978-0134125053 Chapter 9 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 9 Current Liabilities and Long-Term Debt

9.1 Distinguish between known, estimated, and contingent liabilities

1) The majority of a company’s liabilities are estimated liabilities.

Question Type: Concept

2) Notes payable would be an example of a known liability.

Question Type: Concept

3) A contingent liability arises because of a past event, but is dependent upon a future event.

Question Type: Concept

4) A known liability is always classified as a current liability.

Question Type: Concept

5) When a liability exists, the amount owed is always known.

Question Type: Concept

6) Which of the following would be considered an estimated liability?

A) Notes payable

B) Warranties payable

C) Pending litigation

D) Sales tax payable

Question Type: Concept

7) Which of the following would be considered a known liability?

A) Accounts payable

B) Warranties payable

C) Pending litigation

D) Possible contingency payable

Question Type: Concept

8) Which of the following would be considered a contingent liability?

A) Federal income tax payable

B) Warranties payable

C) Pending litigation

D) Salaries payable

Question Type: Concept

9) An obligation dependent upon an event that has not yet occurred is an example of a(n):

A) contingent liability.

B) estimated liability.

C) known liability.

D) accrued liability.

Question Type: Concept

10) You just purchased a new cell phone, which comes with a manufacturer’s warranty of one

year. The company that manufactures the cell phone would record the warranty as a(n):

A) accrued liability.

B) estimated liability.

C) known liability.

D) contingent liability.

Question Type: Application

11) Strong Dog Magazine sold 100 new pre-paid subscriptions to their publication. The

subscription money is an example of a(n):

A) accrued revenue.

B) estimated liability.

C) contingent liability.

D) known liability.

Question Type: Application

12) Safe Scooters, Inc. sold scooters which they knew had faulty brakes. Consumers found out,

and Safe Scooters is now facing a lawsuit over the unsafe scooters; however, no dollar amounts

have been assigned to the case. This lawsuit would be considered a(n):

A) deferred expense.

B) contingent liability.

C) estimated liability.

D) known liability.

Question Type: Application

13) Accrued liabilities, such as interest payable, would be considered a(n):

A) contingent liability.

B) estimated liability.

C) known liability.

D) unknown liability.

Question Type: Concept

14) Contingent liabilities may be classified as:

A) current liabilities only.

B) long-term liabilities only.

C) notes in the financial statements only.

D) either current or long-term liabilities.

Question Type: Concept

15) A known obligation of an unknown amount is a(n):

A) contingent liability.

B) estimated liability.

C) known liability.

D) accrued liability.

Question Type: Concept

16) Why are contingent liabilities considered unique and different from all other liabilities?

A) Whether or not a company has an obligation depends on the result of a future event.

B) Whether or not a company has an obligation depends on the result of a past event.

C) The company knows the amount of the obligation.

D) Both B and C are unique to contingent liabilities.

Question Type: Concept

17) Which of the following liabilities can be classified as either current or long term?

A) known and estimated

B) estimated and contingent

C) known and contingent

D) known, estimated, and contingent

Answer: D

Diff: 1

Question Type: Concept

9.2 Account for current liabilities of a known amount

1) A transaction, such as a utility bill to be paid in 30 days, would be journalized with a debit to

Utilities expense and a credit to Notes payable.

Question Type: Application

2) Making a payment on an account would be journalized with a debit to Accounts Payable and

credit to Cash.

Question Type: Application

3) A note payable that is due within one year is classified as a current liability.

Question Type: Concept

4) A 12-month, 8% note dated August 1, 2016 for $5,000 would have accrued interest payable

on December 31, 2016 of $166.67.

Question Type: Application

5) Sales tax liabilities are classified as long-term payables.

Question Type: Concept

6) Unearned revenues are typically classified as current liabilities.

Question Type: Concept

7) State sales tax collected by a company is generally paid to the state at the end of the year.

Question Type: Concept

8) The current portion of long-term debt represents the principal and interest payments on long–

term installment obligations that are due within one year.

Question Type: Concept

9) On August 15, 2016, Sassycat Designs signed a $30,000 8% 15-year installment note which

requires annual payments of $2,000 plus interest. Sassycat will classify this loan on the

December 31, 2016 Balance Sheet as $2,000 current portion of long-term debt and $30,000 long-

term debt.

Question Type: Application

10) When sales tax is remitted to the state, the journal entry includes a debit to Cash and a credit

to Sales Tax Payable.

