Financial Accounting, 5e (Spiceland)
Chapter 8 Current Liabilities
1) American, Delta, and United Airlines have all, at one time, filed for bankruptcy.
2) In a classified balance sheet, we categorize all liabilities as current.
3) Typically, current liabilities are payable within one year, and long-term liabilities are payable
more than one year from the balance sheet date.
4) Given a choice, most companies would prefer to report a liability as current rather than long-
term, because doing so may cause the firm to appear less risky.
5) When a company borrows cash from a bank promising to repay the amount borrowed plus
interest, the borrower reports its liability as notes payable.
6) Interest is stated in terms of an annual percentage rate to be applied to the face value of the
loan.
7) We record interest expense in the period in which we pay it, rather than in the period we incur
it.
8) A line of credit is an informal agreement that permits a company to borrow up to a
prearranged limit without having to follow formal loan procedures and paperwork.
9) If a company borrows from another company rather than from a bank, the note is referred to
as commercial paper.
10) Accounts payable are amounts the company owes to suppliers of merchandise or services
that it has bought on credit.
11) Deductions from employee salaries in determining the amount of payroll checks include
withholdings for federal and state income taxes, FICA taxes, and the employee portion of
insurance and retirement contributions.
12) All states impose a state income tax.
13) Companies are required by law to withhold federal and state income taxes from employees’
paychecks and remit these taxes to the government.
14) The employer records amounts deducted from employee payroll as liabilities until it pays
them to the appropriate organizations.
15) FICA taxes are paid only by the employee.
16) The employer is required to match the amount of FICA taxes withheld for each employee,
effectively doubling the amount paid into Social Security.
17) Additional employee benefits paid for by the employer are often referred to as fringe
benefits.
18) When a company receives cash in advance, it debits Cash and credits a revenue account
called Deferred Revenue.
19) Airlines do not record revenue when a ticket is sold, but wait to record revenue until the
actual flight occurs.
20) All states impose a general state sales tax, and many areas include an additional local sales
tax.
21) Companies selling products subject to sales taxes are responsible for collecting the sales tax
directly from customers and periodically remitting the sales taxes collected to the state and local
governments.
22) When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax
Payable.
23) Sales taxes collected from customers by the seller are not an expense. Instead, they represent
current liabilities payable to the government.
24) Long-term obligations such as notes, mortgages, and bonds are reported as long-term
liabilities when they become payable within one year of the balance sheet date.
25) Given a choice, most managers would choose to record an obligation as long-term rather
than current.
26) A contingent liability is an existing, uncertain situation that might result in a loss.
27) We record a contingent liability when the likelihood of the loss occurring is reasonably
possible and the amount is reasonably estimable.
28) The journal entry to record a contingent liability requires a debit to a loss (or expense)
account and a credit to a liability.
29) Regarding a contingent liability, when no amount within a range of potential losses appears
more likely than others, we record the maximum amount in the range.
30) If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but
make full disclosure in a note to the financial statements to describe the contingency.
31) If the likelihood of loss is remote, disclosure of a contingency usually is not required.
32) A contingent liability is recorded only if a loss is at least reasonably possible and the amount
is reasonably estimable.
33) The balance in the Warranty Liability account is always equal to Warranty Expense.
34) A gain contingency is an existing uncertain situation that might result in a gain, which often
is the flip side of loss contingencies.
35) We record gain contingencies when the gain is probable and the amount is reasonably
estimable.
36) A company is said to be liquid if it has sufficient cash to pay currently maturing debts.
37) The current ratio is calculated by dividing current liabilities by current assets.
38) The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more
conservative measure of current assets available to pay current liabilities.
39) Quick assets include only cash, short-term investments, and accounts receivable.
40) A lower current ratio or acid-test ratio generally indicates a greater ability to pay current
liabilities on a timely basis.
41) Which of the following is not a reason why a company might prefer to report a liability as
long-term rather than current?
A) It may cause the firm to appear less risky to investors and creditors.
