
(d)result in overstated total assets.

Question 22

Under IFRS, which of the following would most likely be classified as a current liability?
(a)mortgage payable
(b)bonds payable
(c)bank indebtedness
(d)contingent liability

Question 23

Interest expense on a note payable, with interest due at maturity, is
(a)always equal to zero.
(b)accrued over the life of the note.
(c)only recorded at the time the note is issued.
(d)only recorded at maturity when the note is paid.

Question 24

Which of the following statements is true?
(a)If any portion of a non-current liability is to be paid in the next year, the entire debt should be classified as a current liability.
(b)"Current maturities of non-current debt" refers to the amount of interest on notes payable that must be paid in the current year.
(c)Even though current and non-current debt must be shown separately on the statement of financial position, it is not necessary to prepare a journal entry to recognize this.
(d)A non- current liability is an obligation that is expected to be paid within one year.

Question 25

Use the following information to answer questions
Angel Eyes Corporation operates on a calendar year basis.The company is in its first year of operations and received its annual property tax bill on March 31 for $21,000.The bill is due May 1.Even though the company records adjusting entries on a monthly basis, no entries related to property taxes have been recorded.
The March 31 entry to record property tax should be
(a)debit property tax expense $5,250 and credit property tax payable $5,250.
(b)debit property tax expense $21,000 and credit property tax payable $21,000.
(c)debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credits to property tax payable and cash for $15,750 and $5,250, respectively.
(d)debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credit to property tax payable for $21,000.

Question 26

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

Question 27

Use the following information to answer questions
Angel Eyes Corporation operates on a calendar year basis.The company is in its first year of operations and received its annual property tax bill on March 31 for $21,000.The bill is due May 1.Even though the company records adjusting entries on a monthly basis, no entries related to property taxes have been recorded.
Assuming appropriate adjusting entries were completed for the April month end, what entry should be recorded for the payment on May 1?
(a)debit prepaid property tax $21,000 and credit cash $21,000
(b)debits to prepaid property tax and property tax expense for $14,000 and $7,000, respectively and credit to cash for $21,000
(c)debits to prepaid property tax and property tax payable for $14,000 and $7,000, respectively and credit to cash $21,000
(d)debit property tax payable $15,750 and credit to cash $15,750.

Question 28

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

Question 29

Roofer's Inc.had an operating line of credit of $100,000 and overdrew its bank balance to result in a negative cash balance of $33,000 at year-end.This would be reported in the statement of financial position as
(a)a current liability of $33,000.
(b)a non-current liability of $67,000.
(c)a current asset of $67,000.
(d)a current asset of $(33,000).

Question 30

Detailed information such as a list showing the amounts of non-current debt that is scheduled to be paid off in each of the next five years should be disclosed in the notes to the financial statements.

Question 31

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

Question 32

All transactions between bondholders and other investors must be recorded by the issuing corporation.

Question 33

Amortization of a bond premium decreases interest expense recorded by the issuer.

Question 34

The terms of an operating line of credit and a notes (loans) payable are disclosed in the notes to the financial statements.

Question 35

McMichael Exhibits Inc.received its annual property tax bill for $26,200 in January.It was paid when due on March 31.McMichael Exhibits year end is Dec 31.The Dec 31 balances should be
(a)$6,550 for Prepaid Property Tax; $19,650 for Property Tax Expense.
(b)$0 for Prepaid Property Tax; $0 for Property Tax Payable.
(c)$6,550 for Prepaid Property Tax; $6,550 for Property Tax Payable.
(d)$2,183 for Prepaid Property Tax; $24,017 for Property Tax Expense.

Question 36

Use the following information for questions
On January 1 of this year, Gertoni Lenders agrees to lend Ester Corp.$150,000.Ester Corp.signs a $150,000, 6%, 9-month loan.Interest is due at maturity.
What entry will Ester Corp.make to repay the loan on September 30, assuming no further adjusting entries have been made since June 30?

Question 37

Which of the following statements is false?
(a)Notes payable usually require the borrower to pay interest.
(b)Notes payable are sometimes used instead of accounts payable.
(c)Most notes and bank loans are non-interest bearing.
(d)Notes payable reflect a promise to repay a specified amount of money either at a fixed future date or on demand.

Question 38

Use the following information for questions
On January 1 of this year, Gertoni Lenders agrees to lend Ester Corp.$150,000.Ester Corp.signs a $150,000, 6%, 9-month loan.Interest is due at maturity.
The entry made by Ester Corp.on January 1 to record the receipt of the loan is

Question 39

The effective-interest method is required for companies reporting under IFRS, but optional for companies using ASPE if other methods do not result in material differences.

Question 40

The entry to record interest expense on a bank loan payable is a
(a)debit to interest expense and credit to note payable.
(b)debit to note payable and credit to interest income.
(c)debit to interest payable and credit to interest income.
(d)debit to interest expense and credit to interest payable.

