Chapter 08 – Current Liabilities and Fair Value Accounting
TRUE/FALSE
1. Working capital equals current assets minus current liabilities.
2. Payables turnover is measured in number of days.
3. The days’ payable is the number of times, on average, that accounts payable are paid in an accounting
period.
4. The days’ payable shows how long, on average, a company takes to pay its accounts payable.
5. Because failure to record a liability generally leads to failure to record an expense, it usually results in
an understatement of income.
6. Because accounting measures should be verifiable, liabilities should not be estimated.
7. The classification of a liability as current or long-term is important because it may affect the
evaluation of a company’s liquidity.
8. Liabilities generally arise from future transactions.
9. To determine the payables turnover, one first calculates the days’ payable.
10. A liability must always be classified as long-term if it is due in more than one year.
11. If an accrued liability for salaries is not recorded, income for the following period will be understated.
12. All liabilities involve an obligation of one sort or another.
13. Lines of credit from the bank must be disclosed in the financial statements or in the notes.
14. Interest on a promissory note is recognized when the note is issued.
15. The term wages refers to the compensation of employees who are paid at an hourly rate.
16. Commercial paper consists of secured loans that are sold to the public.
17. The declaration of dividends is solely the decision of the corporation’s board of directors.
18. There is no limit to the amount of income subject to the Medicare tax.
19. There is a limit to the amount of income subject to the FUTA tax.
20. Commercial paper normally is issued by companies with poor credit ratings.
21. If any portion of a long-term debt is to be paid in the next year, that portion should be classified as a
current liability.
22. Unearned revenue arises from the acceptance of payment in advance for a service to be performed.
23. Current liabilities are classified as either definitely determinable liabilities or estimated liabilities.
24. A liability for dividends exists only when the board of directors declares them.
25. Salaries are compensation of employees at a yearly or monthly rate.
26. The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal
Unemployment Tax Payable and State Unemployment Tax Payable.
27. Social security and Medicare taxes are borne entirely by the employer.
28. Gross earnings minus deductions equals take-home pay.
29. Both the employee and the employer must bear the tax burden for unemployment benefits.
30. The federal and state unemployment tax rates are not identical.
31. The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to
Social Security Tax Payable and Medicare Tax Payable.
32. An estimated liability is a definite obligation of the firm even though the amount cannot be definitely
determined.
33. The amount of property tax payable is usually an estimated liability for a portion of the year.
34. A liability is usually established for product warranties despite uncertainty as to the amount of the
liability.
35. If the amount of a liability cannot be exactly determined, it should not be recorded.
36. The costs associated with coupons and rebates are usually reflected in liability accounts.
37. Unearned revenue is an example of a definitely determinable liability.
38. Only the used portion of a line of credit is recognized as a liability.
39. At the time a company signs a contract to pay an employee a certain salary in the future, it records a
liability.
40. For notes payable whose interest is stated separately, the adjusting entry would consist of a debit to
Interest Payable and a credit to Interest Expense.
41. The current portion of long-term debt is classified as a current liability only if it is due within the next
year and is to be paid from current assets.
42. Product warranties are an expense of the period in which the product is sold.
43. When a business sells an item and collects a state sales tax on it, a current liability to the state arises.
44. The product warranty liability is an example of a definitely determinable liability.
45. Accrued liabilities often arise as a result of the passage of time.
46. Vacation pay is charged properly as an expense in the month in which the employee earns the vacation
pay.
47. Property Taxes Expense is recorded only in the month it is paid.
48. Promotional costs, such as coupons and rebates, are usually not recorded as an expense with a related
liability.
49. A contingent liability is a legal obligation that does not meet the technical requirements for recognition
as a liability.
50. A contingent liability is not entered into the accounting records under any circumstances.
51. A commitment is recognized when the amount can be reasonably estimated and the likelihood of loss
is probable.
52. The most common examples of commitments are leases and purchase agreements.
53. A contingent liability is recognized when the likelihood of loss is probable and the amount can be
reasonably estimated.
54. A contingent liability is a liability that may materialize in the future because of something that
happened in the past.
55. Potential vacation pay should be accounted for as a contingent liability.
56. Lawsuits against a company in connection with an industrial accident would not be disclosed in the
notes to the financial statements as a contingent liability until the lawsuits have been settled.