B) It may increase interest rates on borrowing.
C) It may cause the company to appear more stable commanding a higher stock price for new
stock listings.
D) It may reduce interest rates on borrowing.
42) Given a choice, most companies would prefer to report a liability as long-term rather than
current because:
A) It may cause the firm to appear less risky to investors and creditors.
B) It may reduce interest rates on borrowing.
C) It may cause the company to appear more stable, commanding a higher stock price for new
stock listings.
D) All of the other answer choices are correct.
43) Which of the following is not a current liability?
A) Accounts payable.
B) A note payable due in 2 years.
C) Current portion of long-term debt.
D) Sales tax payable.
44) In most cases, current liabilities are payable within ________ year(s), and long-term
liabilities are payable more than ________ year(s) from the balance sheet date.
A) one; two
B) one; one
C) two; two
D) one; ten
45) Which of the following is not a characteristic of a liability?
A) It represents a probable, future sacrifice of economic benefits.
B) It must be payable in cash.
C) It arises from present obligations to other entities.
D) It results from past transactions or events.
46) Which of the following is not a liability?
A) Notes payable.
B) Current portion of long-term debt.
C) An unused line of credit.
D) Deferred revenue.
47) Liabilities are defined as:
A) Resources owed by an entity as a result of past transactions.
B) Resources owned by an entity as a result of past transactions.
C) Selling products and services to customers in the current period.
D) Costs of running the business in the current period.
48) Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry
should Brian Inc. record?
A) Debit Cash, $8,000; Credit Notes Receivable, $8,000.
B) Debit Notes Receivable, $8,000; Credit Cash, $8,000.
C) Debit Cash, $8,000; Credit Notes Payable, $8,000.
D) Debit Notes Payable, $8,000; Credit Cash, $8,000.
49) Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry
should First Bank record?
A) Debit Cash, $8,000; Credit Notes Receivable, $8,000.
B) Debit Notes Receivable, $8,000; Credit Cash, $8,000.
C) Debit Cash, $8,000; Credit Notes Payable, $8,000.
D) Debit Notes Payable, $8,000; Credit Cash, $8,000.
50) Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What
entry should Bear Essentials record?
A) Debit Cash, $50,000; Credit Notes Receivable, $50,000.
B) Debit Notes Receivable, $50,000; Credit Cash, $50,000.
C) Debit Cash, $50,000; Credit Notes Payable, $50,000.
D) Debit Notes Payable, $50,000; Credit Cash, $50,000.
51) Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What
entry should Stacks Bank record?
A) Debit Cash, $50,000; Credit Notes Receivable, $50,000.
B) Debit Notes Receivable, $50,000; Credit Cash, $50,000.
C) Debit Cash, $50,000; Credit Notes Payable, $50,000.
D) Debit Notes Payable, $50,000; Credit Cash, $50,000.
52) On November 1, 2021, a company signed a $100,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2022. The company
should report interest payable at December 31, 2021, in the amount of:
A) $0.
B) $1,000.
C) $2,000.
D) $3,000.
53) On November 1, 2021, a company signed a $100,000, 6%, six-month note payable with the
amount borrowed plus accrued interest due six months later on May 1, 2022. The company
records the appropriate adjusting entry for the note on December 31, 2021. In recording the
payment of the note plus accrued interest at maturity on May 1, 2022, the company would:
A) Debit Interest Expense, $2,000.
B) Debit Interest Expense, $1,000.
C) Debit Interest Payable, $2,000.
D) Debit Interest Expense, $3,000.
54) On September 1, 2021, Daylight Donuts signed a $100,000, 9%, six-month note payable
with the amount borrowed plus accrued interest due six months later on March 1, 2022. Daylight
Donuts should report interest payable at December 31, 2021, in the amount of: (Do not round
your intermediate calculations.)
A) $0.
B) $1,500.
C) $3,000.
D) $4,500.
