Chapter 13 Study Guide

A current liability results when a company collects sales taxes from customers.

TRUE

Because current liabilities tend to be liquidated within a short period of time, present value techniques are not normally applied.

TRUE

If sick pay benefits accumulate but do not vest, accrual is permitted but not required.

TRUE

The amount of unremitted employee and employer social security tax on gross wages paid should be reported by the employer as a current liability.

TRUE

Use of the cash basis method in accounting for product warranty costs is required when a company is unable to make a reasonable estimate of the amount of warranty obligations at the time of sale.

TRUE

When a company issues a zero-interest-bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable.

TRUE

Hegel Corporation has $1,500,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? A. $1,000,000. B. $1,500,000. C. $1,500,000. D. $0.

A

Notes payable are only classified as short-term.

FALSE

A liability has three essential characteristics, which of the following is not one of them? A. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. B. The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of their normal business operation. C. The liability must be an unavoidable obligation. D. The transaction or other event creating the obligation must have already occurred.

B

In accounting for compensated absences, the difference between vested rights and accumulated rights is: A. vested rights are normally for a longer period of employment than are accumulated rights. B. vested rights are not contingent upon an employee's future service. C. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. D. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

B

Nietzsche Corn Flakes Company offers its customers a silver cereal spoon if they send in 5 boxtops from Nietzsche Corn Flakes boxes and $1.00. The Company estimates that 75% of the boxtops will be redeemed. In 2014 the Company sold 450,000 boxes of Corn Flakes and customers redeemed 220,000 boxtops receiving 44,000 spoons. If the spoons cost Nietzsche Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2014? A. $23,500 B. $35,250 C. $58,750 D. $82,250

B

Which of the following would not constitute evidence concerning the ability to consummate the refinancing of a short-term obligation? A. Actual refinancing after the balance sheet date by issuance of a long-term obligation. B. A statement by the board of directors that refinancing is inevitable. C. Entering into a financing agreement that clearly permits refinancing on a long-term basis with terms that are readily determinable. D. Actual refinancing after the balance sheet date by issuance of equity securities.

B

The Diana Co. issues a $208,000 6-month, zero-interest-bearing note to the Tang National Bank. The present value of the note is $200,000. The entry to record this transaction by Diana Co. would include: A. a credit to Notes Payable of $200,000. B. a debit to Discount on Notes Payable of $8,000. C. a credit to Discount on Notes Payable of $8,000. D. a debit to cash of $208,000.

B Cash 200,00 Discount on NP 8,000 Notes Payable 208,000

Current liabilities are: A. liabilities that are due and payable on the balance sheet date. B. liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year. C. due within one year or one operating cycle, whichever is longer. D. void of notes payable, as notes are always long-term.

C

If a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be reflected by which of the following? A. Record the loss and the related liability, but at an amount that is significantly conservative. B. Record the loss and the related liability, but indicate in a footnote to the financial statements that this loss may not occur because one of the criteria may not be met. C. Disclose in the footnotes to the financial statements (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. D. Do not record the contingency or make mention of it in the financial statements because it lacks meeting the required criteria.

C

Which of the following is not acceptable treatment for the presentation of current liabilities? A. Listing current liabilities in order of maturity. B. Listing current liabilities according to amount. C. Offsetting current liabilities against assets that are to be applied to their liquidation. D. Showing current liabilities immediately below current assets to obtain a presentation of working capital.

C

Which of the following loss contingencies is normally accrued? A. Pending or threatened litigation. B. General or unspecified business risk. C. Obligations related to product warranties. D. Risk of property loss due to fire.

C

In accounting for compensated absences, a company following GAAP would account for the liability using the:

Cash Basis = no Accrual Basis = yes

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except: A. a general description of the financing arrangement. B. the terms of the new obligation incurred or to be incurred. C. the terms of any equity security issued or to be issued. D. the number of financing institutions that refused to refinance the debt, if any.

D

Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, and unfavorable outcome is highly probable, and: A. the Marx Company admits guilt. B. the court will decide the case within one year. C. the damages appear to be material. D. the cause for action occurred during the accounting period covered by the financial statements.

