Chapter 9 Current Liabilities and Contingent Obligations

On the first day of the year, ABC Company received $80,000 from a customer for 2 years of services. What adjusting entry is needed at year-end?

Debit Unearned Fees for $40,000 and credit Fees Earned for $40,000

Which payroll tax is imposed on both the employee and the employer?

FICA Tax

ABC Company is involved in a lawsuit at year-end. ABC Company's lawyer says it is probable that ABC Company will owe compensation for damages to the plaintiff. Its lawyer also thinks it is probable that ABC Company will owe between $50,000 and $200,000 in damages, but it is most likely that $100,000 will be the required settlement. What amount should ABC Company accrue at year-end for this lawsuit?

$100,000

ABC Company borrows money at a bank by issuing a $70,000, 3-month, non-interest-bearing note. The note is discounted on a 10% basis. What amount of cash will ABC Company receive from the bank?

$68,250 (Face Amount × Interest Rate × Time) = $70,000 - ($70,000 × 10% × 3/12) = $68,250.

ABC Company receives $68,250 on a note with a face amount of $70,000. What is the annual effective interest rate on this note? (Round percent to two decimal places at each stage in the calculation.)

10.24% Total Interest Paid ÷ Amount of Cash Received (annualized) = $1,750 ÷ $68,250 = 2.56% × 12/3 = 10.24%

Which of the following statements regarding contingent loss is not true? a. A company must accrue a contingent loss if the loss is possible and can be reasonably estimated. b. A company must disclose a contingent loss if the loss is possible and can be reasonably estimated. c. A company is not required to disclose or accrue a contingent loss if there is a remote possibility it will occur. d. A company must accrue a contingent loss if the loss is probable and can be reasonably estimated.

A company must accrue a contingent loss if the loss is possible and can be reasonably estimated.

__________ are obligations to suppliers arising from purchasing inventory, supplies, or services on credit.

Accounts payable

Which order would most likely be seen on a balance sheet when presenting current liabilities

Accounts payable, notes payable, accrued liability items, unearned revenue

__________ is an unsecured note payable that is commonly used to finance accounts receivable and inventories, as well as to meet other short-term obligations.

Commercial paper

ABC Company sells 300 machines for $5,000 each in the current year. Each machine carries a 1-year warranty. Experience from the sale of similar machines in the past shows warranty costs will average $100 per machine. ABC Company spent $10,000 to fulfill warranty agreements in the current year. What is the journal entry to accrue the remainder of warranty costs in the current year?

Debit Warranty Expense and credit Warranty Payable for $20,000

Which of the following is not a type of liability?

Financial flexibility

Which of the following statements is not true? a. Management may never exclude short-term debt from current liabilities. b. Short-term debt is generally classified as a current liability. c. When a company's board of directors declares a dividend, the company recognizes a current liability if it expects to distribute the dividends within the following year. d. If a company violates a long-term debt agreement and the liability becomes callable by the creditor within 1 year, the company reports the entire amount of the long-term obligation as a current liability.

Management may never exclude short-term debt from current liabilities.

Which of the following would not be considered an equitable and constructive liability?

Notes payable

Which of the following dividends are not considered current liabilities when declared?

Stock dividends

Which of the following statements does not describe an essential characteristic of a liability? a. The obligated entity has little or no discretion to avoid the future sacrifice. b. A liability is a present obligation that will be settled by a probable future transfer of assets or services. c. The transaction or event obligating the enterprise has already occurred. d. The identity of the recipient must be known to the obligated party.

The identity of the recipient must be known to the obligated party.

According to current U.S. GAAP, which of the following is not a condition suggesting that an accrual for vacation pay be made?

The obligation must relate to rights that vest.

__________ include amounts that a company has collected from customers but for which it has not yet satisfied its performance obligations.

Unearned revenues

With regard to liabilities, liquidity refers to

a company's ability to convert its assets to cash to pay its liabilities.

Existing claims related to product warranties and litigation as of year-end indicate that it is probable that a liability has been incurred. However, as of year-end, the exact amount of the obligation cannot be reasonably estimated, but a range of possible amounts has been determined. Based on these facts, an estimated loss contingency should be

accrued

The FASB has suggested all of the following broad guidelines for reporting assets and liabilities except

assets and liabilities with different general liquidity characteristics should be reported as combined items in one category.

A(n) __________ warranty is a warranty in which the seller promises the customer that the good or service will function as specified in the contract amounts.

assurance-type

All of the following are usually current liabilities except a. accounts payable. b. commercial paper. c. bonds payable. d. current portion of long-term debt.

bonds payable

Operating cycle is typically defined as the time it requires to convert

cash to inventory to receivables to cash.

Chocolate's Sweet Shop includes the amount of sales taxes collected directly in the price charged for merchandise, and the total amount is credited to Sales. During January, the Sales account was credited for $239,680. The January 31 adjusting entry to account for a 7% state sales tax would include a

credit to Sales Taxes Payable.

On the balance sheet, liabilities are generally classified as

current or long term.

Existing claims related to product warranties and litigation as of year-end indicate that it is probable that a liability has been incurred. However, as of year-end, the exact amount of the obligation cannot be reasonably estimated. Based on these facts, an estimated loss contingency should be

disclosed but not accrued.

Sick pay benefits that are related to an employee's services already rendered, whose payment is probable, and the amount reasonably estimated must be accrued and recognized as a current liability if the obligation relates to rights that

do not accumulate and do vest.

Current liabilities may be listed on the balance sheet in all of the following ways except

in alphabetical order.

Conceptually, all liabilities should be reported on the balance sheet at their

present value

All of the following are examples of legal liabilities except a. sales tax payable. b. wages payable. c. vacation payable. d. notes payable.

vacation payable

The modified cash basis to determine warranty expense

violates the matching concept.