SB 7 Liabilities

Warranties normally ______.

cover a specific time period guarantee repair or replacement are based on estimates

Recognizing accrued interest expense ______.

decreases net income is a claims exchange transaction

In a note containing the terms of a lending transaction, the party borrowing the money may be called the ______.

maker issuer

When a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increases by ______ the amount of revenue.

more than

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the ______.

sales tax liability account increases by $120 cash account increases by $2,120

Issuing a note to borrow money affects the ______.

statement of cash flows balance sheet

Paying off a sales tax liability affects the ______.

statement of cash flows balance sheet

Paying off the principal balance of a note payable affects the ______.

statement of cash flows balance sheet

Remitting sales tax (paying cash to the tax authorities), ______

affects the statement of cash flows does not affect the income statement

James Company borrowed $40,000 on a one-year notes payable at 8%. Interest and principal are to be repaid at the end of the note term. If the note was issued on October 1 of Year 1, the amount of accrued interest on the December 31, Year 1 financial statements is ______.

$800 Reason: $40,000 × 8% × (3 ÷ 12)

A potential obligation arising from a past event is called a(n) ___________ liability.

Blank 1: contingent

The maker of a promissory note is sometimes called the

Blank 1: issuer

True or false: A company sold merchandise under warranty in Year 1. The merchandise was returned for a warranty repair in Year 2. The company recognized warranty expense for this item in both years.

False

Which of the following statements regarding contingent liabilities is true? (Select all that apply.)

The amount or existence of a contingent liability depends on some future event. For reporting purposes, contingent liabilities are sorted into three categories depending on the likelihood of their becoming actual liabilities. A contingent liability is a potential obligation arising from a past event.

Jack Company issued a $12,000 note payable on September 1, Year 1 for a one year term at 5% interest. The company prepares financial statements on December 31 of each years. In Year 2, Jack will recognize ______.

a cash outflow from financing activities of $12,000 a decrease in total liabilities of $12,000 $400 of interest expense a cash outflow from operating activities of $600

A company recorded an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This event could have been due to ______.

borrowing money with a two year term to maturity

What type of interest rate remains constant during the term of the loan?

fixed

Warranty obligations ______.

have uncertain timing and amounts are reported in financial statements

Payments on installment loans ______.

include a repayment of a portion of the principal balance include a payment for interest

Recognizing a warranty expense affects the ______.

income statement balance sheet

Recognizing accrued interest expense affects the ______.

income statement balance sheet