Question 1

Because of the matching principle, businesses recognize the cost of employee vacation pay each payroll period as a current liability.

Accepted Answer

The matching principle in accounting dictates that expenses should be recognized in the period in which the related revenues are earned. Therefore, the cost of employee vacation pay is recognized each payroll period as a current liability, as it is an expense incurred in earning the period's revenues.

Question 2

Total vacation pay accumulated by employees is paid to employees in future periods.

Accepted Answer

The answer of Total vacation pay accumulated by employees is...

Question 3

Employers contribute twice the FICA amount paid by their employees because the employers' contributions cover both Social Security and unemployment programs.

Accepted Answer

Employers match their employees' FICA contributions for Social Security and Medicare, but unemployment insurance is funded separately and is not part of FICA.

Question 4

At the end of each accounting period, businesses will generally need to accrue payroll-related expenses.

Accepted Answer

Accruing payroll-related expenses is necessary to recognize the expenses in the period in which the employees earned the wages, regardless of when the wages are actually paid, ensuring that financial statements are accurate and comply with the matching principle of accounting.

Question 5

In regard to contingencies, the accounting standards provide explicit guidance about the terms "probable," "reasonably possible," "remote," and "subject to reasonable estimation."

Accepted Answer

The answer of In regard to contingencies, the accounting standards...

Question 6

Accrued payments related to lawsuits that have been filed will be shown as current liabilities.

Accepted Answer

The answer of Accrued payments related to lawsuits that have...

Question 7

When a loss contingency is recorded, a loss account is debited and a liability account is credited.

Accepted Answer

The answer of When a loss contingency is recorded, a...

Question 8

A convertible bond may be exchanged for common stock of the issuing corporation at the option of the bondholder.

Accepted Answer

A convertible bond is a type of bond that can be converted into a predetermined number of shares of common stock in the issuing company, usually at the discretion of the bondholder.

Question 9

A bond indenture is a legal contract that identifies the rights and obligations of both the buyer and seller of the bond.

Accepted Answer

A bond indenture is indeed a legal contract that outlines the terms, rights, and obligations of both the bond issuer (seller) and the bondholder (buyer).

Question 10

If a bond issue is called by an issuing company, the bond indenture usually requires that bondholders be paid a call premium.

Accepted Answer

A call premium is an amount over the par value of a bond that the issuer pays to bondholders as compensation for exercising the call option to redeem the bond before its maturity date. This is typically outlined in the bond indenture.

Question 11

Journal entries relative to bond sales are recorded by the issuing corporation when sales are made in the primary and secondary markets.

Accepted Answer

Journal entries relative to bond sales are recorded by the issuing corporation only when sales are made in the primary market, not when bonds are resold in the secondary market.

Question 12

Most bonds are not issued at face value.

Accepted Answer

Bonds can be issued at a discount, at par (face value), or at a premium, depending on market conditions, interest rates, and the issuer's creditworthiness.

Question 13

Risk refers to the likelihood that a company will eventually default, or fail to make required interest or principal payments, on its bonds.

Accepted Answer

Risk, in the context of bonds, indeed refers to the possibility that the issuer will not be able to make the required payments, including both interest and principal, leading to default.

Question 14

On February 1, 2011, a company decides to retire a bond that last paid interest on December 31, 2010; the gain or loss on retirement is calculated as the difference between the price to retire and the carrying value of the bond on December 31, 2010.

Accepted Answer

The gain or loss on retirement of a bond is calculated as the difference between the price to retire the bond and the carrying value of the bond on the date of retirement, not on the date of the last interest payment.

Question 15

Both U.S. GAAP and IFRS provide specific criteria for a capital lease, although the criteria are not the same.

Accepted Answer

Under U.S. GAAP, the concept of a capital lease has been replaced by a finance lease under ASC 842. IFRS uses the term "finance lease" in IFRS 16, and while both sets of standards have criteria for lease classification, the specific criteria and terminology differ.

Question 16

Long-term lease obligations should not be separated into current and long-term portions for balance sheet purposes because both the current and long-term pieces relate to the same obligation.

Accepted Answer

Long-term lease obligations should be separated into current and long-term portions for balance sheet purposes to accurately reflect the portion of the obligation that is due within the current year (current liability) and the portion that is due beyond the current year (long-term liability).

Question 17

In the most common type of pension plan, employees make specified percentage-of-earnings to the plan.

Accepted Answer

In a defined contribution plan, employees contribute a specified percentage of their earnings to the plan.

Question 18

Postretirement benefit liabilities are generally significant amounts on most publicly held companies' financial statements.

Accepted Answer

Postretirement benefit liabilities, such as pensions and healthcare benefits, often represent significant obligations for publicly held companies, impacting their financial statements substantially due to the long-term nature of these commitments.

Question 19

Off-balance sheet financing generally involves the issuance of bond debt that is not reported as a liability.

Accepted Answer

Off-balance sheet financing typically involves transactions where a company does not report certain assets or liabilities directly on its balance sheet, such as operating leases or certain joint ventures, rather than the issuance of bond debt which is usually reported as a liability.

Question 20

All liabilities are estimated using time value of money concepts.

Accepted Answer

Not all liabilities are estimated using time value of money concepts. Some liabilities, such as accounts payable or accrued expenses, are recorded at their nominal value without adjusting for the time value of money.

Quiz 7: Liabilities