Question Type: Application

11) A major difference between Accounts Payable and Notes Payable is that:

A) only Accounts Payable are classified as current assets.

B) Notes Payable are more formal than Accounts Payable.

C) only Notes Payable charge interest.

D) Notes Payable are only long-term assets.

Question Type: Concept

12) A company signs a note payable for $4,500 at 11% for 65 days. How much interest (to the

nearest cent) will the company owe using a 360-day year? (Round your final answer to the

nearest cent.)

A) $495.00

B) $88.15

C) $89.38

D) $99.21

Question Type: Application

13) S&C Roofing had sales on account of $32,500 which were subject to state sales tax of 8%.

The entry to record the sales would be to:

A) debit Accounts Receivable, $32,500; credit Sales revenue, $32,500.

B) debit Accounts Receivable, $35,100; credit Sale revenue, $35,100.

C) debit Accounts Receivable, $32,500; debit Sales tax payable, $2,600; credit Sales revenue,

$35,100.

D) debit Accounts Receivable, $35,100; credit Sales revenue, $32,500; credit Sales tax payable,

$2,600.

Question Type: Application

14) Metropolitan Masonry had sales on account of $7,700 which were subject to state sales tax

of 10%. The entry to record the sales would be to:

A) debit Accounts Receivable, $8,470; credit Sales revenue, $7,700; credit Sales tax payable,

$770.

B) debit Accounts Receivable, $8,470; credit Sale revenue, $8,470.

C) debit Accounts Receivable, $7,700; credit Sales revenue, $7,700.

D) debit Accounts Receivable, $7,700; debit Sales tax payable, $770; credit Sales revenue,

$8,470.

Question Type: Application

15) Cypress Corp. had sales on account of $19,500 which were subject to state sales tax of 12%.

The entry to record the sales would be to:

A) debit Accounts Receivable $19,500; debit Sales Tax Payable $2,340; credit Sales Revenue

$21,840.

B) debit Accounts Receivable $21,840; credit Sales Revenue $19,500; credit Sales Tax Payable

$2,340.

C) debit Accounts Receivable $19,500; credit Sales Revenue $19,500.

D) debit Accounts Receivable $21,840; credit Sales Revenue $21,840.

Question Type: Application

16) The Print Shoppe had sales on account of $7,000 which were subject to state sales tax of

6.5%. The entry to record the sales would be to: (Round your final answer to the nearest cent.)

A) debit Accounts Receivable $7,000; credit Sales Revenue $7,000.

B) debit Accounts Receivable $7,000; debit Sales Tax Payable $455.00; credit Sales Revenue

$7,455.00.

C) debit Accounts Receivable $7,455.00; credit Sales Revenue $7,455.00.

D) debit Accounts Receivable $7,455.00; credit Sales Revenue $7,000; credit Sales Tax Payable

$455.00.

Question Type: Application

17) Lionworks Inc. signed a $57,000 8% 30-year installment note on November 1, 2016. The

note requires semiannual payments of $950 plus interest on May 1 and November 1 of each year.

How will Lionworks classify this loan on its December 31, 2016 Balance Sheet?

A) Current Portion of Long-term debt, $0; Long-term debt, $57,000

B) Current Portion of Long-term debt, $57,000; Long-term debt, $0

C) Current Portion of Long-term debt, $950; Long-term debt, $56,050

D) Current Portion of Long-term debt, $1,900; Long-term debt, $55,100

Question Type: Application

18) Tazo Inc. signed a $12,000 10% 15-year installment note on December 1, 2016. The note

requires quarterly payments of $200 plus interest on March 1, June 1, September 1, and

December 1 of each year. How will Tazo classify this loan on its December 31, 2016 Balance

Sheet?

A) Current Portion of Long-term debt, $400; Long-term debt, $11,600

B) Current Portion of Long-term debt, $800; Long-term debt, $11,200

C) Current Portion of Long-term debt, $200; Long-term debt, $11,800

D) Current Portion of Long-term debt, $600; Long-term debt, $11,400

Question Type: Application

19) For a liability to exist:

A) a past transaction or event must have occurred.

B) the exact amount must be known.

C) the identity of the party must be known.

D) an obligation to pay cash in the future must exist.

Question Type: Concept

20) Which of the following would NOT be a liability?

A) The signing of a three-year employment contract at a fixed annual salary

B) An obligation to provide goods or services in the future

C) A note payable with no specified maturity date

D) An obligation that is estimated in amount

Question Type: Concept

9.3 Account for liabilities of an uncertain amount

1) Even liabilities of unknown amounts are required to be placed on the Balance Sheet.

