acct3 chapter 9

To qualify as a capital lease, the terms of the lease must meet: A) at least one of the criteria established by GAAP. B) at least two of the criteria established by GAAP. C) all of the criteria established by GAAP. D) all but one of the criteria established by GAAP.

A) at least one of the criteria established by GAAP.

A company with a high current ratio does not have liquidity problems.

False - Normally, a high current ratio suggests good liquidity; however, a company with a high current ratio might still have liquidity problems if significant funds are tied up in assets that will not be easily converted into cash (such as a slow-moving inventory)

Trade accounts payable are generally incurred as a result of the purchase of goods and services in the normal course of business.

True

Which of the following transactions would usually cause accounts payable turnover to increase? a. Payment of cash to a supplier for merchandise previously purchased on credit. b. Collection of cash from a customer. c. Purchase of merchandise on credit. d. None of the above.

a. Payment of cash to a supplier for merchandise previously purchased on credit.

Jacobs Company borrowed 100,000 at 8 percent interest for three months. How much interest does the company owe at the end of three months? a. $8,000 c. $800 b. $2,000 d. $200

b. $2,000

The present value of annuity of $10,000 per year for 10 years discounted at 8% is what amount? a. $5,002 c. $53,349 b. $67,101 d. $80,000

b. $67,101

Your company borrowed $50,000 on September 30 by issuing a 6-month short-term note payable that bears simple interest of 12%. On December 31, the end of the accounting period, the required adjusting entry related to the note will include a debit to Interest Expense and a credit to Interest Payable for the accrued amount of: A) $1,500 B) $6,000 C) $3,000 D) $2,000

A) $1,500

Present Value of $1 Periods 8%/10%/12%/14% 1/0.9259/0.9091/0.8929/0.8772 2/0.8573/0.8264/0.7972/0.7695 3/0.7938/0.7513/0.7118/0.6750 4/0.7350/0.6830/0.6355/0.5921 Compute the present value of $5,000 to be received one year from today if the interest rate is 10%, compounded annually. A) $4,545.50 B) $5,050.00 C) $4,500.00 D) $5,500.00

A) $4,545.50

Current assets are $400,000 of the total assets of $1,000,000. Current liabilities are $200,000 of the total liabilities of $700,000. What is the current ratio? A) 2.00 B) 2.50 C) 1.43 D) 1.75

A) 2.00

Deferred revenues of $24,000 were received and properly recorded and entered in the ledger of the company. At the end of the accounting period, one-fourth of the deferred revenue had been earned, but unrecorded. The adjusting entry will require a: A) a debit to Unearned Revenues and a credit to Revenues for $6,000. B) a debit to Unearned Revenues and a credit to Cash for $6,000. C) a debit to Unearned Revenues and a credit to Accounts Payable for $6,000. D) a debit to Cash and credit to Revenues for $6,000.

A) a debit to Unearned Revenues and a credit to Revenues for $6,000.

Review the following: Probable: the chance that the future event or events will occur is high. Reasonably possible: the chance that the future event or events will occur is more than remote but less than likely (probable). Remote: the chance that the future event or event will occur is slight. Which of the following rules about contingent liabilities is NOT true? A) A contingent liability that can be estimated and is probable should be recorded. B) A contingent liability that cannot be estimated and is probable should be recorded. C) A contingent liability that cannot be estimated and is remote should not be recorded or disclosed. D) A contingent liability that can be estimated and is only reasonably possible should be disclosed but not recorded.

B) A contingent liability that cannot be estimated and is probable should be recorded.

On October 1, your company issued a mortgage note of $459,000 that requires monthly payments, excluding interest, of $3,000 at the end of each month, beginning October 31. On the December 31 balance sheet, the mortgage note will be reported as a: A) current liability of $27,000 and a long-term liability of $423,000. B) current liability of $36,000 and a long-term liability of $414,000. C) current liability of $9,000 and a long-term liability of $441,000. D) a long-term liability of $450,000.

B) current liability of $36,000 and a long-term liability of $414,000.

The estimated time of accrued vacation time for employees is $63,500 for the period. The required adjusting entry will include a: A) debit to Compensation Expense and a credit to Cash for $63,500. B) debit to Accrued Vacation Liability and a credit to Cash for $63,500. C) debit to Compensation Expense and a credit to Accrued Vacation Liability for $63,500. D) debit to Compensation Expense and a credit to Accounts Payable for $63,500.

C) debit to Compensation Expense and a credit to Accrued Vacation Liability for $63,500.