55) On September 1, 2021, Daylight Donuts signed a $100,000, 9%, six-month note payable
with the amount borrowed plus accrued interest due six months later on March 1, 2022. Daylight
Donuts records the appropriate adjusting entry for the note on December 31, 2021. In recording
the payment of the note plus accrued interest at maturity on March 1, 2022, Daylight Donuts
would: (Do not round your intermediate calculations.)
A) Debit Interest Expense, $3,000.
B) Debit Interest Expense, $1,500.
C) Debit Interest Payable, $1,500.
D) Debit Interest Expense, $4,500.
56) On December 1, 2021, Old World Deli signed a $300,000, 5%, six-month note payable with
the amount borrowed plus accrued interest due six months later on June 1, 2022. Old World Deli
should record which of the following adjusting entries at December 31, 2021?
A) Debit Interest Expense and credit Interest Payable, $7,500.
B) Debit Interest Expense and credit Cash, $7,500.
C) Debit Interest Expense and credit Interest Payable, $1,250.
D) Debit Interest Expense and credit Cash, $1,250.
57) On December 1, 2021, Old World Deli signed a $300,000, 5%, six-month note payable with
the amount borrowed plus accrued interest due six months later on June 1, 2022. Old World Deli
records the appropriate adjusting entry for the note on December 31, 2021. What amount of cash
will be needed to pay back the note payable plus any accrued interest on June 1, 2022?
A) $300,000.
B) $301,250.
C) $306,250.
D) $307,500.
58) On November 1, 2021, New Morning Bakery signed a $200,000, 6%, six-month note
payable with the amount borrowed plus accrued interest due six months later on May 1, 2022.
New Morning Bakery should record which of the following adjusting entries at December 31,
2021? (Do not round your intermediate calculations.)
A) Debit Interest Expense and credit Interest Payable, $2,000.
B) Debit Interest Expense and credit Cash, $2,000.
C) Debit Interest Expense and credit Interest Payable, $6,000.
D) Debit Interest Expense and credit Cash, $6,000.
59) On November 1, 2021, New Morning Bakery signed a $200,000, 6%, six-month note
payable with the amount borrowed plus accrued interest due six months later on May 1, 2022.
New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2021.
What amount of cash will be needed to pay back the note payable plus any accrued interest on
May 1, 2022? (Do not round your intermediate calculations.)
A) $200,000.
B) $202,000.
C) $204,000.
D) $206,000.
60) The Pita Pit borrowed $100,000 on November 1, 2021, and signed a six-month note bearing
interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In
connection with this note, The Pita Pit should report interest expense at December 31, 2021, in
the amount of: (Do not round your intermediate calculations.)
A) $0.
B) $1,000.
C) $2,000.
D) $6,000.
61) The Pita Pit borrowed $100,000 on November 1, 2021, and signed a six-month note bearing
interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In
connection with this note, The Pita Pit should report interest expense in 2022 for the amount of:
A) $0.
B) $4,000.
C) $2,000.
D) $6,000.
62) Universal Travel, Inc. borrowed $500,000 on November 1, 2021, and signed a twelve-month
note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31,
2022. In connection with this note, Universal Travel, Inc. should report interest payable at
December 31, 2021, in the amount of: (Do not round your intermediate calculations.)
A) $8,000.
B) $30,000.
C) $5,000.
D) $25,000.
63) Universal Travel, Inc. borrowed $500,000 on November 1, 2021, and signed a twelve-month
note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31,
2022. In connection with this note, Universal Travel, Inc. should record interest expense in 2022
in the amount of:
A) $8,000.
B) $30,000.
C) $5,000.
D) $25,000.
64) Large, highly-rated firms sometimes sell commercial paper:
A) To borrow funds at a lower rate than through a bank.
B) To borrow funds when they cannot obtain a loan from a bank.
C) Because they can’t borrow anywhere else.
D) To improve their credit rating.
65) An informal agreement that allows a company to borrow up to a prearranged limit without
having to follow formal loan procedures and prepare paperwork is known as:
A) A line of credit.
B) Commercial Paper.
C) A debt covenant.
D) Working capital.