Intermediate Accounting II Chapter 13

(T/F) A company must accrue a liability for sick pay that accumulates but does not vest.

False

What is the relationship between current liabilities and a company's operating cycle? a. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less). b. Current liabilities are the result of operating transactions. c. Current liabilities can't exceed the amount incurred in one operating cycle. d. There is no relationship between the two.

a. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

What is a discount as it relates to zero-interest-bearing notes payable? a. The discount represents the lender's costs to underwrite the note. b. The discount represents the credit quality of the borrower. c. The discount represents the cost of borrowing. d. The discount represents the allowance for uncollectible amounts.

c. The discount represents the cost of borrowing.

(T/F) A zero-interest bearing note payable that is issued at a discount will not result in any interest expense being recognized.

False

(T/F) Accumulated rights exist when an employer has an obligation to make a payment to an employee even after terminating his employment.

False

(T/F) All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

False

(T/F) Companies should accrue an estimated loss from a contingency if information available prior to the issuance of financial statements indicates that it is reasonable possible that a liability has be incurred.

False

(T/F) Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

False

(T/F) Paying a current liability with cash will always reduce the current ratio.

False

(T/F) Prepaid insurance should be included in the numerator when computing the acid-test (quick) ration.

False

Which of the following is not a correct statement about sales taxes? a. Sales taxes are an expense of the seller. b. Many companies record sales taxes in the sales account. c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate. d. Sales Taxes Payable is classified as a current liability.

a. Sales taxes are an expense of the seller.

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 a. current liabilities. b. deferred charges. c. long-term liabilities. d. intermediate debt.

a. current liabilities.

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? a. Record a liability for cumulative amount of preferred stock dividends not declared. b. Disclose the amount of the dividends in arrears. c. Record a liability for the current year's dividends only. d. No disclosure or recognition is required.

b. Disclose the amount of the dividends in arrears.

Which of the following is not true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d. Discount on Notes Payable is a contra account to Notes Payable.

b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.

Why is the liability section of the balance sheet of primary importance to bankers? a. To evaluate the entity's credit quality. b. To assist in understanding the entity's liquidity. c. To better understand sources of repayment. d. To evaluate operating efficiency.

b. To assist in understanding the entity's liquidity.

(T/F) The revenue from a service-type warranty that covers several years should all be recognized in the period when the warranty is sold.

False

(T/F) Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

False

Which of the following is a current liability? a. Preferred dividends in arrears b. A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders d. All of these answers are correct.

c. A cash dividend payable to preferred stockholders

Which of the following items is a current liability? a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months. b. Bonds due in three years. c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

Which of the following is a characteristic of a current liability but not a long-term liability? a. Unavoidable obligation. b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities. d. Transaction or other event creating the liability has already occurred.

c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following situations may give rise to unearned revenue? a. Providing trade credit to customers. b. Selling inventory. c. Selling magazine subscriptions. d. Providing manufacturer warranties.

c. Selling magazine subscriptions.

Which of the following may be a current liability? a. Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue d. All of these answers are correct.

d. All of these answers are correct.

Which of the following should not be included in the current liabilities section of the balance sheet? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these answers are correct.

d. All of these answers are correct.

Where is debt callable by the creditor reported on the debtor's financial statements? a. Long-term liability. b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability. c. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability. d. Current liability.

d. Current liability.

Stock dividends distributable should be classified on the a. income statement as an expense. b. balance sheet as an asset. c. balance sheet as a liability. d. balance sheet as an item of stockholders' equity.

d. balance sheet as an item of stockholders' equity.

An account which would be classified as a current liability is a. dividends payable in the form of a company's stock. b. accounts payable—debit balances. c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage. d. none of these answers are correct.

d. none of these answers are correct.

23. 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. a. 1 b. 2. c. 3 d. Both 2 and 3 are true.

A. 1 (Accounts payable are also called trade accounts payable.)

(T/F) A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

True

(T/F) A short term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis and demonstrates the ability to consummate the refinancing.

True

(T/F) Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

True

(T/F) Companies should not recognize the expense and related liability for compensated absences in the year earned by employees.

True

(T/F) Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True

(T/F) Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

True

(T/F) Magazine subscriptions and airline ticket sales both result in unearned revenues.

True

(T/F) Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

True

(T/F) The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

True

(T/F) The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

True

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt? a. Management indicated that they are going to refinance the obligation. b. Actually refinance the obligation. c. Have capacity under existing financing agreements that can be used to refinance the obligation. d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.

a. Management indicated that they are going to refinance the obligation.

What is the relationship between present value and the concept of a liability? a. Present values are used to measure certain liabilities. b. Present values are not used to measure liabilities. c. Present values are used to measure all liabilities. d. Present values are only used to measure long-term liabilities.

a. Present values are used to measure certain liabilities.

Which of the following statements is false? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. b. Cash dividends should be recorded as a liability when they are declared by the board of directors. c. A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. d. 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.

d. 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? a. Unavoidable obligation. b. Transaction or other event creating the liability has already occurred. c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these answers are correct.

d. None of these answers are correct.

Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. c. 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. d. None of these answers are correct.

d. None of these answers are correct.

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities? a. Intend to refinance the obligation on a long-term basis. b. Obligation must be due with one year. c. Demonstrate the ability to complete the refinancing. d. Subsequently refinance the obligation on a long-term basis.

d. Subsequently refinance the obligation on a long-term basis.

The ability to consummate the refinancing of a short-term obligation may be demonstrated by a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued. b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis. c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued. d. all of these answers are correct.

d. all of these answers are correct.

Liabilities are: a. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles. c. obligations to transfer ownership shares to other entities in the future. d. obligations arising from past transactions and payable in assets or services in the future.

d. obligations arising from past transactions and payable in assets or services in the future.

Of the following items, the only one which should not be classified as a current liability is a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced. d. unearned revenues.

d. unearned revenues.