ACCOUNTING 304 CH 13

A short-term obligation can be included with current liabilities if the company intends to refinance it and can demonstrate the ability to consummate the refinancing

False

GAAP requires the use of the estimated future rate when calculating compensated absences?

False

Wyatt Industries intends to retire $2,500,000 in short-term debt using proceeds from the sale of 85,000 shares of common stock. The stock sells for $20 per share. How much of its short-term debt can Wyatt exclude from current liabilities if the stock sale took place after the balance sheet date but before short-term debt is due or the balance sheet is issued?

$0 (As of the balance sheet date, refinancing had not occurred.)

Harry's Menswear operates as a retail store in a state with a retail sales tax of 5%. Harry's does not segregate its sales tax from the amount of sale at the time of sale. During the month of June, Harry's credits $262,500 to the Sales Revenue account. How much sales tax must Harry's pay for the month of June?

$12,500 ($262,500/105 * 5)

Chic Boutique operates as a retail store in a state with a retail sales tax of 7%. Chic Boutique does not segregate its sales tax from the amount of sale at the time of sale. During the month of May, Chic Boutique credits $251,450 to the Sales Revenue account. How much sales tax did Chic Boutique collect during the month of May?

$16,450 ($251,450/107 * 7)

On March 1, 2020, First National Bank agrees to lend $25,000 to JT Engineering if JT signs a $25,000, 6%, four-month note. At maturity on July 1, 2020, how much must JT pay First National?

$25,500 ($25,000 + $500) ($25,000 * 6% * 4/12 = $500)

On February 1, 2020, Fort Wells Bank agrees to lend $48,000 to RL Enterprises if RL signs a $48,000, 6.5%, six-month note. If RL prepares financial statements monthly, what will its interest expense be each month?

$260 ($48,000 * 6.5% * 6/12 = $1,560) ( $1560/6 = $260)

On April 1, Alpha Industries borrowed $320,000 by signing a $320,000, 12 percent, 12-month note. The interest recognized on this note for the period from April 1 to December 31 is equal to

$28,800 ( $320,000 * 12% * 9/12)

On June 1, O'Dell Publishing sells 6,000 annual subscriptions to its monthly magazine. Subscriptions cost $125 each. Assuming no other subscriptions are sold, how much unearned revenue must O'Dell report on December 31?

$312,500 (Annual Subscriptions: 6,000 * $125 = $750,000) (June 1 - December 31 = 7/12) ($750,000 * 7/12 = $437,500) ( $750,000 - $437,500 = $312,500)

On March 1, 2020, First National Bank agrees to lend $85,000 to JT Engineering if JT signs an $85,000, 5.5%, four-month note. If JT prepares financial statements monthly, what will its interest expense be each month? Round to the nearest dollar.

$390 ($85,000 * 5.5% * 4/12 *4)

On September 1, 2020, Foxtrot Tech issued a $1,800,000, 10% note payable to Elwood Bank, with three equal annual principal payments of $600,000. At the date of issue, Elwood's prime rate was 11%. Foxtrot Tech made its first interest and principal payment on September 1, 2021. How much accrued interest payable should Foxtrot Tech record on December 31, 2021?

$40,000 ($1,800,000 - $600,000 = $1,200,000) ($1,200,000 * 10% * 4/12)

Why are accumulated but undeclared dividends on cumulative preferred stock not recognized as a liability?

Because they are not considered an obligation until payment is authorized

Ahrens Automotive sells one-, two-, and three-year automobile service contracts for cash. Cash receipts from contracts are credited to unearned service contract revenues. At December 31, 2019, this account has a $720,000 balance before year-end adjustment. As of this date, Ahrens has $160,000 in contracts expiring during 2020; $250,000 expiring during 2021; and $115,000 expiring in 2022. Assuming contract costs are charged as incurred, how much unearned service contract revenues should Ahrens record on the December 31, 2019 balance sheet?

$525,000 ($720,000 + $160,000 + $250,000 + $115,000 = $1,245,000) ($1,245,000 - $720,000 = $525,000)

JT Engineering issues a 12-month, zero-interest-bearing note payable to First National Bank. If the face value of the note is $300,000 and the discount at the bank is 7%, what is the effective interest on the note?

