Financial Accounting: IFRS, 11e, GE
Harrison/Horngren/Thomas/Tietz/Suwardy
Test Item File
Chapter 9: Liabilities
9.1-1 Current liabilities are obligations due within one year or within the company’s normal operating cycle
if it is longer than one year.
9.1-2 The amount of an obligation must be known in advance to be considered a liability.
9.1-3 The purchase of merchandise inventory frequently results in a liability.
9.1-4 If a company has a short-term note payable, it must accrue interest expense and interest payable at the
end of the period.
9.1-5 The presence of an Unearned Revenue account on a company’s balance sheet indicates that the
company received cash from customers prior to providing goods and services.
9.1-6 When recording interest accrued on very short-term notes, the interest can be added to the Notes
Payable account.
9.1-7 An accrued expense is an expense incurred in the current period that will be paid in a future
period.
9.1-8 Sales tax payable is an estimated liability arising out of sales revenue that has been reported on the
income statement.
9.1-9 The amount of long-term debt that must be paid in the current period affects the current ratio.
9.1-10 Sales tax collected by the merchant is an expense on their books.
9.1-11 For most service companies, the major expense is employee compensation.
9.1-12 When a company has earned all of the revenue it had previously collected in advance, the balance in
the unearned revenue account will be zero.
9.1-13 Warranty payable is an example of a liability that exists, but its exact amount is not known.
9.1-14 Warranty expense is recognized in the same period that the sales revenue is recognized because of the
conservatism principle.
9.1-15 The estimated warranty payable account will be zeroed out at the end of every fiscal year.
9.1-16 A contingent liability is a potential liability, with the dollar amount of the liability dependent on a
future event arising out of a past transaction.
9.1-17 A contingent liability that has a remote chance of occurrence should be disclosed in the financial
statement footnotes.
9.1-18 A contingent liability that has a probable chance of occurrence should be recorded in the financial
statements.
9.1-19 Contingent liabilities are reported on the income statement.
9.1-20 Companies that are experiencing financial difficulties will want to overstate liabilities, rather than
understate liabilities.
9.1-21 Current liabilities are obligations due within:
A) one month or within the company’s normal operating cycle if it is longer than one month.
B) one year or within the company’s normal operating cycle if it is longer than one year.
C) one year or within the company’s normal operating cycle if it is shorter than one year.
D) one month or within the company’s normal operating cycle if it is shorter than one month.
9.1-22 Obligations that are due beyond one year or after the company’s normal operating cycle if longer than
a year are:
A) current liabilities.
B) estimated liabilities.
C) long-term liabilities.
D) current installment of long-term debt.
9.1-23 At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term
note payable. As a result of this transaction:
A) current liabilities increase and current assets decrease.
B) current liabilities increase and equity increases.
C) current liabilities increase and equity decreases.
D) current liabilities decrease and equity decreases.
9.1-24 If at the end of the year, a company has a short-term note payable outstanding that was entered into
earlier in the current year:
A) short-term notes payable and interest payable will appear on the balance sheet and interest
expense will appear on the income statement.
B) short-term notes payable will appear on the balance sheet and interest expense and interest
payable will appear on the income statement.
C) short-term notes payable will be the only item appearing on the balance sheet.
D) none of the above will occur.
9.1-25 The journal entry to record payroll:
A) debits salary expense for the gross payroll.
B) credits income tax payable for the income tax that has been withheld from the employees.
C) credits salary payable for the net pay.
D) does all of the above.
9.1-26 When a business receives cash from a customer before earning the revenue, they have a(n):
A) contingent liability.
B) unearned revenue.
C) account payable.
D) prepaid revenue.
9.1-27 When a company makes a journal entry to record revenue that it had previously collected in advance:
A) it debits unearned revenue and credits cash.
B) it debits unearned revenue and credits a revenue account.
C) a liability decreases and revenue increases.
D) both B and C occur.
9.1-28 Failure to record an accrued liability causes a company to:
A) understate liabilities.
B) understate owners’ equity.
C) overstate expenses.
D) overstate assets.
9.1-29 A company failed to recognize an accrued liability. As a result, the current ratio is:
A) understated because the denominator is overstated.
B) understated because the denominator is understated.
C) overstated because the denominator is understated.
D) overstated because the denominator is overstated.
9.1-30 Which of the following are overstated as a result of the failure to record an accrued liability?
A) Net income, current ratio and rate of return on debt
B) Current ratio, acid-test ratio and rate of return on debt
C) Net income, acid-test ratio and rate of return on debt
D) Net income, current ratio and acid test ratio
9.1-31 Warranty expense should be recorded in the period:
A) the product is paid for by the customer.
B) immediately following the period in which the product is sold.
C) the product sold is repaired or replaced.
D) the product is sold and recognized as sales.
9.1-32 The accounting principle requiring that a company record the warranty expense in the same period
that it records sales revenue is the:
A) consistency principle.
B) historical cost principle.
C) matching principle.
D) stable-dollar principle.
9.1-33 The Oven Store has a short-term note payable of $3,000. At maturity, the interest on the note is $200
and has not been accrued. The journal entry to record the payment of the note would include:
A) a debit to Note Payable for $3,000.
B) a credit to cash for $3,200.
C) a debit to interest expense for $200.
D) all of the above.
9.1-34 Monthly sales were $150,000. Warranty costs are estimated at 5% of monthly sales. In the month of
sale, the company should record a debit to:
A) Warranty Payable for $7,500.