Question 41

On January 1, 2022, Junction Limited, a calendar-year company, issued $160,000 of notes payable, of which $65,000 is due on January 1 for each of the next four years.The proper statement of financial position presentation on December 31, 2022, is
(a)Current Liabilities, $160,000.
(b)Non-current Liabilities, $160,000.
(c)Current Liabilities, $65,000; Non-current Liabilities, $95,000.
(d)Current Liabilities, $95,000; Non-current Liabilities, $65,000.

Question 42

Use the following information to answer questions
The following totals for the month of April were taken from the payroll register of Branson Corp.:

The journal entry to record the accrual of the employee's portion of Canada Pension Plan (CPP) would include a
(a)debit to CPP Payable of $1,330.
(b)debit to CPP Expense of $1,330.
(c)credit to Employee Benefits Expense of $1,330.
(d)credit to CPP Payable of $1,330.

Question 43

Which of the following statements is true?
(a)With instalment payments on a non-current note payable, the principal portion decreases each period.
(b)With instalment payments on a non-current note payable, the interest portion decreases each period.
(c)With instalment payments on a non-current note payable, the interest portion does not change each period.
(d)With instalment payments on a non-current note payable, the interest portion increases each period.

Question 44

Harmonized Sales Tax (HST) collected by a retailer are expenses
(a)of the retailer.
(b)of the customers.
(c)of the government.
(d)that are not recognized by the retailer until they are submitted to the government.

Question 45

Use the following information for questions
On October 1, 2022, Mekhi's Golf Service Limited borrows $80,000 from Rigor Bank by signing a 3-month, $80,000, 4% bank loan.Interest is due the first of each month.
The entry by Mekhi's Golf Service to record payment of the loan and accrued interest on January 1, 2023 is

Question 46

As equal instalment payments are made on a long-term loan,
(a)the interest portion increases and the principal portion decreases.
(b)the interest and principal portions remain the same.
(c)the interest portion decreases and the principal portion increases.
(d)both the interest portion and the principal portion decrease.

Question 47

A financial liability is a
(a)contractual obligation to receive cash in the future.
(b)contractual obligation to pay cash in the future.
(c)contractual obligation to issue common shares in the future.
(d)contractual obligation to issue a mortgage payable.

Question 48

A customer paid a total of $8,960 for a purchase, including 13% HST (Harmonized Sales Tax).How much was the HST?
(a)$8,960
(b)$8,000
(c)$1,075
(d)$1,031

Question 49

One example of a liability that is not a financial liability is

A) notes payable.
B) deferred revenue.
C) bonds payable.
D) financial lease.

Question 50

Interest rates on notes and loans are usually stated as a(n)
(a)monthly rate.
(b)daily rate.
(c)semi-annual rate.
(d)annual rate.

Question 51

Which of the following statements is false?

A)With equal instalment loans, the equal periodic payments result in the interest portion increasing each period.
B)With equal instalment payments, the reduction of principal increases.
C)With equal instalment loans, the equal periodic payments result in the interest portion decreasing each period.
D)With equal instalment loans, the equal periodic payments are constant each period.

Question 52

If interest is due at maturity, a $50,000, 4%, 9-month note payable requires an interest payment of
(a)$1,500.
(b)$222.
(c)$167.
(d)$2,000.

Question 53

A five-year, 4%, $102,000 note payable is issued on January 1.Terms include equal annual instalment payments of $22,912.The entry to record the first instalment payment will include a
(a)debit to Notes Payable of $18,832.
(b)credit to Interest Expense of $4,080.
(c)credit to Notes Payable of $22,912.
(d)debit to Cash of $22,912.

Question 54

Which of the following is not a financial liability?

A)notes payable
B)deferred revenue
C)bank loans payable
D)mortgages payable

Question 55

When a long-term note payable has periodic instalment payments on fixed dates, it means that
(a)the principal can be paid down at any time.
(b)the periodic payment decreases over time.
(c)the payment consists of interest on the unpaid balance of the loan at the beginning of the period.
(d)the payment does not include any portion of the loan principal..

Question 56

Under ASPE, a contingent liability is recorded in the accounting records
(a)if it is likely that a future event will confirm that a liability has been incurred and the amount of the related loss can be estimated.
(b)if the contingency has not already been disclosed in the notes to the financial statements.
(c)if the amount can be estimated, but the possibility of occurrence is remote.
(d)under no circumstances.

Question 57

Use the following information for questions
On October 1, 2022, Mekhi's Golf Service Limited borrows $80,000 from Rigor Bank by signing a 3-month, $80,000, 4% bank loan.Interest is due the first of each month.
What adjusting entry is required at December 31, 2022?

Question 58

Use the following information to answer questions
The following totals for the month of April were taken from the payroll register of Branson Corp.:

The journal entry to record payment of the net payroll would include a
(a)debit to Salaries Payable for $17,881.
(b)debit to Salaries Payable for $15,300.
(c)debit to Salaries Payable for $21,065.
(d)credit to Cash for $26,850.

