978-1337276337 Test Bank Chapter 9 Part 2

Chapter 9

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57. Assume the current ratio is 3 to 4. Purchases of inventory on account would cause the current ratio to

a. increase.

b. decrease.

c. be unchanged since the effects offset each other.

d. be unchanged since it has no effect on any current accounts.

58. Assume the current ratio is 3 to 1. Estimating the warranties expense on the period’s sales would cause the current

ratio to

a. increase.

b. decrease.

c. be unchanged since the effects offset one another.

d. be unchanged since it has no effect on any current accounts.

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59. The landlord records the security deposit she collects from the tenant as a(n)

a. asset.

b. liability.

c. contingent liability.

d. contra liability.

60. A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are

$14,350, then the quick ratio would be

a. 5.0 to 1.

b. 2.6 to 1.

c. 2.0 to 1.

d. 1.2 to 1.

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61. If current assets amount to $62,000, total assets $350,000, current liabilities $31,000, and total liabilities $125,000,

then the current ratio is

a. 0.5 to 1.

b. 2.0 to 1.

c. 2.8 to 1.

d. 3.0 to 1.

62. Long-term assets are $5,000, current liabilities are $700, and long-term liabilities are $3,000. If the current ratio is 3 to

1, then current assets are

a. $9,000.

b. $6,900.

c. $4,300.

d. $2,100.

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63. If a company purchases $3,000 worth of inventory with terms of 1/15, n/30 and pays within 15 days, then the amount

paid to the seller would be

a. $2,550.

b. $2,970.

c. $3,000.

d. $3,030.

64. A bank loaned York Construction Company $35,000 on a one-year, 6% note, but deducted the interest in advance.

The journal entry made by York to record receipt of the cash would include a(n)

a. increase in cash for $35,000.

b. decrease in notes payable for $32,900.

c. increase in discount on notes payable for $2,100.

d. increase in interest revenue for $2,100.

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65. On November 1, Greenfield Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the

amount of $55,000. If you assume 360 days in year, the November 30 adjustment will

a. increase interest expense by $550 and decrease cash by $550.

b. increase discount on notes payable by $1,100 and increase interest payable by $1,100.

c. increase interest expense by $550 and increase interest payable by $550.

d. increase interest expense by $550 and increase notes payable by $550.

66. Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After

one month, the company’s total liability for this loan amounts to

a. $91,800.

b. $90,900.

c. $90,450.

d. $90,000.

67. Interest payable on a loan becomes a liability

a. when the borrowed money is received.

b. when the note payable is issued.

c. at the maturity date.

d. as it accrues.

68. On November 1, 2017, Brownsville Co. borrowed $80,000 from State Bank and signed a 12%, six-month note

payable, all due at maturity. The interest on this loan is stated separately. At December 31, 2017, the adjustment for this

note includes a(n)

a. increase to interest expense for $3,200.

b. increase to notes payable for $1,600.

c. decrease to cash for $4,800.

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d. increase to interest payable for $1,600.

69. On November 1, 2017, Brownsville Co. borrowed $80,000 from State Bank and signed a 12%, six-month note

payable, all due at maturity. The interest on this loan is stated separately. At December 31, 2017, Brownsville Co.’s

overall liability for this loan amounts to

a. $84,800.

b. $80,000.

c. $81,600.

d. $83,200.

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70. An invoice received from a supplier for $8,000 on January 1 with terms 1/15, n/30 means that the company should pay

a. $7,920 before the end of January.

b. either $7,920 before January 16 or $8,000 before the end of the month.

c. $8,000 between January 2 and January 16.

d. $6,800 before January 16.

71. All of the following statements are true except

a. U.S. standards do not require a classified balance sheet.

b. IFRS require companies to present classified balance sheets.

c. under IFRS, an unclassified balance sheet based on the order of liquidity is acceptable only when it provides more

reliable information than a classified one.

d. U.S. standards require a classified balance sheet with liabilities in order by size or by order of liquidity.

72. There are some liabilities, such as income tax payable, for which the amounts must be estimated. Failure to estimate

these amounts and record them would be a violation of the

a. matching principle.

b. convention of conservation.

c. practice of consistency.

d. concept of historical cost.

73. Proctor Inc. has a weekly payroll of $8,000 for a five-day workweek, Monday through Friday. If December 31, the

last day of the accounting year, falls on Wednesday, Proctor would make an adjustment that would

a. increase wages expense by $4,800.

b. decrease wages payable by $4,800.

c. decrease cash by $4,800.

d. increase wages payable by $8,000.

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74. An example of a current liability that must be accrued is

a. accounts payable.

b. current maturity of long-term debt.

c. revenue received in advance.

d. income taxes payable.

75. On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a one-year, 7% note. If the

company’s fiscal year ends as of December 31, Lawrence should make an entry to increase

a. interest expense, $4,200.

b. notes payable, $1,050.

c. interest payable, $1,050.

d. prepaid interest, $3,150.

76. Employees earn $6,000 per day, work five days per week, Monday through Friday, and get paid every Friday. If the

previous payday was January 26 and the accounting period ends on January 31, what amount is the ending balance in the

Wages Payable account?

a. $18,000

b. $6,000

c. $30,000

d. None of these are correct

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78. A company’s weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days

per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period,

Monday, March 31, 2017. What amount is wages expense for April for the payday, Friday, April, 4, 2017?

a. $0

b. $40,000

c. $10,000

d. $50,000

79. On May 1, Chris Company borrowed $30,000 from Third Street Bank on a one-year, 6% note. If the company keeps

its records on a calendar year, an entry is needed on December 31 to increase

a. interest expense by $600.

b. interest expense by $1,800.

c. interest payable by $900.

d. interest payable by $1,200.

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80. Almost all current liabilities affect the Operating category of the statement of cash flows, but one that does not affect

cash provided by operating activities is

a. accounts payable.

b. interest payable.

c. notes payable.

d. taxes payable.

81. Which of the following statements regarding the inclusion of liabilities on the statement of cash flows is true?

a. All current liabilities affect the Operating Activities section.

b. Long-term liabilities generally affect the Investing Activities section.

c. A decrease in a current liability from the beginning to the end of the year is accompanied by a decrease of cash.

d. A decrease in a current liability from the beginning to the end of the year is accompanied by an inflow of cash.

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82. A company’s balance sheet shows the account, Notes Payable. This resulted from a loan made by the company’s bank.

If the end-of-year balance in the Notes Payable account exceeds the beginning-of-year balance by $5,000, this is shown

on the cash flow statement as an

a. inflow of cash of $5,000 in the Operating Activities category.

b. outflow of cash of $5,000 in the Operating Activities category.

c. inflow of cash of $5,000 in the Financing Activities category.

d. outflow of cash of $5,000 in the Financing Activities category.

83. Carrington, Inc. recorded $97,000 in salary expense for January 2017. Its beginning balance in salaries payable was

$3,000, and its ending balance was $4,000. How much was paid in cash for salaries during January 2017?

a. $96,000

b. $97,000

c. $98,000

d. $99,000

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84. Which of the following would appear on the balance sheet as a current liability?

a. A loss from an anticipated strike by employees

b. Potential damages from possible explosions in a fireworks factory

c. Premium offers in cereal boxes

d. The possible loss from a lawsuit

85. All of the following statements are true except

a. the threshold for recording items as liabilities is lower under IFRS than under U.S. GAAP.

b. the threshold for recording items as liabilities is lower under U.S. GAAP than under IFRS.

c. IFRS require a liability to be recorded as a present value amount.

d. under U.S. GAAP, a contingent item should be recorded as a liability if the loss or outflow is probable and can be

reasonably estimated.

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86. In 2017, Baloga Heating Company sold 400 water heaters for $350 each. The water heaters carry a two-year warranty

for repairs. Baloga estimates that repair costs will average 2% of the total selling price. How much is recorded in the

warranty liability account as a result of selling the water heaters during 2017?

a. $4,200

b. $2,800

c. $1,400

d. No liability should be recorded until the water heaters are brought back for repairs.

87. In 2017, Morton Co. sold 100 hot air balloons at $4,000 each. The balloons carry a five-year warranty for defects.

Morton estimates that repair costs will average 4% of the total selling price. The estimated warranty liability at the

beginning of the year was $42,000. $11,000 in claims was actually incurred during the year to honor their warranty. What

was the balance of the estimated warranty liability at the end of the year?

a. $47,000

b. $42,000

c. $37,000

d. $5,000

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88. In 2017, Morton Co. sold 150 hot air balloons at $4,000 each. The balloons carry a five-year warranty for defects.

Morton estimates that repair costs will average 4% of the total selling price. The estimated warranty liability at the

beginning of the year was $14,000. $20,000 in claims was actually incurred during the year to honor their warranty. What

was the warranty expense for 2017?

a. $10,000

b. $18,000

c. $20,000

d. $24,000

89. Which of the following statements regarding contingencies is true?

a. Contingencies that are probable and not estimable appear on the balance sheet.

b. Contingencies that are probable and not estimable are disclosed in the notes to the financial statements.

c. Contingencies that are remote but estimable are disclosed in the notes to the financial statements.

d. Contingent assets are recorded on the balance sheet, but not in the notes to the financial statements.

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90. Which of the following statements regarding contingencies is true?

a. Contingencies that are probable and estimable must be recorded before the outcome of future events.

b. Contingent assets, if probable and estimable, are treated in much the same way as contingent liabilities.

c. The accounting principle that determines whether a contingent asset is recorded is that of materiality.

d. Contingencies that are not estimable should not be disclosed even if probable.

91. A cereal company includes one premium coupon in every cereal box. Upon returning ten such coupons to the

company, a customer will be sent a free cereal bowl. In a recent year, the company sold 200,000 boxes of cereal for $1 a

box. It is estimated that 20% of the coupons will be returned. If the cereal bowls cost the company $3 each, what amount

of liability for premium redemptions must be recorded by the company?

a. $6,000

b. $12,000

c. $24,000

d. $200,000

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92. A firm is required to estimate a liability for repairs for products sold with a warranty. If the firm’s accountants later

find that the estimated amount for repairs has been overstated, the correct accounting procedure is to

a. make an adjusting entry to reduce the amount of estimate.

b. make a correcting entry because the overstatement is an error.

c. show the amount of overstatement on the income statement as a loss.

d. do nothing for the year in question and modify the next year’s estimate.

93. Clarion Inc. issues numerous discount coupons throughout the year. A balance in the Estimated Liability for Coupon

Redemption account

a. indicates an error has been made in posting.

b. should equal the same amount of coupons redeemed.

c. is the amount of outstanding coupons it expects to be redeemed.

d. indicates that more coupons were redeemed than estimated.

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94. In 2017, Scranton, Inc. sold 2,000 carpets for $50 each. The carpets carry a two-year warranty for repairs. Scranton

estimates that repair costs will average 3% of the total selling price. What amount would be recorded in the warranty

liability account as a result of selling the carpets during 2017?

a. $1,500

b. $3,000

c. $50

d. No liability should be recorded until the carpets are returned for repairs.

95. Boston Trombley Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is anticipated to

continue for several years, but no reasonable estimate can be made at this time regarding ultimate financial responsibility.

This situation is an example of a(n)

a. $3 billion expense to be recorded in the income statement during the year of the suit.

b. loss contingency that should be disclosed in the notes to Boston’s financial statements.

c. estimated liability that must appear in Boston Trombley Company’s balance sheet.

d. None of these are correct.

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96. Which of the following is an example of a contingent liability?

a. A liability for notes payable with interest included in the face amount

b. The liability for future warranty repairs on computers sold during the current period

c. A lawsuit being threatened but not yet filed against a restaurant chain for improper preparation of food

d. A corporate long-term employment contract with the chief executive officer

97. The total amount of simple interest calculated annually on a $4,000 note payable in five years at 9% is

a. $1,800.00.

b. $1,411.20.

c. $2,154.60.

d. $554.04.

98. The total amount of simple interest calculated annually on a $6,000 note payable for three years at 11% is

a. $1,980.

b. $2,205.

c. $6,600.

d. $7,980.

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99. To determine whether a lottery winner would prefer to receive the money in a single lump sum immediately or receive

an equal amount over a period of years, you would use which type of time value of money calculation?

a. The future value of a single amount

b. The present value of a single amount

c. The future value of an annuity

d. The present value of an annuity

100. The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the

text is necessary to complete the calculations.

If interest is compounded annually, the total amount of interest on an $18,000 note payable for four years at 10% is

a. $5,706.

b. $7,200.

c. $8,352.

d. $8,500.