Chapter 8 Quiz

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the estimated warranty liability reported in the balance sheet this year?

$25,000.

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest expense for the year ended December 31, 2022?

$4.5 million.

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

A debit to a liability and a credit to a revenue account.

Which of the following is reported as a current liability?

Current portion of long-term debt.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Debit Cash, $5,000; Credit Notes Payable, $5,000.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:

Debit interest expense and credit interest payable, $4,000.

Which of the following increases an employer's payroll costs?

Employer's FICA contribution.

Which of the following statements regarding liabilities is true?

Liabilities represent probable future sacrifices of benefits.

Current liabilities

May include contingent liabilities.

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

$0.

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000.

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

$450,000

Which of the following represents a characteristic of a liability?

All of these are characteristics of a liability.

Which of the following is not a current liability?

An unused line of credit.

The acid-test ratio is

Cash, current investments, and accounts receivable divided by current liabilities.

The current ratio is:

Current assets divided by current liabilities.

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

Disclosed but not reported as a liability.

The city of Summerton has a sales tax rate of 8%. A local convenience store sells merchandise, and the customer pays a total of $38.34. What effect does this transaction have on total liabilities?

Increase of $2.84.

Which of the following is not a characteristic of a liability?

It must be payable in cash.

Which of the following statements regarding liabilities is not true?

Liabilities result from future transactions.

Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):

Liability.

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?

No asset or gain is reported.

Assume that Airline Accessories' current ratio is greater than 1. Which of the following will decrease its current ratio?

Purchasing inventory on account.

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable.

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

Interest expense is recorded in the period in which:

The interest is incurred.

Which of the following is not deducted from an employee's salary?

Unemployment taxes.

We record interest expense on a note payable in the period in which

We incur interest.

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

debit to an asset and a credit to a liability account.

In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

one; one

If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% interest, how much interest expense should it record by December 31 of that same year?

$1.5 million.

Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will have to pay an estimated amount in the range of $75,000 to $175,000, with all amounts in the range considered equally likely. How should Western report this litigation?

As a liability for $75,000 with disclosure of the range.

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

Debit Notes Receivable, $5,000; Credit Cash, $5,000.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio?

Increase the current ratio and increase the acid-test ratio.

Which of the following is not included in calculating the acid-test ratio?

Inventory.

Express Jet borrows $100 million on October 1, 2021, for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31, 2021?

$1.5 million.

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

$2,000.

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?

$400.

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?

$8,000

Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

As a liability for $500,000 with disclosure of the range.

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

Disclosed but not reported as a liability.

Which of the following is paid by both the employee and the employer?

FICA taxes.

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

No change to the current ratio and decrease the acid-test ratio.

A contingent liability that is probable and can be reasonably estimated must be

Recorded.

Assuming a current ratio of 1.00 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?

No change to the current ratio and decrease the acid-test ratio.