MGMT 200 Chapter 8

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.

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 Payable, $5,000.

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.

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

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

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.

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.

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

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.

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

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

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

Inventory

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

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

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

Liability

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

Recorded

Interest expense is recorded in the period in which:

The interest is incurred

The current ratio is:

current assets divided by current liabilities

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

one;one