Question 1

Mitchell Corporation sells 4,000 units of inventory during the year for $500 each. The selling price includes a one-year warranty on parts. It is estimated that 3% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000. What amount will be reported as Estimated Warranty Liability at the end of the year?
A) $4,000.
B) $2,000.
C) $6,000.
D) $0.

Accepted Answer

The estimated warranty liability is calculated as 3% of 4,000 units, which is 120 units. At $50 per unit, the total estimated cost is $6,000. Since $4,000 has already been incurred, the remaining liability is $2,000.

Question 2

Failure to record an accrued liability causes a company to:
A) overstate income.
B) overstate assets.
C) understate liabilities.
D) understate owners' equity.

Accepted Answer

Failure to record an accrued liability means that a liability that should have been recognized has not been recorded in the financial statements. This results in an understatement of liabilities, which can lead to false assumptions about the company's financial health. For example, understating liabilities could make a company appear to be more profitable than it actually is, as it would overstate owners' equity by not recognizing the liability.

Question 3

Tyler Company paid $1,500 cash to replace a wheel on equipment sold under warranty. The entry to record the payment would be to:
A) debit warranty expense and credit cash.
B) debit equipment expense and credit cash.
C) debit warranty payable and credit cash.
D) debit parts expense and credit cash.

Accepted Answer

The payment made by Tyler Company is for replacing a wheel on the equipment sold under warranty, so it should be recorded as a payment against the warranty payable account. Therefore, the entry to record the payment should be to debit warranty payable and credit cash. Option A is incorrect because a warranty expense has not been incurred, and Option B is incorrect because equipment expense is not affected by the replacement of a wheel under warranty. Option D is incorrect because there is no parts expense involved in this transaction.

Question 4

Liabilities are classified on the balance sheet as current or:
A) unearned.
B) deferred.
C) long-term.
D) accrued

Accepted Answer

Liabilities on the balance sheet are classified into two categories: current liabilities that are due within one year, and long-term liabilities that are due in more than one year. Unearned revenue, deferred revenue, and accrued expenses can all be classified as either current or long-term liabilities depending on when they are due. However, they are not a separate category of liabilities.

Question 5

If at the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year:
A) short-term notes payable will appear on the balance sheet and interest payable will appear on the income statement.
B) short-term notes payable will be included in the notes to the financial statements.
C) short-term notes payable and interest payable will appear on the balance sheet.
D) short-term notes payable, interest payable and interest expense will appear on the balance sheet.

Accepted Answer

Short-term notes payable and interest payable are both liabilities and will appear on the balance sheet. Interest expense, however, will appear on the income statement.

Question 6

The current ratio is current assets:
A) minus current liabilities.
B) divided by current liabilities.
C) plus current liabilities.
D) multiplied by current liabilities.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay off its short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities. Therefore, the correct choice is B - divided by current liabilities.

Question 7

A current liability is a debt that can reasonably be expected to be paid:
A) within one year or the company's normal operating cycle (if it is longer than one year).
B) between 6 months and 18 months.
C) out of cash on hand.
D) out of current revenues.

Accepted Answer

A current liability is a debt that is due within one year or the company's normal operating cycle, whichever is longer. This means that it is expected to be paid off using current assets or through the use of current revenues within the next year or operating cycle. Therefore, choice A is the correct answer.

Question 8

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid at maturity of the note is:
A) $108,000.
B) $106,000.
C) $100,000.
D) $104,000.

Accepted Answer

Interest = $100,000 x 8% x 4/12 = $2,666.67Total cash paid at maturity = $100,000 + $2,666.67 = $108,000

Question 9

When a business receives cash from a customer before earning the revenue, they have a(n):
A) bonds payable.
B) notes payable.
C) accounts payable.
D) unearned revenue.

Accepted Answer

Unearned revenue refers to cash received from customers before the business has earned the revenue through providing the goods or services. Bond payable refers to a long-term debt issued by a company, notes payable refers to a short-term debt that a company owes to creditors, and accounts payable refers to the amount owed by a company to its suppliers for the goods or services it has received but not yet paid for.

Question 10

The journal entry to record payroll:
A) debits salary expense and credits salary payable for the net pay.
B) debits salary expense and credits salary payable for the gross pay.
C) debits salary expense for the gross pay and credits salary payable for the net pay.
D) debits salary expense for the net pay and credits salary payable for the gross pay.

Accepted Answer

The correct entry debits salary expense for the gross pay and credits salary payable for the net pay, reflecting the total expense and the liability owed to employees after deductions.

Question 11

Monthly sales were $200,000. Warranty costs are estimated at 4% of monthly sales. In the month of sale, the company should record a credit to:
A) Warranty Payable for $8,000.
B) Warranty Expense for $8,000.
C) Sales for $8,000.
D) Inventory for $8,000.

Accepted Answer

The company should record a credit to Warranty Payable for $8,000, which represents the estimated liability for future warranty claims based on the sales.

Question 12

At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:
A) current liabilities increase and current assets increase.
B) current liabilities increase and equity increases.
C) current liabilities decrease and equity decreases.
D) current liabilities increase and equity decreases.

Accepted Answer

The journal entry to accrue interest on a short-term note payable will increase the current liability for interest expense and decrease equity through the recognition of expense. Therefore, option D is the correct choice. Options A and B are incorrect because the entry does not affect current assets, and it decreases equity instead of increasing it. Option C is incorrect because it implies that the entry reduces both current liabilities and equity, which is not the case.

