Deck 10: Reporting and Interpreting Liabilities

Question 1

Bonds that are not backed by collateral are referred to as "debentures."

Answer 1

True

Question 2

The principal of a loan does not include any interest charges.

Answer 2

True

Question 3

The straight-line method of amortization allocates the amount of bond premium or discount over each period of a bond's life in amounts corresponding to the bond's carrying value.

Answer 3

False

Question 4

Bonds that are backed by a company's assets are referred to as "secured" bonds.

Question 5

If the market rate exceeds the stated interest rate,a bond will sell at a premium.

Question 6

The threshold for recording contingent liabilities under IFRS is higher than that under GAAP.

Question 7

If the likelihood of a loss is reasonably possible,a contingent liability is recorded by making an appropriate journal entry.

Question 8

The debt-to-assets ratio indicates financing risk by computing the proportion of total assets financed by debt.

Question 9

When a company issues bonds that include no periodic interest payments,the bonds are referred to as "zero-coupon" bonds.

Question 10

Bonds allow a company to borrow large sums of money from many different investors.

Question 11

At the maturity date,the carrying value of a bond should always be equal to the face value.

Question 12

The gross earnings for all employees is credited to Salaries and Salaries and Wages Payable.

Question 13

Contingent liabilities arise from past transactions,but depend on future events.

Question 14

FICA payments consist of Social Security taxes and Medicare taxes.

Question 15

The net amount of a bond liability that appears on the balance sheet is equal to the face value of the bond plus any related discount or minus any related premium.

Question 16

An entertainment company received $6 million in cash for advance season ticket sales.Prior to the beginning of the season,these sales should be recorded as a liability.

Question 17

The entry to record a bond retirement at maturity usually involves no gain or loss.

Question 18

When the times interest earned ratio increases,the likelihood of default on liabilities decreases.

Question 19

Callable bonds can be converted to stock.

Question 20

Operating cycles are generally longer than a year.

Question 21

A typical classified balance sheet provides no information about which of the following items?

A) To whom the company owes money
B) For what the company owes money
C) How much the company owes
D) The proportion of the company's debts that will be paid in the short-term

Question 22

Payroll taxes paid by employees include which of the following?

A) Federal income tax, federal unemployment tax, and Medicare
B) Social security, federal unemployment tax, and state unemployment tax
C) Social security, federal unemployment tax, and state unemployment tax
D) Federal income tax withheld, state income tax withheld, and Medicare

Question 23

The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds.

Question 24

Bobby Darling is the only employee of Atlantic Records, Inc.During the first week of January, Darling earned $800 and had federal and state income tax withholdings of $40 and $15, respectively.FICA taxes are 7.65% on earnings up to $117,000.State and federal unemployment taxes for the period are $50 and $8, respectively.
Use the information above to answer the following question.What is the employer's payroll tax expense for the week?

A) $113.00
B) $119.20
C) $174.20
D) $235.40

Question 25

Current liabilities could include all of the following except:

A) an accounts payable due in 30 days.
B) a notes payable due in 9 months.
C) a bank loan due in 18 months.
D) any part of long-term debt due during the current period.

Question 26

A company typically records the amount owed to suppliers for goods or services when:

A) they are ordered.
B) a verbal commitment to purchase the goods or services has first been made.
C) payment is made.
D) the goods or services are received.

Question 27

For the employee,net pay is equal to gross earnings minus:

A) Federal income tax withholdings
B) payroll deductions
C) Social Security withholdings
D) medical insurance premiums

Question 28

Obligations due to be paid within one year or the company's operating cycle,whichever is longer,are classified as:

A) current assets.
B) current liabilities.
C) earned revenues.
D) noncurrent liabilities.

Question 29

Liabilities are classified as current if they:

A) will be paid within the company's operating cycle or within 1 year, whichever is longer.
B) will be paid using current assets.
C) are less than the current assets.
D) are greater than the current assets.