D

The currently maturing portion of long-term debt should be classified as a current liability if: A. the debt is to be converted into capital stock. B. the debt is to be refinanced on a long-term basis. C. the funds used to liquidate it are currently classified as a long-term investment on the balance sheet. D. the portion so classified will be liquidated within one year using current assets.

D

Use of the accrual method in accounting for product warranty costs: A. is required for federal income tax purposes. B. is frequently justified on the basis of expediency when warranty costs are immaterial. C. finds the expense account being charged when the seller performs in compliance with the warranty. D. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

D

Williams Co., which has a taxable payroll of $300,000, is subject to the FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Williams Co.? A. $35,100 B. $24,600 C. $12,000 D. $ 8,400

D

Wilson Company is involved in a litigation suit concerning the clean-up of old underground oil storage tanks on property it sold to a housing development company five years ago. The attorneys for Wilson Company cannot give a best estimate for the probable liability; however, the attorneys state that the liability to Wilson Company will probably fall within a range of $2 million to $10 million. According to the SEC, what should Wilson Company record with regards to this environmental liability? A. No entry is required. B. A loss and liability of $10 million. C. A loss and liability of $6 million. D. A loss and liability of $2 million.

D

A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets.

FALSE

Current liabilities are generally measured by the present value of the future outlay of cash required to liquidate them.

FALSE

Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet.

FALSE

GAAP requires that a liability always be accrued for the cost of compensation for future absences of full-time employees.

FALSE

One factor to consider in determining whether a liability should be recorded with respect to threatened litigation is the effect such a liability will have on a reported financial condition.

FALSE

Preferred dividends in arrears should be recognized as a liability in the balance sheet.

FALSE

The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer.

FALSE

The term "loss contingency," as used in accounting, refers to situations that result in a liability after the passage of a specified period of time.

FALSE

Vested rights exist when an employer has an obligation to make payment to an employee but not if the employee is terminated.

FALSE

When a company offers premiums to its customers in return for coupons, the cost of the premiums should be charged to expense when the premiums are distributed to customers.

FALSE

When there is an absence of insurance, a firm should estimate the amount of possible future losses and record a liability at the date of the financial statements.

FALSE

With respect to the following loss contingencies, would a liability normally be accrued or not accrued?

Loss to Receivable Collection = accrued Loss to Product Warranty = accrued

On October 1, 2013, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable on October 1, 2014. How will the note payable and the related interest be classified in the December 31, 2013, balance sheet?

Note Payable = current liability Accrued Interest = current liability

A short-term obligation expected to be refinanced may be excluded from current liabilities if (a) a company intends to refinance the obligation on a long-term basis, and (b) the company demonstrates an ability to consummate the refinancing.

TRUE

If a loss contingency is likely to occur and its amount can be reasonably estimated, it should be recorded in the accounts.

TRUE

If a short-term obligation is excluded from current liabilities because of refinancing, a footnote to the financial statements should be included disclosing the particulars of the refinancing arrangement.

TRUE

The currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long-term asset such as a sinking fund.

TRUE

The number of outstanding premium offers that will be presented for redemption must be estimated in order to reflect the existing current liability and to match costs with revenues.

TRUE

To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements.

TRUE

When refinancing on a long-term basis is expected to be accomplished through the issuance of equity securities, it is not appropriate to include the short-term obligation in owners' equity.

TRUE

A contingency is defined by the accounting profession as: A. an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. B. an existing condition, situation, or set of circumstances involving uncertainty as to a possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. C. an event that will result in the requirement to record a liability if it can be shown that an asset is in danger of being lost to the enterprise and the company has no ability to avoid the loss. D. an uncertain event that must have a reasonable chance of occurrence and the amount must be reasonably determinable by the company.

A

An enterprise is required to exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a long-term basis and: A. the enterprise can demonstrate the ability to consummate the refinancing. B. the obligation is not a part of normal operations. C. it can demonstrate that a negative effect on working capital will result if it is not reclassified. D. the interest rate on the long-term obligation is not above the prime rate.

A