7.53% ($300,000 * 7% = $21,000) ($300,000 - $21,000 = $279,000) ($21,000 / $279,000 = .0753 * 100 = 7.53)

Which of the following would be considered a current maturity of long-term debt?

A serial bond installment due in the next 12 months

The lag time between the acquisition of the title for inventory and the issuance of payment for the inventory gives rise to which of the following types of liability?

Accounts payable

In the event that a short-term obligation is refinanced on a long-term basis prior to the issuance of the financial statements but after the balance sheet date, how much of the short-term obligation can be excluded from current liabilities in the financial statements?

An amount not exceeding the proceeds from the new obligation

As of December 31, JT Engineering has a note payable totaling $160,000 with First National Bank. This is an interest-bearing, four-month note. How should the note be classified on JT's balance sheet?

As a current liability

How should a debt that is callable by the creditor be recorded on a company's financial statements?

As a current liability

Which of the following transactions would create an accounts payable liability for the purchasing company?

Charlie Industries purchases raw materials in March 2020. Materials are delivered in April 2020 with a 60-day extension of credit by the supplier.

Charlie Company leased a building to Delta Industries on January 1, 2020 for a 10-year term at $140,000 rent per year. On that date, Delta paid two-years rent and a security deposit of $280,000, for a total payment of $560,000. The security deposit will not be returned to Delta at lease expiration but will be applied to the last two years of rent. How much of the $560,000 should Charlie record as a current liability and how much as a long-term liability on its December 31, 2020 balance sheet?

Current liability of $140,000; long-term liability of $280,000

What is the proper accounting treatment or disclosure for three years of undeclared dividends on cumulative preferred stock?

Disclosure of the amount of the dividends in arrears

Which of the following scenarios involves a zero-interest-bearing note?

Echo Industries purchases inventory in October 2020. The inventory is paid for with a bank loan issued at present value, which comes due in April 2021.

On November 1, 2020, JT Engineering signs a $150,000, 4 percent, one-year note for which both principal and interest are payable on November 1, 2021. On the December 31, 2020 balance sheet, how should JT classify the note and the related interest?

It should classify the note payable as a current liability and the accrued interest as a current liability.

JT Engineering issues a $12,600, four-month, zero-interest-bearing note to First National Bank. If the present value of the note is $12,000, how should JT record the note?

It should credit $12,600 to Notes Payable and debit $600 to Discount on Notes Payable.

For the period, Alpha Industries credits $186,000 in combined sales revenue and sales taxes to its Sales Revenue account. Now, $14,880 in sales tax is due to the state. How should Alpha journalize this payment?

It should debit Sales Revenue $14,880 and credit Sales Taxes Payable $14,880.

A customer of Charlie Airlines takes a flight on June 20, 2020. She paid $900 for the flight on April 1, 2020. How should Charlie recognize the revenue associated with this customer's flight on June 20, 2020?

It should debit Unearned Ticket Revenue $900 and credit Passenger Revenue $900

Which of the following is a distinct characteristic of a current liability and not a long-term liability?

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

How does present value relate to the concept of liability?

Present values are used to measure certain liabilities.

Which of the following statements about liabilities is false?

Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued.

Which of the following statements about short-term obligations that will be refinanced on a long-term basis is true?

Such obligations must have contractual right to defer settlement more than one year.

In which of the following scenarios may a company exclude a short-term obligation from current liabilities?

The company must have a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.

Which of the following most accurately defines the term discount as it applies to a zero-interest-bearing note?

The discount represents the cost of borrowing.

Which of the following factors would be included in a company's evaluation of whether to record a liability for pending litigation?

The probability of an unfavorable outcome, The time period in which the underlying cause of action occurred, The ability to make a reasonable estimate of the amount of the loss

Which of the following statements about current liabilities is true?

They are due within one year or one operating cycle, whichever is longer

The present value of a zero-interest-bearing note payable equals the face value of the note at maturity minus the discount charged by the lender for the term of the note.

True

JT Engineering purchases 16,000 gadgets in May 2020. The gadgets are delivered in June 2020, and are paid for with a bank loan issued at present value. The loan will come due in September 2020. Which type of note is used to pay for these gadgets?

Zero-interest-bearing note

Under current generally accepted accounting principles, a loss contingency should be accrued when

the amount of loss is reasonably estimable and occurrence of event is probable.