Chapter 8 Acct

What is a current liability?

Account Payable, A contingent liability that is probable of occurring within one year of the balance sheet date and is reasonably estimable, Current portion of long-term debt, Sales tax collected from customers.

T/F: In a classified balance sheet, we categorize all liabilities as current.

False (Liabilities may be classified as either current or long-term.)

The current portion of long-term debt is:

The amount that will be paid within one year of the balance sheet date.

The Environmental Protection Agency (EPA) is in the process of investigating a possible water contamination issue at the manufacturing facility of Northwest Forest Products. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement is estimated to be $25 million. Determine how the estimated cost of the settlement will affect the current financial statements.

The potiential loss and liability should not be recorded but should be disclosed in the notes to the financial statements.

T/F: A company is said to be liquid if it has sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts

True

T/F: A contingent liability is an existing, uncertain situation that might result in a loss.

True

T/F: A liability is an obligation of a company to transfer some economic benefit in the future.

True

T/F: Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit.

True

T/F: Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs.

True

T/F: Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments.

True

T/F: Given a choice, most managers would choose to record an obligation as long-term rather than current.

True

T/F: If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency.

True

T/F: If the likelihood of loss is remote, disclosure of a contingency usually is not required.

True

T/F: Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan.

True

T/F: Sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government

True

T/F: The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities.

True

T/F: The adjusting entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability

True

T/F: Typically, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year.

True

T/F: When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable.

True

T/F: When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable.

True

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

When the equipment is sold

On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company should report interest payable on December 31, 2024, in the amount of:

$1,000 ($100,000 × 6%) × 2/12 = $1,000

Carpenter Incorporated estimates warranty expense at 3% of sales. Sales during the year were $8 million and warranty expenditures during the year were $54,000. What was the balance in the Warranty Liability account at the end of the year?

$8 million × 3% = $240,000;$240,000 − 54,000 = $186,000

What is a disclosure note only?

A contingent liability that is reasonably possible of occurring within one year of the balance sheet date and is reasonably estimable.

Which of the following statements regarding liquidity ratios is true?

A high working capital generally indicates the ability to pay current liabilities on a timely basis.

The current portion of long-term debt should be:

Reported as a current liability on the balance sheet.

Which of the following is not a current liability?

A note payable due in 2 years.

On December 2, 2023, Quebecor Printing received cash from customers for online subscriptions to begin in 2024. What would be the appropriate journal entry at the time cash was received on December 2, 2023?

Debit Cash Credit Deferred Revenue

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be:

Disclosed and reported as a liability.

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be:

Disclosed, but not reported as a liability.

T/F: We record interest expense in the period in which we pay it, rather than in the period we incur it.

False (Interest expense is recorded in the period incurred, not in the period in which we pay it)

On July 1, Bahama Excursions issues a $120,000, eight-month, 6.25% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjusting entry on December 31?

Interest Expense: $3,750 ($120,000*6,25%*6/12)

Sales taxes collected by a company on behalf of the state and local governments are recorded as a(n):

Liability

Deferred Revenues is a:

Liability account

A company's liquidity refers to its ability to:

Pay currently maturing debts.