ACCT206 Quiz Chapter 9

Madison Company issued an interest-bearing note payable with a face value of $25,200 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, what is the amount of cash flow from operating activities reported on Madison's Year 1 statement of cash flows?

$0 The $25,200 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.

On September 1, Year 1, West Company borrowed $28,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?

$560 Interest expense (September 1 through December 31) = $28,000 × 6% × (4 ÷ 12) = $560The fact that it was an 18-month note does not affect the Year 1 interest expense.

The following information is taken from the balance sheet of Atlanta Company: Current assets $720Current liabilities$600 Property, Plant & Equipment1,200 Noncurrent liabilities760 Total assets$1,920 Total liabilities$1,360

1.2 to 1 Current ratio = Current assets ÷ Current liabilities Current ratio = $720 ÷ $600 = 1.2 to 1

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000. What is the company's current ratio?

1.44 to 1 Current ratio = Current assets ÷ Current liabilities Current ratio = $8,650 ÷ $6,000 = 1.44 to 1

Which of the following describes the effect of remitting the sales tax to the tax authority?

Decreases liabilities. Remittance of sales tax decreases assets (cash) and decreases liabilities (sales tax payable).

Vogel Company purchased $8,000 of equipment by making a $500 down payment and issuing a note for the remainder. As a result of this event, assets increased by $8,000.

False Assets (equipment) increase by $8,000 and assets (cash) decreases by $500, for a net increase of $7,500. Liabilities (notes payable) increase by $7,500.

All lawsuits in which a company has been named a defendant should be either disclosed in the company's notes to the financial statements, or recognized as a liability on its balance sheet.

False If the likelihood of a future obligation arising is remote, which might be the case with a frivolous lawsuit, no liability need be recognized in the financial statements or disclosed in the notes to the statements.

Employers must withhold unemployment taxes from employee salaries.

False Unemployment tax is paid by the employer and is not withheld from employee salaries.

Sales tax is reported as revenue when it is collected, and reported as an expense when it is paid.

False When sales tax is collected, it is reported as a liability, which is decreased when the tax is paid. It has no effect on the income statement.

Which of the following is not an item deducted from salary expense to arrive at net pay?

Federal unemployment tax Federal unemployment tax is paid entirely by the employer; as such, it is not withheld from an employee's pay.

Which of the following items would most likely not be classified as a current asset?

Office equipment A current (short-term) asset is expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer. An operating cycle is defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash. Merchandise inventory, office supplies, and prepaid rent would be classified as current assets. Office equipment is not a current asset because it would be used for more than one year or one operating cycle.

Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet?

The outcome is probable and the amount can be reasonably estimated. A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If it is considered only reasonably possible, it is only disclosed in the notes to the financial statements.

When calculating interest expense on a 6-month note, multiply the principal by the interest rate, and then multiply by (6 ÷ 12).

True Interest rates are always expressed as annual rates, so it is necessary to multiply by 6 out of 12 months for a 6-month note.