Chapter 13 accounting multiple choice
To record an asset retirement obligation (ARO), the cost associated with the ARO is
included in the carrying amount of the related long-lived asset.
A contingent liability
is the result of a loss contingency
The ratio of current assets to current liabilities is called the
current ratio
Which of the following best describes the accounting for assurance-type warranty costs?
Expensed based on estimate in year of sale
Which of the following statements is false?
FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority
Which of the following is not considered a part of the definition of a liability?
Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities
Which of the following is not a correct statement about sales taxes?
Sales taxes are an expense of the seller
Which of the following situations may give rise to unearned revenue?
Selling magazine subscriptions
Under what conditions is an employer required to accrue a liability for sick pay?
Sick pay benefits vest
Which of the following taxes does not represent a common employee payroll deduction?
State unemployment taxes
What does the current ratio inform you about a company?
The company's liquidity
An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?
The difference between the cost of the video game and the cash received is recognized as premium expense
What is a discount as it relates to zero-interest-bearing notes payable?.
The discount represents the cost of borrowing.
Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
accrued
The ability to consummate the refinancing of a short-term obligation may be demon- strated by
all of these answers are correct: actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued, entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis, actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued
Accrued liabilities are disclosed in financial statements by
appropriately classifying them as regular liabilities in the balance sheet
Stock dividends distributable should be classified on the
balance sheet as an item of stockholders' equity.
A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should
be accrued during the period when earned.
A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
Disclose the amount of the dividends in arrears
Which of these is not included in an employer's payroll tax expense?
Federal income taxes
Which of the following is a characteristic of a current liability but not a long-term liability?
Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities
Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?
Management indicated that they are going to refinance the obligation
Which of the following is a characteristic of an assurance-type warranty, but not a service-type warranty?
Warranty liability
If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
the number of financing institutions that refused to refinance the debt, if any
A company is legally obligated for the costs associated with the retirement of a long-lived asset
whether it hires another party to perform the retirement activities or performs the activities itself.
In accounting for compensated absences, the difference between vested rights and accumulated rights is that:
portion of FICA taxes and any union dues
Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2017, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Brown had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroad's offer. The Railroad's 2017 financial statements should include the following related to the incident:
recognition of a loss and creation of a liability for the value of the land.
In a service-type warranty, warranty revenue is
recognized equally over the warranty period
Accounting for product warranty costs under an assurance-type warranty
represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale
Of the following items, the only one which should not be classified as a current liability is
short-term obligations expected to be refinanced
Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty
should be reported as part current and part long-term.
A loss contingency can be accrued when
the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred
Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
the cause for action occurred during the accounting period covered by the financial statements
Which of the following is true about accounts payable? 1. Accounts payable are also called trade accounts payable. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.
1
Which of the following should not be included in the current liabilities section of the balance sheet?
All of these answers are correct: Trade notes payable, Short-term zero-interest-bearing notes payable, The discount on short-term notes payable
Which of the following may be a current liability?
All of these answers are correct: Withheld Income Taxes, Deposits Received from Customers, Deferred Revenue
Which of the following gives rise to the requirement to accrue a liability for the cost of compensated absences?
All of these answers are correct: payment is probable, employee rights vest or accumulate, amount can be reasonably estimated
Which of the following items is a current liability?
Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. A cash dividend payable to preferred stockholders
What condition(s) is/are necessary to recognize an asset retirement obligation?
Company has an existing legal obligation and can reasonably estimate the amount of the liability
Where is debt callable by the creditor reported on the debtor's financial statements?
Current liability.
Which of the following is not true about the discount on short-term notes payable?
The Discount on Notes Payable account should be reported as an asset on the balance sheet.
Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation?
The type of litigation involved
Why is the liability section of the balance sheet of primary importance to bankers?
To assist in understanding the entity's liquidity.
Each of the following are included in both the current ratio and the acid-test ratio except
inventory
Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
All of these are conditions for the accrual: the obligation relates to the rights that vest or accumulate, payment of the compensation is probable, the obligation is attributable to employee services already performed
Which of the following contingencies need not be disclosed in the financial statements or the related notes?
All of these must be disclosed: probable losses not reasonably estimate, environment liabilities that cannot be reasonably estimated, and guarantees of indebtedness of others
Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
Amount of loss is reasonably estimable and occurrence of event is probable
What is a contingency?
An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.
Which of the following terms is associated with recording a contingent liability?
As a disclosure only.
The amount of the liability for compensated absences should be based on 1. the current rates of pay in effect when employees earn the right to compensated absences. 2. the future rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future period
Either 1 or 2 is acceptable
Which of the following statements is correct?
None of these answers are correct: A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis, A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing, A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued
Which of the following is a current liability?
None of these answers are correct: A long-term debt maturing currently, which is to be paid with cash in a sinking fund, A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue, A long-term debt maturing currently, which is to be converted into common stock
Which of the following is an example of a contingent liability?
Obligations related to product warranties
Which of the following is not an acceptable treatment for the presentation of current liabilities?
Offsetting current liabilities against assets that are to be applied to their liquidation
Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2017. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
Operating expense of $800,000 and liability of $800,000
What are compensated absences?
Paid time off
What is the relationship between current liabilities and a company's operating cycle?
Present values are used to measure certain liabilities
Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?
Subsequently refinance the obligation on a long-term basis.
How do you determine the acid-test ratio?
The sum of cash, short-term investments and net receivables divided by current liabilities
When is a contingent liability recorded?
When the future events are probable to occur and the amount can be reasonably estimated.
The numerator of the acid-test ratio consists of
cash, marketable securities, and net receivables
Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as
current liabilities
An account which would be classified as a current liability is
none of these answers are correct.: dividends payable in the form of a company's stock, accounts payable—debit balances, losses expected to be incurred within the next twelve months in excess of the company's insurance coverage
Liabilities are
obligations arising from past transactions and payable in assets or services in the future
Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
the minimum of the range