Question 59

Under IFRS, if a company can determine a reasonable estimate of an expected loss from a lawsuit and it is probable it will lose the suit, it should
(a)disclose the basic facts regarding the suit in the notes to its financial statements.
(b)accrue the loss.
(c)neither disclose in the notes nor accrue the loss.
(d)pay the amount estimated.

Question 60

A long-term note secured by collateral may be referred to as a
(a)premium.
(b)debenture.
(c)bond.
(d)mortgage.

Question 61

Interest expense is based on the ___ interest rate and the carrying amount of a bond while the interest paid is based on the ___ interest rate and the face value of the bond.
(a)market; market
(b)coupon; market
(c)coupon; coupon
(d)market; coupon

Question 62

On March 1, Brutto Corp.issues a 3 year, 5%, $60,000 bond at face value.Interest is paid semi-annually.The entry to record the first interest payment will include a
(a)debit to Bonds Payable of $3,000.
(b)debit to Cash of $1,500.
(c)credit to Interest Expense of $3,000.
(d)debit to Interest Expense of $1,500.

Question 63

Liabilities with instalment payments are repayable in a) equal periodic amounts plus interest.
B) varying periodic amounts plus interest.
C) equal periodic amounts including interest.
D) varying periodic amounts including interest.

Question 64

Liquidity ratios measure a company's
(a)operating cycle.
(b)revenue-producing ability.
(c)short-term debt-paying ability.
(d)long-range solvency.

Question 65

On March 1, Brutto Corp.issues a 3 year 5%, $60,000 note payable.The terms of the note include equal monthly instalment payments of $1,799.The entry to record the second instalment payment will include a
(a)debit to Notes Payable of $1,555.
(b)debit to Cash of $1,799.
(c)debit to Interest Expense of $250.
(d)credit to Interest Expense of $244.

Question 66

Which of the following statements is true?
(a)The carrying amount of bonds issued at a discount will initially be higher than the face value.
(b)The carrying amount of a bond is its face value less any unamortized premium or plus any unamortized discount.
(c)The carrying amount of a bond is its face value plus any unamortized premium or less any unamortized discount.
(d)The carrying amount of bonds issued at a premium will initially be lower than the face value.

Question 67

On March 2, Conroy and Conrad Inc.obtained a loan for $120,000 for 5 years at 4%.Payments are $2,210 per month How much interest expense is recorded with the first instalment payment? a) $400
B) $210
C) $2,400
D) $4,800

Question 68

Which of the following is not an example of a non-current liability with instalment payments?
(a)long-term notes payable
(b)deferred revenue
(c)bank loans payable
(d)mortgages payable

Question 69

With loans that have equal periodic instalment payments, the interest portion of the payment___ each period as the principal portion of the payment ___. a) decreases, decreases
B) increases, increases
C) increases, decreases
D) decreases, increases

Question 70

Which of the following statements is true?
(a)Current liabilities are generally presented on the statement of financial position in order of liquidity, but IFRS allows presentation in reverse order of liquidity as well.
(b)Current liabilities are listed in order of descending dollar value.
(c)All companies are prohibited to report current liabilities in reverse order of liquidity.
(d)Current liabilities are listed in order of ascending dollar value.

Question 71

The relationship between current assets and current liabilities is
(a)useful in determining profitability.
(b)useful in evaluating a company's liquidity.
(c)useful in evaluating a company's solvency.
(d)useful in determining the amount of a company's non-current debt.

Question 72

Last year, Hadley Bakery's statement of income reported the following: net income, $325,600; interest expense, $81,400; and income tax expense, $113,960.The company's times interest earned ratio is
(a)5.0 times.
(b)6.4 times.
(c)4.0 times.
(d)4.6 times.

Question 73

Instalments can be paid a) monthly.
B) quarterly.
C) semi-annually.
D) all of the above

Question 74

Which of the following statements is true?
(a)Liquidity ratios measure a company's long-term ability to pay debt.
(b)Solvency ratios measure a company's ability to repay current debt.
(c)A high liquidity ratio generally indicates that a company has a greater ability to meet its current obligations.
(d)Solvency ratios measure a company's ability to survive on a short-term basis.

Question 75

The times interest earned ratio is calculated by dividing
(a)net income by interest expense.
(b)net income plus income tax expense by interest expense.
(c)net income plus interest expense by interest expense.
(d)net income plus interest expense plus income tax expense by interest expense.

Question 76

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called
(a)early retirement bonds.
(b)redeemable bonds.
(c)options.
(d)debentures.

Question 77

Which of the following credit ratings is regarded as speculative or indicative of a high degree of risk?
(a)R1
(b)R2
(c)R3
(d)R4

Question 78

If a bond has a face value of $10,000, a 6% coupon interest rate and a 4% market interest rate, then the semi-annual interest payment will be
(a)$600.
(b)$400.
(c)$200.
(d)$300.

Question 79

Long-term notes may have a) fixed rates of interest only.
B) floating interest rates only.
C) no interest rates.
D) fixed or floating interest rates.

Question 80

A measure of a company's solvency is the
(a)inventory turnover ratio.
(b)current ratio.
(c)times interest earned ratio.
(d)asset turnover ratio.