Question 30

Current liabilities are due:

A) but not receivable for more than one year or the current operating cycle, whichever is longer.
B) but not payable for more than one year or the current operating cycle, whichever is longer.
C) and receivable within the current operating cycle or one year, whichever is longer.
D) and payable within the current operating cycle or one year, whichever is longer.

Question 31

When preparing the balance sheet for AAA,Inc.for December 31,2015,which item would not be classified as a current liability?

A) Note payable due March 1, 2017
B) Accounts payable
C) Income taxes due on September 15, 2016
D) The current portion of a 30-year mortgage

Question 32

During one pay period,your company distributes $130,500 to employees as net pay.The income tax withholdings were $19,000 and the FICA withholdings were $5,000.Total payroll costs to the company for this pay period,excluding any unemployment taxes,was:

A) $149,500.
B) $130,500.
C) $154,500.
D) $159,500.

Question 33

Employer payroll taxes:

A) represent the federal taxes withheld from the employees' paychecks.
B) are the amounts paid by the employee.
C) are an added payroll expense beyond the wages and salaries earned by employees.
D) represent the FICA taxes withheld from employees' paychecks.

Question 34

Which of the following statements about payroll is correct?

A) Payroll deductions are an expense of the company.
B) When recording the payroll, Salaries and Wages Expense equals the sum of all the deductions.
C) The net pay is debited to Salaries and Wages Expense when the payroll is recorded.
D) Gross earnings are computed by multiplying the time worked by the pay rate promised by the employer.

Question 35

Bobby Darling is the only employee of Atlantic Records, Inc.During the first week of January, Darling earned $800 and had federal and state income tax withholdings of $40 and $15, respectively.FICA taxes are 7.65% on earnings up to $117,000.State and federal unemployment taxes for the period are $50 and $8, respectively.
Use the information above to answer the following question.What would be the amount of Darling's payroll check for the first week of January?

A) $683.80
B) $741.80
C) $628.80
D) $625.80

Question 36

Which of the following events does not create a liability?

A) Buying goods and services on credit
B) Obtaining a short-term loan
C) Issuing long-term debt
D) Remitting sales tax to the government

Question 37

Which of the following must be paid by both the employee and the employer?

A) FICA taxes
B) State unemployment tax
C) State withholding tax
D) Federal unemployment tax

Question 38

If a company's gross salaries and wages are $12,000,and it withholds $1,800 for income taxes and $800 for FICA taxes,the journal entry to record the employees' pay should include a:

A) debit to Salaries and Wages Expense for $9,400.
B) debit to Salaries and Wages Payable for $9,400.
C) credit to Salaries and Wages Payable for $12,000.
D) credit to Salaries and Wages Payable for $9,400.

Question 39

The Ideal Corp.has the following information its payroll records:

The employer amount of FICA taxes that Ideal is required to pay is equal to the amount that it withholds from its employees.Assume no other payroll taxes are incurred at this time.What is Ideal's total expense with regards to this payroll?

A) $80,000
B) $85,000
C) $100,000
D) $105,000

Question 40

Which of the following statements about payroll liabilities is correct?

A) Accrued payroll includes liabilities required by law or voluntarily requested by employees that have not yet been paid (or remitted).
B) Only employees are required to pay FICA taxes.
C) Both employers and employees are required to pay unemployment taxes.
D) Accrued payroll liabilities do not include any voluntary deductions by employees for charitable contributions or union dues.

Question 41

The entry to record the issuance of a note for cash was recorded with a debit to Cash and a credit to Notes Receivable.The effect of recording this entry causes:

A) assets to be understated.
B) liabilities to be overstated .
C) stockholders' equity to be understated.
D) stockholders' equity to be overstated.

Question 42

On September 1,ABC Company borrowed $50,000 on a 6%,9month note payable to XYZ National Bank.Given no previous adjusting entries have been recorded,ABC's adjusting entry four months later at December 31 would include a:

A) debit to Interest Expense of $750.
B) debit to Interest Expense of $1,000.
C) debit to Interest Expense of $3,000.
D) debit to Interest Expense of $2,250.