A current liability is a short-term obligation that A) will be paid within the current operating cycle. B) will be paid within one year of the balance sheet date. C) will be paid in the longer of periods (A) and (B). D) does not affect liquidity.

C) will be paid in the longer of periods (A) and (B).

Table A.4 - Present Value of Annuity of $1 Periods 8%/10%/12%/14% 1/0.9259/0.9091/0.8929/0.8772 2/1.7883/1.7355/1.6901/1.6467 3/2.5771/2.4869/2.4018/2.3216 4/3.3121/3.1699/3.0373/2.9137 Your grandmother has agreed to send you $14,000 a year for 4 years to help finance your college education. What is the present value of this annuity at a discount rate of 10%? A) $34,816.60 B) $56,000.00 C) $55,600.00 D) $44,378.60

D) $44,378.60

On January 2, 2006, a company buys new equipment and signs a note agreeing to pay $235,000 on December 31, 2007, The amount represents the cash equivalent price of the equipment plus interest for two years. Equipment should be debited and notes payable should be credited for $235,000.

False - In conformity with the cost principle, the cost of the equipment is its current cash equivalent price, which is the present value of the future payment.

A publisher who sells one-year, prepaid subscriptions to its monthly magazine does not need to defer revenue because the advance payments have already been received from customers

False - When a company collects cash before the related revenue has been earned, the cash is called dferred revenues; in other words, this revenue should be deferred. The publisher does not earn and should not record any revneu upon receipt of the advance subscription payments from its customers. Instead, the publisher earns and records revenue each time the monthly magazines are delivered to its customers.

A contingent liability that is material in amount and has at least a remote possibility of occurrence must be disclosed in a footnote to the financial statements

False - a contingent liability with only a remote possibility of occurrence does not need to be disclosed in the footnotes to the financial statements

When all or part of a company's long-term debt is due within the next year, it is reported as a noncurrent liability on the balance sheet and disclosed in the footnotes to the financial statements

False - long-term debt, or a portion therof, which is due within the next year, must be reported on the balance sheet as a current liability

Since compound interest problems involve more complex interest calculations, the simple interest formula cannot be used to compute interest expense.

False - the simple interest formula is used for all interest calculations, simple or compound. The rate and time are adjusted in compound interest calculations for compounding more frequently than annually.

Working capital is computed by subtracting liabilities from assets

False - working capital is computed by subtracting current liabilities from current assets

Companies generally use long-term debt to finance long-lived assets, matching the life of the asset to the term of the debt

True

Current liabilities are likely to be satisied with current assets.

True

Which of the following statements regarding the accounts payable turnover ratio is not correct? a. The accounts payable turnover ratio measures how quickly management is paying trade accounts. b. A high ratio normally suggests that a company is not paying its suppliers in a timely manner. c. A low ratio would raise questions concerning a company's liquidity. d. The accounts payable turnover ratio is subject to manipulation. e. All of the above statements are correct.

b. A high ratio normally suggests that a company is not paying its suppliers in a timely manner.

Working capital is computed by a. subtracting current assets from current liabilities b. subtracting current liabilities from current assets c. dividing current assets by current liabilities d. dividing current liabilities by current assets e. dividing current liabilities by noncurrent liabilities

b. subtracting current liabilities from current assets

Company X has borrowed $100,000 from the bank to be repaid over the next five years, with payments beginning next month. Which of the following best describes the presentation of this debt in the balance sheet as of today (the date of borrowing)? a. $100,000 in the long-term liability section. b. $100,000 plus the interest to be paid over the five-year period in the long-term liability section. c. A portion of the $100,000 in the current liability section and the remainder of the principal in the long-term liability section. d. A portion of the $100,000 plus interest in the current liability section and the remainder of the principal plus interest in the long-term liability section.

c. A portion of the $100,000 in the current liability section and the remainder of the principal in the long-term liability section.

A company is facing a class-action lawsuit in the upcoming year. It is possible, but not probable, that the company will have to pay a settlement of approximately $2,000,000. How would this fact be reported in the financial statements to be issued at the end of the current month? a. $ 2,000,000 in the current liability section. b. $ 2,000,000 in the long-term liability section. c. In a descriptive narrative in the footnote section. d. None because disclosure is not required.

c. In a descriptive narrative in the footnote section.

