13 and 14 conceptual
Which of these is not included in an employer's payroll tax expense?
Federal income taxes
What is the relationship between present value and the concept of a liability?
Present values are used to measure certain liabilities.
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 must be disclosed relative to long-term debt maturities and sinking fund requirements?
The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
What does the current ratio inform you about a company?
The company's liquidity.
Which of the following arguments is presented by the FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?
The debtholders' loss is the shareholders' gain.
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.
The rate of interest actually earned by bondholders is called the
The rate of interest actually earned by bondholders is called the
How do you determine the acid-test ratio?
The sum of cash, short-term investments and net receivables divided by current liabilities.
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.
If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting
Unrealized Holding Gain/Loss-Income.
Which of the following is a characteristic of an assurance-type warranty, but not a service-type warranty?
Warranty liability.
When is a contingent liability recorded?
When the future events are probable to occur and the amount can be reasonably estimated.
When the effective-interest method is used to amortize bond premium or discount, the periodic amortization amount will
increase if the bonds were issued at either a discount or a premium.
When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
increased by accrued interest from May 1 to June 1.
Each of the following are included in both the current ratio and the acid-test ratio except
inventory.
A contingent liability
is the result of a loss contingency.
Note disclosures for long-term debt generally include all of the following except
names of specific creditors.
An account which would be classified as a current liability is
none of these answers are correct.
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.
Bonds for which the owners' names are not registered with the issuing corporation are called
income bonds.
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
One step in calculating the issue price of the bonds is to multiply the face value by the table value for
20 periods and 4% from the present value of 1 table.
Which of the following is a current liability?
A cash dividend payable to preferred stockholders
An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition
All of these answers are correct.
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.
Which of the following may be a current liability?
All of these answers are correct.
Which of the following should not be included in the current liabilities section of the balance sheet?
All of these answers are included.
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.
Which of the following contingencies need not be disclosed in the financial statements or the related notes?
All of these must be disclosed.
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 is the proper way to report some gain contingencies?
As a disclosure only.
Which of the following items is a current liability?
Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
Bonds for which the owners' names are not registered with the issuing corporation are called
Bonds for which the owners' names are not registered with the issuing corporation are called
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.
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.
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 periods.
Either 1 or 2 is acceptable
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 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 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.
What is the relationship between current liabilities and a company's operating cycle?
Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
Which of the following does not allow a company to exclude a short term obligation from current liabilities?
Management indicated that they are going to refinance the obligation.
Which of the following is a current liability?
None of these answers are correct.
Which of the following statements is correct?
None of these answers are correct.
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 30. One step in calculating the issue price of the bonds is to
None of these answers is correct.
Which of the following is not a condition allowing a company to exclude a short-term obligation from current liabilities?
Obligation must be due within one year
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, 2020. 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.
Which of the following terms is associated with recording a contingent liability?
Probable.
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.
"In-substance defeasance" is a term used to refer to an arrangement whereby
a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.
In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize
a gain on the restructuring.
In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,
a new effective-interest rate must be computed.
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.
Excluding a short-term obligation from current liabilities can be done when
all of these answers are correct.
Premium on bonds payable is
an adjunct account.
A project financing arrangement refers to:
an arrangement where a company creates a special-purpose entity to perform a special project.
When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless
any of these answers are correct.
Accrued liabilities are disclosed in financial statements by
appropriately classifying them as regular liabilities in the balance sheet.
Long-term debt that matures within one year and is to be converted into stock should be reported
as noncurrent and accompanied with a note explaining the method to be used in its liquidation.
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.
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
bond indenture.
In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
calculate its loss using the historical effective rate of the loan.
When a company enters into what is referred to as off-balance-sheet financing, the company
can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost.
In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the
carrying amount of the pre-restructure debt is greater than the total future cash flows.
The numerator of the acid-test ratio consists of
cash, marketable securities, and net receivables.
The interest rate written in the terms of the bond indenture is known as the
coupon rate, nominal rate, or stated rate.
If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
credit to Interest Expense.
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
The ratio of current assets to current liabilities is called the
current ratio.
The times interest earned is computed by dividing
income before income taxes and interest expense by interest expense.
The term used for bonds that are unsecured as to principal is
debenture bonds.
An example of an item which is not a liability is
dividends payable in stock.
If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will
exceed what it would have been had the effective-interest method of amortization been used.
Bond interest paid is equal to the
face amount of the bonds multiplied by the stated interest rate.
A troubled debt restructuring will generally result in a
gain by the debtor and a loss by the creditor.
If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
greater than if the straight-line method were used.
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
Liabilities are
obligations arising from past transactions and payable in assets or services in the future.
An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's
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, 2020, 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 2020 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 on a long-term basis.
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.
The face value of bonds is also called each of the following except
stated value.
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.
Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
the market rate multiplied by the beginning-of-period carrying amount of the bonds.
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.
Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a premium, this indicates that
the nominal rate of interest exceeded the market rate.
The currently maturing portion of long-term debt should be classified as a current liability if
the portion so classified will be liquidated within one year using current assets.
A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place
the present value of the debt instrument must be approximated using an imputed interest rate.
The debt to assets ratio is computed by dividing
total liabilities by total assets.
In accounting for compensated absences, the difference between vested rights and accumulated rights is that:
vested rights are not contingent upon an employee's future service