57. When a company discounts a note receivable at the bank, it has a contingent liability.
58. A contingent liability always becomes a true liability.
59. The market approach to the measurement of fair value converts future cash flows to a single present
value.
60. The cost approach to the measurement of fair value is based on the amount that currently would be
required to replace an asset with the same or a comparable asset.
61. Future value refers to the amount of principle plus interest after one or more periods.
62. An ordinary annuity is a series of equal payments made at the end of equal intervals of time.
63. When compound interest is used, interest accumulates quicker than when simple interest is used.
64. The annual interest earned on an amount deposited into a bank account will increase each year when
simple interest is used.
65. The annual interest earned on an amount deposited into a bank account will be the same each year
when simple interest is used.
66. All factors in a future value table must be greater than or equal to 1.000.
67. The lower the interest rate, the lower the present value factor.
68. All factors in a present value of a single sum table are less than 1.000.
69. The higher the interest rate, the lower the future value factor.
70. Decision makers rely on the future values, rather than on the present values, of future cash flows.
71. In a deferred payment arrangement, an implied or imputed interest rate is usually charged.
72. The theoretical value of an asset is the present value of the expected benefits.
73. An asset purchased according to a deferred payment plan should be recorded based on the present
value of the total cash paid.
74. If the net present value of a proposed investment is negative, it means that the investment should not
be made.
75. Assets purchased under a deferred payment plan should be recorded at the present value of the
installment payments.
76. A company wishes to make deposits at the end of each of the next four years to accumulate a fund of
$60,000. The annual contributions equal $60,000 multiplied by the appropriate present value of an
ordinary annuity factor.
MULTIPLE CHOICE
1. All of the following are measures of liquidity and cash flow except
a.
payables turnover.
b.
return on assets.
c.
the current ratio.
d.
days’ payable.
2. Days’ payable is the shortest in which of the following industries?
a.
Grocery stores
b.
Computers
c.
Machinery
d.
Auto and home supply
3. Current liabilities are debts that are expected to be satisfied within
a.
one year or the normal operating cycle, whichever is shorter.
b.
one year or the normal operating cycle, whichever is longer.
c.
one year.
d.
the normal operating cycle.
4. Failure to record a liability probably will
a.
result in an overstated net income.
b.
result in overstated total liabilities and stockholders’ equity.
c.
have no effect on net income.
d.
result in overstated total assets.
5. Usually, failure to record a liability means failure to record a(n)
a.
revenue.
b.
dividend.
c.
expense.
d.
current asset.
6. Days’ payable is measured
a.
in days.
b.
as a percentage.
c.
in dollars.
d.
in times.
7. To find the days’ payable,
a.
divide 365 by the payables turnover.
b.
multiply the payables turnover by 365.
c.
divide the payables turnover by 365.
d.
subtract 365 from the payables turnover.
8. Which of the following most likely would be classified as a current liability?
a.
Mortgage payable
b.
Taxes payable
c.
Ten-year notes payable
d.
Bonds payable
9. A liability is recognized when
a.
the exact due date is known.
b.
it is paid for.
c.
an obligation has arisen.
d.
the exact amount of the liability is known.
10. Which of the following most likely is an example of an accrued liability?
a.
Interest payable
b.
Accounts payable
c.
Long-term debt
d.
Sales tax payable
11. Which of the following typically would not be done to satisfy a current liability?
a.
Use long-term assets to satisfy the liability
b.
Render a service to satisfy the liability
c.
Use current assets to satisfy the liability
d.
Take on another current liability to satisfy the liability
12. Which of the following descriptions would not fit the definition of a liability?
a.
Obligation to deliver services already paid for
b.
Result of past transaction
c.
Future obligation for future salary payments
d.
Present obligation for future payment
13. Which of the following does not represent a liability?
a.
An obligation for estimated income taxes payable
b.
Interest that has accrued on a bank loan
c.
An obligation to pay for goods purchased, payable one year after purchase
d.
An obligation for future purchases of goods
14. On January 2, 2013, Chester Company, a calendar-year company, issued $80,000 of notes payable, of
which $20,000 is due on January 2 for each of the next four years. The proper balance sheet
presentation on December 31, 2013, is
a.
Current Liabilities, $80,000.
b.
Current Liabilities, $20,000; Long-Term Liabilities, $60,000.
c.