Question 43

The entry to record the initial borrowing of cash by issuing a promissory note will include a debit to ______ and a credit to ______:

A) Cash; Notes Payable
B) Notes Payable; Cash
C) Interest Expense; Cash
D) Cash; Interest Expense

Question 44

Texable,Inc.is required to match $45,900 for its portion of FICA and $4,700 for federal and state unemployment taxes.The entry to record Texable's payroll taxes includes:

A) debit to Payroll Tax Expense for $50,600.
B) credit to Payroll Tax Expense for $50,600.
C) debit to FICA Payable for $45,900.
D) debit to Unemployment Tax Payable of $4,700.

Question 45

If a company forgets to record the journal entry to accrue interest expense,then its net income is too ______ and its liabilities are too ______:

A) high; high
B) low; high
C) low; low
D) high; low

Question 46

Payroll deductions:

A) are amounts added to employees' gross earnings to determine their net pay.
B) are all voluntary increase the amount of cash an employee receives.
C) are amounts subtracted from employees' gross earnings to determine their net pay.

Question 47

The Payroll records of Oregon Mist contained the following information for the month of November:

The journal entry to record the monthly Payroll Tax Expense would include a:

A) debit to Payroll Tax Expense of $25,200.
B) credit to FICA Taxes Payable of $43,400.
C) debit to Payroll Tax Expense of $48,650.
D) debit to Payroll Tax Expense of $26,950.

Question 48

The journal entry to record employer payroll taxes affects:

A) assets only.
B) liabilities only.
C) liabilities and stockholders' equity.
D) assets and liabilities.

Question 49

Accruing a liability always involves ______ expenses and ______ liabilities.

A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing

Question 50

Gross earnings for the pay period are $100,000.Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850.The journal entry to record wages paid includes a:

A) $100,000 credit to Salaries and Wages Payable.
B) $6,700 debit to FICA Payable.
C) $100,000 debit to Salaries and Wages Expense.
D) $70,000 debit to Salaries and Wages Expense.

Question 51

The following 12%,$1,000 notes were issued on December 1.Which of the following is the correct method of calculation for the interest accrued as of December 31 of the same year on each of the notes described?

A) Interest on a 4-month note is calculated as: $1,000 x 12% x 1/12.
B) Interest on a 3-month note is calculated as: $1,000 x 12% x 1/3.
C) Interest on a 4-month note is calculated as: $1,000 x 12% x 1/4.
D) Interest on a 2-year note is calculated as: $1,000 x 12% x 1/24.

Question 52

John Smith works 40 hours for ABC Corp.for $15 per hour.Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10.The entry to record his net pay would cause which of the following to change as described?

A) Salaries and Wages Expense increases by $600.
B) Salaries and Wages Expense decreases by $600.
C) Salaries and Wages Payable increases by $600.
D) Salaries and Wages Payable decreases by $600.

Question 53

On November 1,2015,ABC Corp.borrowed $100,000 cash on a 1year note payable with a 6% annual rate that requires ABC to pay all the interest as well as the principal on October 31,2016.Assuming the November 1 transaction was properly recorded,how would the December 31,2015,year-end adjusting entry affect the accounting equation?

A) Liabilities decrease and stockholders' equity increases.
B) Both assets and stockholders' equity increase.
C) Liabilities increase and stockholders' equity decreases.
D) Liabilities increase and stockholders' equity increases.

Question 54

Acme Enterprises began the year owing its suppliers $3,000 for merchandise purchased last year.Acme then sold half of this merchandise for $5,000 on account.Two weeks later,Acme paid its suppliers $1,000 and bought another $4,000 of merchandise on account.Acme now has an Accounts Payable balance of:

A) $11,000.
B) $6,000.
C) $1,000.
D) $4,500.

