Chapter 8

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? $0. $4.5 million. $1.5 million. $6 million.

$1.5 million.

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? $4.5 million. $3.0 million. $1.5 million. $0.

$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? $0. $2,000. $8,000. $10,000.

$2,000.

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? $30,000. $25,000. $10,000. $ 5,000.

$25,000.

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. $25,000. $10,000. $ 5,000.

$30,000.

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? $0. $4.5 million. $1.5 million. $6 million.

$4.5 million.

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. $320. $720. $0.

$400.

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? $300,000 $450,000 $150,000 $600,000

$450,000

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. What is the amount of interest expense to report in 20X2? $0 $12,000 $8,000 $24,000

$8,000

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as: A debit to a revenue and a credit to a liability account. A debit to a revenue and a credit to an asset account. A debit to an asset and a credit to a revenue account. A debit to a liability and a credit to a revenue account.

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

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as: A debit to an asset and a credit to a liability account. A debit to a revenue and a credit to an asset account. A debit to an asset and a credit to a revenue account. A debit to a liability and a credit to a revenue account.

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

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. As a liability for $125,000 with disclosure of the range. As a liability for $175,000 with disclosure of the range. As a disclosure only. No liability is reported.

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

The current ratio is: Current assets divided by current liabilities. Current liabilities divided by current assets. Cash, short-term investments, and accounts receivable divided by current liabilities. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Current assets divided by current liabilities.

Which of the following is reported as a current liability? Notes payable due in two years. Notes payable due in 15 months. Current portion of long-term debt. Unused line of credit.

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

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. Debit interest expense and credit cash, $4,000. Debit interest expense and credit interest payable, $12,000. Debit interest expense and credit cash, $12,000.

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

Which of the following increases an employer's payroll costs? FICA withholding from the employee. State income tax. Federal income tax. Employer's FICA contribution.

Employer's FICA contribution.

Which of the following is paid by both the employee and the employer? FICA taxes. Federal unemployment taxes. State unemployment taxes. Personal income taxes.

FICA taxes.

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 $3.07. Decrease of $38.34. Increase of $2.84. No effect.

Increase of $2.84.

Which of the following is not included in calculating the acid-test ratio? Accounts receivable. Current investment in marketable securities. Accounts payable. Inventory.

Inventory.

Which of the following statements regarding liabilities is true? Liabilities are always payable in cash. Liabilities are all reported as current in the balance sheet. Liabilities result from future transactions. Liabilities represent probable future sacrifices of benefits.

Liabilities represent probable future sacrifices of benefits.

Which of the following statements regarding liabilities is not true? Liabilities can be for services rather than cash. Liabilities are reported in the balance sheet for almost every business. Liabilities result from future transactions. Liabilities represent probable future sacrifices of benefits.

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. Expense. Asset. Revenue.

Liability.

Current liabilities May include contingent liabilities. Include obligations payable within one year or one operating cycle, whichever is shorter. Can be satisfied only with the payment of cash. Are preferred by most companies over long-term liabilities.

May include contingent liabilities.

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? As an asset for $125,000. As a gain for $125,000. As both an asset and a gain for $125,000. No asset or gain is reported.

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. Collecting an accounts receivable. Issuing common stock for cash. Purchasing equipment, signing a long-term note.

Purchasing inventory on account.

A contingent liability that is probable and can be reasonably estimated must be Disclosed. Not disclosed. Recorded. Paid.

Recorded.

Which of the following is true in comparing the current ratio with the acid-test ratio? Sometimes the current ratio will be larger and sometimes the acid-test ratio will be larger. The denominator in the ratios will differ. The current ratio will always be at least as large as the acid-test ratio. The acid-test ratio will always be at least as large as the current ratio.

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

Which of the following is not deducted from an employee's salary? FICA taxes. Unemployment taxes. Income taxes. Employee portion of insurance and retirement payments.

Unemployment taxes.

We record interest expense on a note payable in the period in which We pay cash for interest. We incur interest. We pay cash and incur interest. We pay cash or incur interest.

We incur interest.

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

one; one

Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record? Debit Cash, $5,000; Credit Notes Receivable, $5,000. Debit Notes Receivable, $5,000; Credit Cash, $5,000. Debit Cash, $5,000; Credit Notes Payable, $5,000. Debit Notes Payable, $5,000; Credit Cash, $5,000.

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

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

Interest expense is recorded in the period in which: The interest is paid. The interest is incurred. The interest is paid or incurred. The interest is paid and incurred.

The interest is incurred.

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? $2.0 million. $1.8 million. $1.5 million. $0.

$0.

Which of the following represents a characteristic of a liability? A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events. All of these are characteristics of a liability.

All of these are characteristics of a liability.

Which of the following is not a current liability? Notes payable due in six months. Current portion of long-term debt. An unused line of credit. Deferred revenue to be earned in nine months.

An unused line of credit.

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 $700,000 with disclosure of the range. As a liability for $600,000 with disclosure of the range. As a liability for $500,000 with disclosure of the range. As a disclosure only. No liability is reported.

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 likely, a contingent liability should be: Disclosed but not reported as a liability. Disclosed and reported as a liability. Neither disclosed or reported as a liability. Reported as a liability but not disclosed.

Disclosed but not reported as a liability.

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. Disclosed and reported as a liability. Neither disclosed nor reported as a liability. Reported as a liability but not disclosed.

Disclosed but not reported as a liability.

Which of the following is not a characteristic of a liability? It represents a probable, future sacrifice of economic benefits. It must be payable in cash. It arises from present obligations to other entities. It results from past transactions or events.

It must be payable in cash.

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? Increase the current ratio and increase the acid-test ratio. No change to the current ratio and decrease the acid-test ratio. Decrease the current ratio and decrease the acid-test ratio. Increase the current ratio and decrease the acid-test ratio.

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

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as Sales tax expense. Sales tax revenue. Sales tax receivable. Sales tax payable.

Sales tax payable.