Intermediate Accounting Chapter 13 True/ False & MC

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. 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 the enterprise can demonstrate the ability to consummate the refinancing. The effect on working capital and the interest rate on the long-term obligation have nothing to do with the specific requirements for reclassifying the debt from current to long-term

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. A liability must meet the three characteristics noted in alternatives A, C, and D. The indication in alternative B that the obligation be liquidated using assets earned in the normal course of operations is not an essential characteristic. The funds used to liquidate a liability could come from borrowing.

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. The following entry would be made by Diana Co.: Cash 200,000 Discount on Notes Payable 8,000 Notes Payable 208,000

Which of the following would constitute 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 contractual 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. Short term obligations may be properly excluded from current liabilities if (a) the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date or (b) the company has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

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. Vested rights exist when an employer has an obligation to make payment to an employee even if his or her employment is terminated; thus, vested rights are not contingent on an employee's future service. Accumulated rights are those that can be carried forward to future periods if not used in the period in which they are earned. The length of time, the legality, or compensation involved are not characteristics which identify specific differences.

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. Current liabilities are obligations that mature within one year or the operating cycle, whichever is longer, and they are reasonably expected to require the use of current assets for their liquidation.

On October 1, 2019, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable on October 1, 2020. How will the note payable and the related interest be classified in the December 31, 2019, balance sheet? Note Payable Accrued Interest A. Current liability Noncurrent liability B. Noncurrent liability Current liability C. Current liability Current liability D. Noncurrent liability Noncurrent liability

C. Since these liabilities will be paid within one year from the December 31, 2016 balance sheet date, both the note payable and the related accrued interest payable should be classified as current liabilities.

In accounting for compensated absences, a company following GAAP would account for the liability using the: Cash Basis Accrual Basis A. Yes Yes B. Yes No C. No Yes D. No No

C. The accounting profession requires that a liability be accrued for the cost of compensation for future absences if all of the following conditions are met: 1. The employer's obligation relating to the employees' rights to receive compensation for future absences is attributable to employees' services already rendered. 2. The obligation relates to rights that vest or accumulate. 3. Payment of the compensation is probable. 4. The amount can be reasonably estimated.

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. The computation of the federal and state unemployment taxes for Williams Co. is as follows: State unemployment tax payment (.02 × $300,000) $6,000 *Federal unemployment tax (6.2% − 5.4%) ($300,000) 2,400 Total federal and state unemployment tax $8,400 *When employers display by their benefit and contribution experience that they have provided steady employment and thus receive a reduction in state unemployment taxes, they are still allowed the federal credit of 5.4% even though the effective state contribution rate is less than 5.4%.

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. The item would be classified as a current liability as long as it met the relevant criteria. The criteria include payment within one year or the operating cycle, whichever is longer, and payment made using assets classified as current.

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

False: A liability for the cost of compensation for future absences is required if the four following conditions are met: (a) the employee's services have already been rendered, (b) the obligation relates to rights that vest or accumulate, (c) payment is probable, and (d) the amount can be reasonably estimated.

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

False: A stock dividend distributable is liquidated using capital stock rather than assets. Thus, a stock dividend distributable should be classified in an entity's equity section.

(T/F) Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet.

False: Discount on Notes Payable is a contra account to Notes Payable and therefore is subtracted from Notes Payable on the balance sheet.

(T/F) 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: In addition to the "operating cycle or one year, whichever is longer" criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities.

(T/F) Notes payable are only classified as short-term

False: Notes payable may be classified as short-term or long-term, depending upon the payment due date.

(T/F) Preferred dividends in arrears should be recognized as a liability in the balance sheet.

False: Preferred dividends in arrears are not an obligation until formal action is taken by the board of directors authorizing the distribution of earnings (although a disclosure may be involved).

(T/F) A current liability results when a company collects sales taxes from customers.

True

(T/F) 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

(T/F) 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

(T/F) 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