Question 13

Omaha Bank lends Nebraska Paper Company $100,000 on January 1. Nebraska Paper Company signs a $100,000, 8%, 6-month note. The entry made by Nebraska Paper Company on January 1 to record the proceeds and issuance of the note would include:
A) a debit to cash of $92,000.
B) a debit to interest expense of $8,000.
C) a credit to Notes Payable of $100,000
D) a credit to Interest Payable of $8,000.

Accepted Answer

When Nebraska Paper Company takes out a loan of $100,000 from Omaha Bank, it creates a liability for itself in the form of a note payable of $100,000. Therefore, Nebraska Paper Company should record a credit to Notes Payable for $100,000 to reflect this liability. There is no indication that the loan has a discount, so options A and B are not applicable. Additionally, interest expense and interest payable would be recorded at the end of the term, not at the issuance of the note. Therefore, the correct answer is C.

Question 14

Estimated warranty payable are reported on the balance sheet as:
A) administrative expenses.
B) a long-term liability.
C) a current liability.
D) part of cost of goods sold.

Accepted Answer

Estimated warranty payable represents the amount a company expects to pay for warranty claims on products sold. This is a current liability as it is expected to be paid within one year from the balance sheet date.

Question 15

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid for interest (only) at maturity of the note is:
A) $6,000.
B) $8,000.
C) $4,000.
D) $32,000

Accepted Answer

The answer of Michigan Bank lends Canton Furniture Company $100,000...

Question 16

All of the following are reported as current liabilities EXCEPT:
A) bonds payable.
B) sales tax payable.
C) accounts payable.
D) unearned revenues.

Accepted Answer

Bonds payable are reported as long-term liabilities, not current liabilities. The other options listed (sales tax payable, accounts payable, and unearned revenues) are all reported as current liabilities.

Question 17

The journal entry to record accrued interest on a short-term note payable must include a debit to:
A) interest payable and a credit to cash.
B) interest expense and a credit to cash.
C) interest expense and a credit to interest payable.
D) interest payable and a credit to notes payable.

Accepted Answer

Accrued interest on a short-term note is recorded by debiting Interest Expense and crediting Interest Payable. This is because Interest Expense is an income statement account and is used to record the cost of borrowing money. Interest Payable is a balance sheet account and represents the amount of interest that has been incurred but not yet paid.

Question 18

Which of the liability accounts below is usually NOT an accrued liability:
A) interest payable.
B) wages payable.
C) taxes payable.
D) notes payable.

Accepted Answer

Notes payable is not usually an accrued liability because it represents a formal agreement to borrow money and make payments in the future, rather than an obligation that has been incurred but not yet paid. Therefore, it is not accrued, but rather is recorded when the loan is taken out and as payments are made.

Question 19

The accounting principle requiring that a company record the warranty expense in the same period that it records sales revenue is the:
A) going concern principle.
B) matching principle.
C) conservatism principle.
D) consistency principle.

Accepted Answer

The matching principle requires that expenses should be recognized in the same period as the corresponding revenue is recognized. Since warranty expense is directly related to sales revenue, it should be recognized in the same period as the sales revenue is recorded. This ensures that the financial statements reflect the true profitability of the company during a given period.

Question 20

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The entry made by Canton Furniture Company on December 31 to record the accrued interest on the note would be:
A) a debit to interest expense and a credit to interest payable of $2,000.
B) a debit to interest payable and a credit to interest expense of $2,000.
C) a debit to interest expense and a credit to cash of $2,000.
D) a debit to interest payable and a credit to cash of $2,000.

Accepted Answer

The interest on the note can be calculated as follows:

Interest = Principal x Rate x Time
= $100,000 x 0.08 x (1/12) 
= $667

Since the note was issued on December 1 and the interest is being accrued at the end of the month (December 31), the company would owe one month's worth of interest, which is $667.

The entry to record the accrued interest would be:

Debit: Interest Expense - $667 
Credit: Interest Payable - $667

Option A is correct as it correctly debits the interest expense account and credits the interest payable account for the accrued interest of $2,000 ($667 x 3 months).

Quiz 9: Liabilities

Failure to record an accrued liability causes a company to:

Tyler Company paid $1,500 cash to replace a wheel on equipment sold under warranty. The entry to record the payment would be to:

Liabilities are classified on the balance sheet as current or:

If at the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year:

The current ratio is current assets:

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

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid at maturity of the note is:

When a business receives cash from a customer before earning the revenue, they have a(n) :

The journal entry to record payroll:

Monthly sales were $200,000. Warranty costs are estimated at 4% of monthly sales. In the month of sale, the company should record a credit to:

At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:

Omaha Bank lends Nebraska Paper Company $100,000 on January 1. Nebraska Paper Company signs a $100,000, 8%, 6-month note. The entry made by Nebraska Paper Company on January 1 to record the proceeds and issuance of the note would include:

Estimated warranty payable are reported on the balance sheet as:

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid for interest (only) at maturity of the note is:

All of the following are reported as current liabilities EXCEPT:

The journal entry to record accrued interest on a short-term note payable must include a debit to:

Which of the liability accounts below is usually NOT an accrued liability:

The accounting principle requiring that a company record the warranty expense in the same period that it records sales revenue is the:

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The entry made by Canton Furniture Company on December 31 to record the accrued interest on the note would be: