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Chapter 10 Liabilities Answer Key
True / False Questions
1.
A liability that is known to exist but the precise dollar amount is not known is called a
possible liability.
2.
Working capital is equal to current assets less current liabilities.
3.
Current liabilities are obligations that must be repaid within the shorter of one year or the
operating cycle.
4.
Accounts payable are often subdivided into the categories of trade accounts payable and
notes payable.
5.
When money is borrowed by issuing a note payable, the borrower records a liability equal
to the maturity value of the note.
6.
Since payment is due within one year, the current portion of long-term debt should be
reported separately in the long-term liabilities section of the balance sheet.
7.
Gross pay less withholding tax and less worker's compensation is considered net pay.
8.
The amount of FICA tax and Medicare tax withheld from an employee is used to pay the
employer's percentage of the tax and is mailed to the government quarterly.
9.
The most common types of payroll deductions are taxes, insurance premiums, employee
savings, and union dues.
10.
Worker's compensation premiums are deducted from each employee's gross pay.
11.
The withholding of taxes from an employee's pay is a liability to the company.
12.
Federal unemployment taxes apply to a set dollar amount of employee wages and tend to
decline dramatically as the year progresses.
13.
If a long-term debt is to be paid off in monthly installments over a 5-year period, the entire
principal should be classified as a long-term debt.
14.
An amortization table for a note payable shows decreasing amounts of interest and an
increasing amount of unpaid balance each period.
15.
The unpaid balance column on an amortization table for a note payable shows the amount
the debtor could pay to settle the liability at a particular point in time.
16.
Bonds secured by a pledge of specific assets are called debenture bonds.
17.
Junk bonds are attractive to investors because they carry a high rate of interest and are
convertible into a specified number of shares of capital stock.
18.
Dividends paid by a corporation to its stockholders are tax deductible by the corporation
but interest paid on bonds is not tax deductible.
19.
When bonds are sold by one investor to another, they sell at market price plus accrued
interest since the last payment date.
20.
When a company sells bonds, the bondholders are permitted to vote for the board of
directors.
21.
There is a tax advantage for a company to issue bonds in lieu of stocks.
22.
Bonds payable are a means of dividing a very large, long-term liability among many
creditors, some of whom may participate in the loan only for a short period of time.
23.
The market value of a convertible bond tends to move inversely to the market value of an
equivalent number of shares of common stock.
24.
Convertible bonds can be exchanged for common stock at the option of the company.
25.
Sinking funds make a bond issue less attractive to the investor.
26.
If a bond is callable, the call price is usually lower than the face value of the bond.
27.
The underwriter guarantees the issuing corporation a specific price for the entire bond
issue and sells the bonds to the investing public at a higher price.
28.
When bonds are issued at a discount, the borrower must pay more at maturity than the
amount originally received.
29.
The account Discount on Bonds Payable actually represents interest expense and will be
amortized over the life of the bond.
30.
If a bond is issued at a premium, the company receives more money for the bond than it
will have to pay back at the end of the bond's life, and as a result the company records no
interest expense over the life of the bond.
31.
A bond with a $100,000 face value that is issued at a premium will have a higher maturity
value than a bond with a $100,000 face value that is issued at a discount.
32.
The account Discount on Bonds Payable has a debit balance and should appear on the
balance sheet as an asset; the account Premium on Bonds Payable has a credit balance
and should be classified as a liability.
33.
The amortization of discount on bonds payable reduces the amount of interest expense
recognized during the period.
34.
The amortization of bond discount by the issuing company decreases the carrying value of
its bonds payable.
35.
The future value will always be less than the present value.
36.
When interest rates rise, the price of a given bond issue will fall.
37.
A loss contingency is recorded in the accounting records when it is probable that a loss
has been incurred and the amount of the loss is known.
38.
A commitment, such as a contract to pay a baseball player $5,000,000 a year for five years,
should be listed as a long-term liability.
39.
Estimated liabilities, contingencies, and commitments are usually reported in the long-
term liability section of the financial statements.
40.
Loss contingencies stem from past events.
41.
Loss contingencies should be recorded in the accounting records whenever it is probable
that a loss has been incurred and the amount of loss might be material in amount.
42.
The quick ratio is a more stringent measure of solvency than the current ratio.
43.
A high interest coverage ratio is a sign of creditworthiness.
44.
The debt ratio measures how quickly a company pays off the long-term liabilities it has
incurred.
45.
A pension fund is an independent entity managed by a bank or insurance company.
46.
If a lease transfers ownership of the property to the lessee at the end of the lease term, it
should be regarded as an operating lease.
47.
When a company has a fully funded pension plan, they only need to record the present
value of pension payments as a current liability.
48.
Payments of pensions and other benefits to retired workers are recognized as expense in
the period payment is made.
49.
Deferred income taxes may be classified as assets.
Multiple Choice Questions
50.
Assets that have been pledged as security for a loan:
51.
All of the following are examples of current liabilities
except
:
