Question 1

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

Accepted Answer

Unearned revenues are liabilities, not revenues, and should be classified as a liability on the balance sheet until the service is performed or the product is delivered.

Question 2

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

Accepted Answer

A note payable and an account payable have different terms and due dates depending on the agreement made between the parties involved. There is no rule that a note payable must always be paid before an account payable.

Question 3

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

Accepted Answer

A higher sales tax rate means that customers will have to pay more for goods, which may lead to lower sales volume as consumers decide to shop elsewhere or purchase fewer items. This can result in lower profits for retailers.

Question 4

Notes payable usually require the borrower to pay interest.

Accepted Answer

Notes payable are debts owed by a business that include an interest rate that must be paid by the borrower to the lender.

Question 5

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

Accepted Answer

With an interest-bearing note, the amount of cash received upon issuance is typically equal to the note's face value; the interest accrues over time and is paid in addition to the face value at maturity or through periodic payments.

Question 6

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

Accepted Answer

Interest expense on a note payable is typically recorded throughout the life of the loan, not just 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.

Accepted Answer

The answer of If any portion of a long-term debt...

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.

Accepted Answer

The sales tax is calculated as 5% of the total price, which is $200 x 0.05 = $10. The question states that the sales tax is $9.52, which is not correct.

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.

Accepted Answer

Sales taxes collected from customers are not an expense for the company; they are a liability. The company should recognize $100,000 as Sales Revenue and $6,000 as Sales Tax Payable.

Question 10

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

Accepted Answer

Payroll taxes do include the employer's share of Social Security taxes, as well as state and federal unemployment taxes, which are part of the costs employers incur for having employees.

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.

Accepted Answer

Current maturities of long-term debt refer to the portion of long-term debt that is due in the current year, which includes both principal and interest payments.

Question 12

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

Accepted Answer

When a company's current liabilities exceed its current assets, it means that the company may struggle to meet its short-term obligations. This suggests a potential liquidity problem where the company may not have enough cash or liquid assets to pay off its debts.

Question 13

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

Accepted Answer

Interest expense is considered a type of expense and is typically reported under the category of Other Expenses and Losses in the income statement.

Question 14

Notes payable are often used instead of accounts payable.

Accepted Answer

Notes payable are a type of short or long-term debt that a company promises to pay back with interest, often used instead of accounts payable which are debts owed to vendors or suppliers for goods or services received.

Question 15

Most notes are not interest bearing.

Accepted Answer

Many notes, especially those related to loans or credit, are interest-bearing as they include terms for interest payments in addition to the principal amount.

Question 16

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

Accepted Answer

The interest on a $20,000 note at 8% for 9 months is calculated as $20,000 * 0.08 * (9/12) = $1,200.

Question 17

A current liability must be paid out of current earnings.

Accepted Answer

A current liability is defined as a liability that is expected to be settled within one fiscal year or the operating cycle, whichever is longer, and can be paid out of current assets or by creating other current liabilities, not necessarily from current earnings.

Question 18

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

Accepted Answer

Unearned revenues are payments received by a company for goods or services that have not yet been delivered or performed, representing a liability until the obligation is fulfilled.

Question 19

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

Accepted Answer

When a business collects sales tax, it holds the tax amount as a liability until it is remitted to the state, creating a current liability on the balance sheet.

Question 20

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

Accepted Answer

Current liabilities are those that are expected to be paid off within one year or the normal operating cycle of the business, whichever is longer. This includes obligations like accounts payable, salaries and wages payable, and short-term loans. Anything that extends beyond one year is considered a long-term liability.

Quiz 10: Reporting and Analyzing Liabilities