The current ratio is computed by: a. subtracting current assets from current liabilities. b. subtracting current liabilities from current assets. c. dividing current assets by current liabilities d. dividing current liabilities by current assets. e. dividing current liabilities by noncurrent liabilities

c. dividing current assets by current liabilities

Deferred revenues represent a liability because: a. No cash has changed hands b. collection is uncertain. c. gooods and services have been paid for, but not yet provided to the customer. d. the company is transferring them to another period for tax reasons e. the customer may someday return items purchased for a refund.

c. gooods and services have been paid for, but not yet provided to the customer.

When a liability is first recorded, it is: a. reported as a current liability b. reported as a long-term liability c. measured in terms of its current cash equivalent, which is the cash amount a creditor would accept to settle the liability immediately. d. only recorded if it must be paid within the current operating cycle or one year, whichever is longer. e. all of the above.

c. measured in terms of its current cash equivalent, which is the cash amount a creditor would accept to settle the liability immediately.

Interest expense is computed by multipying a. the face value of the note by the annual percentage rate b. the face value of the note by the annual interest rate by the number of days outstanding c. the face value of the note by the annual interest rate by the time period for the loan (expressed as a portion of the year that the loan has been outstanding) d. the face value of the note by the annual interest rate divided by 365 e. the face value of the note by the annual interest rate divided by 360

c. the face value of the note by the annual interest rate by the time period for the loan (expressed as a portion of the year that the loan has been outstanding)

The present value of a known future amount a. will always be more than the future amount b. will be equal to the future amoutn c. will always be less than the future amount d. may be greater than or less than the future amount, depending on the interest rate used e. may be greater than or less than the future amount, depending on the amount of time in between.

c. will always be less than the future amount

Which of the following best describes accrued liabilities? a. Long-term liabilities. b. Current amounts owed to suppliers of inventory. c. Current liabilities to be recognized as revenue in a future period. d. Current amounts owed to various parties excluding suppliers of inventory.

d. Current amounts owed to various parties excluding suppliers of inventory.

Fred wants to save enough money each year so that he can purchase a sports car in January 2011. Fred receives a large bonus from his employer every December 31. He anticipates that the car will cost $54,000 on January 1, 2011. Which of the following will Fred need to calculate how much he must save each December 31? a. The anticipated interest rate and the present value of $1 table. b. The anticipated interest rate and the future value of $1 table. c. The anticipated interest rate and the present value table for annuities. d. The anticipated interest rate and the future value table for annuities.

d. The anticipated interest rate and the future value table for annuities.

An annuity is a. a series of annual payments of the same amount. b. any group of payments, equally spaced c. any payments to a beneficiary from a fund set aside for that purpose d. a series of consecutive equal payments, equally spaced, with the same implicit interest rate each period e. annual payments of equal amounts at a fixed interest rate

d. a series of consecutive equal payments, equally spaced, with the same implicit interest rate each period

In order to be recorded as a liability on the balance sheet, an item must be a. reasonably possible and subject to estimate b. probable. c. remote, but subject to estimate d. probably, and subject to estimate e. all of the above

d. probably, and subject to estimate

The university spirit organization needs to buy a car to travel to football games. A dealership in Lockhart has agreed to the following terms: $4,000 down plus 20 monthly payments of $750. A dealership in Leander will agree to a $1,000 down payment plus 20 monthly payments of $850. The local bank is currently charging an annual interest rate of 12% for car loans. Which is the better deal, and why? a. The Leander offer is better because the total payments of $18,000 are less than the total payments of $19,000 to be made to the Lockhart dealership. b. The Lockhart offer is better because the cost in terms of present value is less than the present value cost of the Leander offer. c. The Lockhart offer is better because the monthly payments are less. d. The Leander offer is better because the cash down payment is less. e. The Leander offer is better because the cost in terms of present value is less than the present value cost of the Lockhart offer.

e. The Leander offer is better because the cost in terms of present value is less than the present value cost of the Lockhart offer.

A contingent liability a. is dependent on another company in order to occur b. will result from a future event c. cannot be estimated d. is only remotely possbile. e. is a potential liability that has arisen because of a past event or transaction.

e. is a potential liability that has arisen because of a past event or transaction.

A contingent liability that cannot be reasonably estimated a. may be recordded as a balance sheet item or disclosed in a footnote to the financial statements, at the discretion of management b. may be disclosed in a footnote to the financial statements at the discretion of the management c. need not be disclosed in the footnotes to the financial statements d. must be reported as a liability on the balance sheet e. requires disclosure in a footnote to the financial statements if it is at least reasonably possible

e. is a potential liability that has arisen because of a past event or transaction.