Question Type: Concept

2) Warranty expense must be estimated and matched to revenues.

Question Type: Concept

3) Estimated liabilities are generally classified as long-term liabilities.

Question Type: Concept

4) Warranty expense is always recorded in the period that the warranty claims are paid.

Question Type: Concept

5) According to the matching principle, warranty expense must always be recorded in the same

period as the related revenue.

Question Type: Concept

6) The need to create an estimated warranty liability arises from the ________ principle.

A) matching

B) entity

C) conservatism

D) objectivity

Question Type: Concept

7) When a company settles a warranty claim by replacing the defective goods, the journal entry

will include a debit to _______ and a credit to _______.

A) Warranty Expense, Cash

B) Warranty Expense, Inventory

C) Estimated Warranty Payable, Cash

D) Estimated Warranty Payable, Inventory

Question Type: Application

8) TNT Construction had cash sales for the month of June totaling $44,000. TNT offers a 1-year

warranty on its construction services. If TNT estimates warranty claims will equal 5% of sales,

the journal entry to record the estimated warranty expense for the month is:

A) debit Warranty expense, $2,200; credit Cash, $2,200.

B) debit Estimated warranty payable, $2,200; credit Warranty expense, $2,200.

C) debit Warranty expense, $2,200; credit Estimated warranty payable, $2,200.

D) debit Warranty expense, $2,200; credit Sales revenue, $2,200.

Question Type: Application

9) Southeast Plumbing had cash sales for the month totaling $732,000. Southeast offers a 6–

month warranty on its services. If Southeast estimates warranty claims will equal 3% of sales,

the journal entry to record the estimated warranty expense for the month is:

A) debit Warranty expense, $21,960; credit Cash, $21,960.

B) debit Warranty expense, $21,960; credit Estimated warranty payable, $21,960.

C) debit Warranty expense, $21,960; credit Sales revenue, $21,960.

D) debit Estimated warranty payable, $21,960; credit Warranty expense, $21,960.

Question Type: Application

10) During the month, TNT Construction paid $300 to settle warranty claims. TNT uses an

estimated warranty account. The journal entry to record the claims payment would have been:

A) debit Warranty expense, $300; credit Cash, $300.

B) debit Warranty expense, $300; credit Estimated warranty payable, $300.

C) debit Estimated warranty payable, $300; credit Warranty expense, $300.

D) debit Estimated warranty payable, $300; credit Cash, $300.

Question Type: Application

11) During the month, Southeast Plumbing paid $600 to settle warranty claims. Southeast uses

an estimated warranty account. The journal entry to record the payment would have been:

A) debit Estimated warranty payable, $600; credit Cash, $600.

B) debit Warranty expense, $600; credit Estimated Warranty payable, $600.

C) debit Estimated warranty payable, $600; credit Warranty expense, $600.

D) debit Warranty expense, $600; credit Cash, $600.

Question Type: Application

12) Evergreen Roofing had cash sales for the month totaling $42,000. Evergreen offers a 1-year

warranty on its roofing services. If Evergreen estimates warranty claims will equal 3% of sales,

the journal entry to record the estimated warranty expense for the month is:

A) debit warranty expense $1,260; credit Cash $1,260.

B) debit estimated warranty expense $1,260; credit warranty payable $1,260.

C) debit warranty expense $1,260; credit Sales Revenue $1,260.

D) debit warranty expense $1,260; credit Estimated Warranty Payable $1,260.

Question Type: Application

13) During the month, Evergreen Roofing settled $600 in warranty claims by replacing the

defective flashing. Evergreen uses an estimated warranty account. The journal entry to record the

settled claims would have been:

A) debit Estimated Warranty Payable $600; credit Cash $600.

B) debit Estimated Warranty Payable $600; credit Inventory $600.

C) debit Warranty Expense $600; credit Estimated Warranty Payable $600.

D) debit Warranty Expense $600; credit Cash $600.

Question Type: Application

9.4 Account for contingent liabilities

1) Contingent liabilities represent actual—NOT potential—obligations.

Question Type: Concept

2) The accounting treatment of a contingent liability depends upon the likelihood of an actual

obligation occurring.

Question Type: Concept

3) A company that cosigns on a loan for another company could incur a contingent liability.

Question Type: Concept

4) There are times when contingent liabilities are never recorded.

Question Type: Concept