Question 55

The entry to record the initial borrowing of cash by issuing a promissory note causes a(n):

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

Question 56

Employees' gross earnings differ from their net pay because of:

A) unemployment taxes.
B) payroll deductions.
C) accounts payable.
D) corporate income taxes.

Question 57

Issuing a note payable for cash immediately results in a(n):

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

Question 58

On November 1,2015,ABC Corp.borrowed $100,000 cash on a 1year,6% note payable that requires ABC to pay both principal and interest on October 31,2016.Given no prior adjusting entries have been recorded,the adjusting journal entry on December 31,2015,ABC's year end,would include a:

A) credit to Cash of $1,000.
B) debit to Interest Expense of $6,000.
C) credit to Interest Payable of $1,000.
D) credit to Note Payable of $1,000.

Question 59

The law requires ______ to pay FICA taxes.

A) both employee and employer
B) the employee
C) the employer
D) only retailers

Question 60

Gross earnings for the pay period are $100,000.Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850.What is the net pay to employees?

A) $70,000
B) $100,000
C) $130,000
D) $78,150

Question 61

When interest is accrued on a note payable,but not paid,the

A) Interest Expense account is increased; the Interest Payable account is increased.
B) Interest Expense account is decreased; the Interest Payable account is increased.
C) Notes Payable account is increased; the Interest Payable account is increased.
D) Interest Expense account is increased; the Interest Payable account is decreased.

Question 62

A company purchased equipment by issuing a $200,000,one-year,8% note payable.The transaction would be recorded in the accounting records with a credit to Notes Payable for:

A) $200,000.
B) $216,000.
C) $184,000.
D) $208,000.

Question 63

A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should include a:

A) debit to Interest Expense for $9,000 and a credit to Cash for $9,000.
B) debit to Cash for $9,000 and a credit to Interest Payable for $9,000.
C) debit to Interest Expense for $3,000, a debit to Interest Payable for $6,000, and a credit to Cash for $9,000.
D) debit to Interest Payable for $6,000, a debit to Accrued Interest for $3,000, and a credit to Cash for $9,000.

Question 64

On October 1,Angelica Inc.signs a note for $200,000 to provide the funds needed to build a new facility.The note is due in 10 years,includes an annual interest rate at 7%,and requires semiannual interest payments each April and October.The journal entry to record the issuance of the promissory note should debit:

A) Notes Payable for $200,000, debit Interest Expense for $14,000, credit Cash for $200,000, and credit Interest Payable for $14,000.
B) Accrued Interest and credit Cash for $14,000.
C) Cash and credit Notes Payable for $200,000.
D) Cash for $200,000, debit Interest Expense for $14,000, credit Notes Payable for $200,000, and credit Interest Payable $14,000.

Question 65

On October 1,2015,Bill Burns borrowed $170,000 from the New National Bank on a 6-month,6% note.Assuming no interest has been recorded yet,what is the amount of accrued interest as of December 31,2015?

A) $5,100
B) $2,550
C) $10,200
D) $7,650

Question 66

On October 1,2015,Attra Inc.borrows $200,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30.On December 31,2015,the adjusting entry to accrue interest on the note should debit:

A) Interest Expense and credit Interest Payable for $3,000.
B) Interest Payable and credit Interest Expense for $3,000.
C) Interest Expense and credit Cash for $6,000.
D) Interest Expense and credit Interest Payable for $6,000.

Question 67

What kind of account is Unearned Revenue?

A) Asset
B) Liability
C) Revenue
D) Expense

Question 68

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000, 4%, 9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only.
Use the information above to answer the following question.What journal entry will Brickyard make when paying the interest at maturity?

A) Debit Notes Payable and credit Cash for $206,000
B) Debit Interest Expense for $4,000, and credit Cash for $4,000
C) Debit Interest Expense for $6,000 and Cash for $206,000
D) Debit Interest Payable for $4,000, credit Interest Expense for $2,000, and credit Cash for $6,000

Question 69

In October,you sign a note for $50,000 in order to buy new equipment.The note is due in five years,at 8% annual interest.Semiannual interest payments are due each March and September.Assuming no other long-term debt,what is the initial balance in the related long-term debt account?