Long-Term Liabilities, $80,000.
d.
Current Liabilities, $60,000; Long-Term Liabilities, $20,000.
15. The following information is known for Alcorn Company for the year ended December 31:
Cash
$83,700
Accounts receivable
69,000
Beginning merchandise inventory
123,000
Ending merchandise inventory
108,000
Land
435,000
Buildings
240,000
Beginning accounts payable
105,000
Ending accounts payable
144,000
Wages payable
71,100
Mortgage payable
624,000
Net sales
1,968,000
Purchases
1,143,000
Compute Alcorn Company’s payables turnover for the current year (round to two decimal places).
a.
10.89 times
b.
9.18 times
c.
8.52 times
d.
7.94 times
16. The following information is known for Alcorn Company for the year ended December 31:
Cash
$83,700
Accounts receivable
69,000
Beginning merchandise inventory
123,000
Ending merchandise inventory
108,000
Land
435,000
Buildings
240,000
Beginning accounts payable
105,000
Ending accounts payable
144,000
Wages payable
71,100
Mortgage payable
624,000
Net sales
1,968,000
Purchases
1,143,000
Compute Alcorn Company’s days’ payable for the current year (round to two decimal places).
a.
39.76 days
b.
38.75 days
c.
56.07 days
d.
54.07 days
17. Sales Tax Payable is an example of a(n)
a.
estimated liability.
b.
contingent liability.
c.
trade liability.
d.
definitely determinable liability.
18. All of the following are classified as definitely determinable liabilities except
a.
sales tax payable.
b.
estimated property warranty liability.
c.
dividends payable.
d.
unearned revenue.
19. Which of the following is most likely a definitely determinable liability during interim periods?
a.
Estimated property tax payable
b.
Accrued interest payable
c.
Estimated product warranty liability
d.
Estimated income taxes payable
20. Dividends Payable is an example of a(n)
a.
contingent liability.
b.
definitely determinable liability.
c.
estimated liability.
d.
long-term liability.
21. Which of the following taxes is not subject to a maximum amount per employee per year?
a.
State unemployment tax
b.
Federal unemployment tax
c.
Social security tax
d.
Medicare tax
22. All of the following can be employee payroll withholdings except
a.
state income taxes.
b.
medical insurance premium payments.
c.
social security tax.
d.
state unemployment tax.
23. Payroll Taxes and Benefits Expense includes all of the following except
a.
state income taxes.
b.
pension contributions.
c.
Medicare taxes.
d.
unemployment taxes.
24. All of the following are estimated liabilities except
a.
liability for vacation pay.
b.
payroll liabilities.
c.
product warranty liability.
d.
property tax liability.
25. Which of the following most likely is an estimated liability?
a.
Incomes taxes payable
b.
Payroll liabilities
c.
Sales tax payable
d.
Current portion of long-term debt
26. Which of the following is a tax borne by the employer but not the employee?
a.
Federal income tax
b.
State unemployment tax
c.
Medicare tax
d.
Social security tax
27. Which of the following businesses most likely would have a large Unearned Revenue account balance
at all times?
a.
Dry cleaners
b.
Realtor
c.
Magazine publisher
d.
Department store
28. Which of the following is both an estimated liability and a contingent liability?
a.
Co signature on $500 loan
b.
Current portion of long-term debt
c.
Warranty liability
d.
Liability for dividends
29. Recording estimated product warranty expense in the year of the sale best follows which of the
following accounting principles?
a.
Matching
b.
Consistency
c.
Historical cost
d.
Full disclosure
30. A company receives $200 for a sale, of which $8 is for sales tax and $12 is for excise tax. The journal
entry to record the sale is:
a.
Cash 180
Sales 180
b.
Excise Tax expense 12
Sales Tax expense 8
Cash 180
Sales 200
c.
Sales 200
Cash 200
d.
Cash 200
Sales Tax Payable 8
Excise tax payable 12
Sales 180
31. A company receives $180 for a sale, of which $10 is for sales tax. The journal entry to record the sale
is:
a.
Sales Tax expense 10
Cash 170
Sales 180
b.
Cash 170
Sales 170
c.
Cash 180
Sales 180
d.
Cash 180
Sales Tax Payable 10
Sales 170
32. Use this information to answer the following question.
The transactions below pertain to Bolivar Company, whose fiscal year ends September 30.
