ACT 210 - Chapter 8

Which of the following is an important criteria used to determine the reporting of a contingent liability?

The likelihood of future payment or loss

Which of the following is correct regarding gain contingencies?

They are recorded when the gain is known with certainty.

Deferred revenue is classified as

a liability

A(n) _______ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas a(n) _______ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity date.

account; note

The process of recording a cost by debiting a balance sheet account.

capitalization - debit an asset

An existing uncertain situation that might result in a loss depending on the outcome of a future event is a ________ liability.

contingent

Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to _______ liabilities

contingent

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should

credit notes payable $5,000.

Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a

credit to contingent liability for lawsuit $10,000.

Current maturities of long-term debt should be classified as ______ liabilities

current

Deferred revenues and sales tax payable typically are reported as _______ liabilities.

current

The ______ portion of long-term debt is the amount that will be paid within the next year.

current

Taxes collected for taxing authorities are recognized as

current liabilities

The portion of a long-term liability that will be paid within the next year is referred to and reported as the:

current portion of long-term debt

The cost of a plant asset less its salvage value.

depreciable cost

The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

depreciation

The process of recording a cost by debiting an income statement account.

expensing - debit an expense

Under GAAP, we do not record contingent ______ until the gain is known with certainty.

gain

The value of all favorable attributes that relate to a business enterprise.

goodwill

Obtaining a note payable for cash results in a(n) ______.

increase in assets and an increase in liabilities. (debit to cash, credit to notes payable)

An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.

revenue

A method in which an equal amount of depreciation is expensed each year of the asset's useful life.

straight-line method

A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.

trademark (trade name)

The Blooming Miracles Flower Shop bought a delivery van on January 1, 2017. The van cost $18,000 and had an expected salvage value of $3,000. The life of the van was estimated to be 5 years or 150,000 miles. The depreciable cost of the van is:

$15,000

Ralph charges a fee of $2,180 for services performed for a new client. Assuming that the fee includes 9% of sales tax, Ralph should credit sales tax payable for:

$180. (2180-(2180/1.09))

The Blooming Miracles Flower Shop bought a delivery van on January 1, 2017. The van cost $18,000 and had an expected salvage value of $3,000. The life of the van was estimated to be 5 years or 150,000 miles. Using the straight-line method of depreciation, the book value of the van at the beginning of the third year would be:

$12,000

On September 1, 2018, Great Lakes Equipment receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Great Lakes Equipment should recognize on the income statement for the year ending December 2018?

$4000. (24,000/24 months = 1000 per month x 4 months = 4000)

On October 1, 2018, Perry Corporation signed a 12-month, 8% interest-bearing promissory note for $10,000. Assume that all appropriate adjusting journal entries were made at 12/31. The journal entry required when the note matures on October 1, 2019 would include a debit to interest expense for

$600. (800 x 9/12)

On June 1, 2018, Oxian Corp. receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Oxian should recognize on the income statement for 2018?

$7,000. (24,000/24 months = 1,000

Melvin charges a fee of $1,080 for merchandise purchased by a customer. Assuming that the amount includes 8% of sales tax, Melvin should credit sales tax payable for:

$80. (1080-(1080/1.08))

Jingle Company signs a 6-month, $20,000 note. Stated interest rate is 8% payable at the maturity date. Interest incurred on the note is:

$800. (20,000 x .08 x 6/12)

Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year?

- A noncurrent liability of $504,000. - A current liability of $36,000.

Identify characteristics of notes payable that are not common to accounts payable.

- Based on promissory note - Interest bearing

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles and back. How does ABC Airlines record the $300 collected in advance?

A debit to Cash of $300 and a credit to Deferred Revenue of $300.

Notes payable is classified as a liability that has which of the following effects?

Creates interest expense on the income statement

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?

Credit to Note Payable $100,000 Debit to Cash $100,000

On October 1, 2018, Logan Corporation signed a 6-month, 8% interest-bearing promissory note for $10,000. The journal entry required at December 31, 2018 would include which of the following?

Debit interest expense $200. (10,000 x 0.08 x 3/12)

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required at December 31, 2018 would include which of the following?

Debit interest expense $4,000

On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's balance sheet reports:

interest payable for one month

A(n) _________ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events.

liability

Expenditures to maintain the operating efficiency and expected productive life of the asset.

ordinary repairs

Resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers.

plant assets

A loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

The Blooming Miracles Flower Shop bought a delivery van on January 1, 2017. The van cost $18,000 and had an expected salvage value of $3,000. The life of the van was estimated to be 5 years or 150,000 miles. The depreciation expense for 2017 using the straight-line method of depreciation is:

$3,000

Volker Company signs a 3-month, $10,000 note. Stated interest rate is 12% payable at the maturity date. Interest incurred on the note is:

$300. (10,000 x 0.12 x 3/12)

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required March 1, 2019 at the maturity date includes which of the following entries?

- Debit interest expense $2,000 - Debit note payable $100,000 - Debit interest payable $4,000 - Credit cash $106,000

Which of the following may be classified as contingent liabilities?

- Future litigation losses - Product warranties - Frequent flyer program awards

A contingent liability is recorded if which conditions are met?

- It is probable that a future loss will occur. - The amount of the loss can be reasonably estimated.

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

- The likelihood of payment - The ability to estimate the amount of payment

Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:

- debit to loss - credit to contingent liability

Common current liabilities include:

- Deferred Revenues - Sales tax payable - The current portion of long-term debt

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.

- sales taxes payable of $100. - sales revenue of $1,000.

Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.

intangible assets

On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's income statement reports:

interest expense for one month