A) $46,000
B) $50,000
C) $52,000
D) $54,000

Question 70

On October 1,2015,United Co.negotiates with its bank to borrow $10,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2016,the maturity date.What adjusting entry needs to be recorded of December 31,2015?

A) Debit Interest Expense and credit Interest Payable for $250
B) Debit Interest Expense and credit Interest Payable for $125
C) Debit Interest Expense and credit Interest Payable for $500
D) Debit Interest Payable and credit Interest Expense for $500

Question 71

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000, 4%, 9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only.
Use the information above to answer the following question.On January 1,which of the following journal entries will be made by Brickyard to record the issuance of the note?

A) Debit Interest Expense for $6,000, debit Cash $194,000, and credit Notes Payable for $200,000
B) Debit Cash and credit Notes Payable for $200,000
C) Debit Cash for $200,000, debit Interest Expense for $6,000, and credit Notes Payable for $206,000
D) Debit Cash for $200,000, debit Interest Expense for $6,000, credit Notes Payable for $200,000, and credit Interest Payable for $6,000

Question 72

A one-year,$15,000,12% note is signed on April 1.If the note is repaid on September 1 of the same year,how much interest expense is incurred?

A) $1,800
B) $900
C) $750
D) $600

Question 73

A 6-month note is issued on November 1.If no previous accruals have been made,how many months of interest should be accrued at December 31?

A) Six
B) Two
C) Four
D) None

Question 74

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000, 4%, 9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only.
Use the information above to answer the following question.What adjusting entry should Brickyard make on June 30 before preparing its annual financial statements?

A) Debit Interest Expense and credit Interest Payable for $4,000
B) Debit Interest Expense and credit Interest Payable for $4,000
C) Debit Interest Payable and credit Interest Expense for $4,000
D) Debit Interest Payable and credit Interest Expense for $4,000

Question 75

A company pays $18,000 in interest on notes,consisting of $12,000 interest that was accrued during the last accounting period and $6,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should:

A) debit Interest Expense for $18,000 and credit Cash for $18,000.
B) debit Cash for $18,000 and credit Interest Payable for $18,000.
C) debit Interest Expense for $6,000, debit Interest Payable $12,000 and credit Cash for $18,000.
D) debit Interest Payable for $12,000, debit Accrued Interest $6,000 and credit Cash for $18,000.

Question 76

On October 1,2015,United Co.negotiates with its bank to borrow $10,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2016,the maturity date.What journal entry needs to be recorded as of March 31,2016?

A) Debit Interest Payable $125, debit Interest Expense $125, and credit Cash $250
B) Debit Interest Expense $250 and credit Cash $250
C) Debit Interest Expense $250 and credit Interest Payable for $250
D) Debit Interest Expense $125 and credit Cash for $125

Question 77

Interest on an obligation is recorded:

A) as time passes.
B) when goods are purchased on account.
C) at maturity.
D) when a bank loan is obtained.

Question 78

Sales taxes are recorded by the retailer as:

A) Sales Tax Expense.
B) Sales Tax Payable.
C) Sales Revenue.
D) Sales Returns and Allowances.

Question 79

ABC Airlines collects $300 for a roundtrip ticket from Chicago to Los Angeles.The flights will not occur until the next accounting period.How does ABC Airlines record the $300 collected in advance?

A) A debit to Cash of $300 and a credit to Unearned Revenue of $300
B) A debit to Unearned Revenue of $300 and a credit to Cash of $300
C) A debit to Cash of $300 and a credit to Revenue of $300
D) A debit to Revenue of $300 and a credit to Cash of $300

Question 80

The total amount of interest that will be paid on a four-month,$6,500,9% note payable equals:

A) $585
B) $292
C) $146
D) $195