Sept.
10
30
The entry to record the September 10 transaction (amounts rounded) is:
a.
Cash 1,480
Notes Payable 1,480
b.
Cash 48,520
Accounts receivable 48,520
c.
Cash 48,520
Notes Payable 48,520
d.
Cash 50,000
Notes Payable 50,000
33. Use this information to answer the following question.
The transactions below pertain to Bolivar Company, whose fiscal year ends September 30.
Sept.
10
30
The September 30 adjusting entry, rounded to the nearest dollar, to accrue the interest expense on the
note payable is:
a.
Interest Expense 329
Cash 329
b.
Cash 329
Interest Expense 329
c.
Interest Expense 329
Interest Payable 329
d.
Interest Expense 329
Notes Payable 329
34. What would be the adjusting entry for a note payable whose interest is not included in the face amount
of the note?
a.
Debit Interest Receivable and credit Interest Income.
b.
Debit Interest Expense and credit Cash.
c.
Debit Interest Expense and credit Interest Payable.
d.
Debit Cash and credit Notes Payable.
35. An employee has gross earnings of $1,200 and withholdings of $91.80 for social security and
Medicare taxes and $120 for income taxes. The employer pays $91.80 for social security and Medicare
taxes and $9.60 for FUTA. The total cost of this employee to the employer is
a.
$1,301.40.
b.
$1,200.00.
c.
$1,393.20.
d.
$1,209.60.
36. Use this information to answer the following question.
The following totals for the month of July were taken from the payroll register of Greene Company:
Salaries expense
$24,000
Social security and Medicare taxes withheld
1,100
Income taxes withheld
5,000
Medical insurance deductions
500
Life insurance deductions
400
Salaries subject to federal and state unemployment taxes of 6.2 percent
8,000
The journal entry to record the monthly payroll on July 31 would include a
a.
debit to Salaries Expense for $24,000.
b.
debit to Salaries Payable for $24,000.
c.
credit to Salaries Payable for $24,000.
d.
debit to Salaries Expense for $17,000.
37. Use this information to answer the following question.
The following totals for the month of July were taken from the payroll register of Greene Company:
Salaries expense
$24,000
Social security and Medicare taxes withheld
1,100
Income taxes withheld
5,000
Medical insurance deductions
500
Life insurance deductions
400
Salaries subject to federal and state unemployment taxes of 6.2 percent
8,000
The entry to record the payment of net payroll would include a
a.
debit to Salaries Payable for $24,000.
b.
debit to Salaries Payable for $15,900.
c.
debit to Salaries Payable for $17,000.
d.
credit to Cash for $18,100.
38. Use this information to answer the following question.
The following totals for the month of July were taken from the payroll register of Greene Company:
Salaries expense
$24,000
Social security and Medicare taxes withheld
1,100
Income taxes withheld
5,000
Medical insurance deductions
500
Life insurance deductions
400
Salaries subject to federal and state unemployment taxes of 6.2 percent
8,000
The entry to record the accrual of employer’s payroll taxes would include a debit to Payroll Taxes and
Benefits Expense for
a.
$2,496.
b.
$1,100.
c.
$1,596.
d.
$496.
39. Use this information to answer the following question.
The following totals for the month of July were taken from the payroll register of Greene Company:
Salaries expense
$24,000
Social security and Medicare taxes withheld
1,100
Income taxes withheld
5,000
Medical insurance deductions
500
Life insurance deductions
400
Salaries subject to federal and state unemployment taxes of 6.2 percent
8,000
The amount of liabilities relating to payroll, other than Salaries Payable, is
a.
$8,356.
b.
$7,496.
c.
$7,256.
d.
$8,596.
40. Use this information to answer the following question.
The following totals for the month of July were taken from the payroll register of Greene Company:
Salaries expense
$24,000
Social security and Medicare taxes withheld
1,100
Income taxes withheld
5,000
Medical insurance deductions
500
Life insurance deductions
400
Salaries subject to federal and state unemployment taxes of 6.2 percent
8,000
The entry to record the accrual of federal unemployment tax (assume FUTA tax of .8 percent) would
include a
a.
credit to Federal Unemployment Tax Payable for $64.
b.
debit to Federal Unemployment Tax Payable for $64.
c.
debit to FUTA Tax Expense for $64.