B) Warranty Expense for $7,500.
C) Sales for $7,500.
D) none of the above. No entry is required since the actual liability amount is not known.
9.1-35 Jaye’s Company paid $750 cash to replace a part on equipment sold under warranty. To recognize the
payment, which of the following are correct?
A) Debit Warranty Payable and credit Cash
B) Debit Warranty Expense and credit Cash
C) Debit Equipment Expense and credit Cash
D) Debit Parts Expense and credit Cash
9.1-36 The beginning balance in the Warranty Payable account was $50,000. Sales were $900,000 and warranty
costs were estimated at 7% of sales. During the year, $55,000 was paid to settle warranty claims. As a result of
these transactions, what is the amount of warranty expense for the year and what is the ending balance in
Warranty Payable?
Warranty Expense Warranty Payable
A) $50,000 $63,000
B) $63,000 $58,000
C) $55,000 $63,000
D) $113,000 $58,000
9.1-37 On December 11, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30-day, 9%
note payable. The amount of accrued interest on December 31 (using a 360 day year) is:
A) $63.
B) $65.
C) $98.
D) $75.
9.1-38 On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30-day, 9%
note payable. The total cash paid for interest at maturity of the note (using a 360 day year) is:
A) $70.
B) $97.50.
C) $1,300.
D) $13,000.
9.1-39 On December 12, the G. Baker Corporation purchases $13,000 of equipment by issuing a 30-day, 9%
note payable. The total cash paid on the maturity date of the note (using a 360 day year) is:
A) $13,000.
B) $13,065.
C) $13,097.50.
D) $13,750.
9.1-40 The journal entry to record accrued interest on a short-term note payable must include a debit to:
A) Interest Expense and a credit to Notes Payable.
B) Interest Expense and a credit to Interest Payable.
C) Interest Payable and a credit to Interest Expense.
D) Interest Payable and a credit to Notes Payable.
9.1-41 Current liabilities fall into two categories which are referred to as:
A) liabilities of a known amount and estimated liabilities.
B) contingent liabilities and noncontingent liabilities.
C) contingent liabilities and contra-liabilities.
D) unearned liabilities and accrued liabilities.
9.1-42 The current installment of long-term debt:
A) is classified as a long-term liability.
B) is classified as a short-term liability.
C) does not need to be separated from the long-term debt.
D) is none of the above.
9.1-43 Speedo sales had monthly sales of $773,000. There is a 7% state sales tax. The amount of the sales
tax payable is:
A) $50,570.
B) $54,110.
C) $63,250.
D) $71,242.
9.1-44 Short-term notes payable are:
A) generally due within three months, with a maximum time period of six months.
B) shown as a reduction to notes receivable on the balance sheet, with an appropriate footnote
disclosure.
C) shown on the balance sheet after bonds payable.
D) shown on the balance sheet with current liabilities.
9.1-45 Which entry could be used when dealing with sales tax?
A) Debit Sales Tax Payable and credit Sales Tax Expense
B) Debit Sates Tax Expense and credit Sales
C) Debit Cash and credit Sales Tax Payable
D) Debit Sales Tax Expense and credit Sales Tax Payable
9.1-46 Davis Company’s sales for March 19 were $31,900. Davis is required to collect a 7% state sales tax.
The total cash received from customers was:
A) $ 2,233.
B) $21,289.
C) $31,223.
D) $34,133.
9.1-47 The Salary Expense account is debited for:
A) payroll tax liabilities only.
B) gross pay only.
C) gross pay plus employee payroll liabilities.
D) gross pay minus employee payroll liabilities.
9.1-48 The total earnings of an employee for the payroll period is the:
A) net pay.
B) gross pay.
C) take home pay.
D) withholdings.
9.1-49 Which of the following accounts represents a deferred revenue?
I. Interest Revenue
II. Income Tax Payable
III. Unearned Subscription Revenue
A) I only
B) II only
C) III only
D) Both II and III
9.1-50 Computing Magazine receives $100 in advance from a customer for a 2 year subscription.
Computing Magazine’s entry to record this transaction would include a:
A) debit to Subscription Revenue for $100.
B) credit to Subscription Revenue for $100.
C) debit to Unearned Subscription Revenue for $100.
D) credit to Unearned Subscription Revenue for $100.
9.1-51 Kosovo Company has $45 million in long-term debt, payable in annual installments of $15 million.
How much of the debt should be reported as current liabilities? How much as long-term liabilities?
Current Liabilities Long-Term Liabilities
A) $0 $45 million
B) $7.5 million $40 million
C) $15 million $30 million
D) $45 million $0
9.1-52 Potential liabilities that depend on future events arising out of past events are called:
A) actual liabilities.
B) contingent liabilities.
C) estimated liabilities.
D) long-term liabilities.
9.1-53 A company has a contingent loss that can be estimated and has a probable chance of occurrence.
What reporting does the FASB require regarding this contingency?
A It should be accrued and reported on the financial statements and reported in the notes to the
financial statements.
B It should be reported in the notes to the financial statements.
C It should be ignored until the actual loss materializes.
D It should be accrued and reported on the financial statements.
9.1-54 A company has a contingent loss that can be estimated and has a reasonably possible chance of
occurrence. What reporting does the IASB require regarding this contingency?
A) It should be put into a memo until the actual loss materializes.
B) It should be accrued and reported on the financial statements and reported in the notes to the
financial statements.
C) It should be accrued and reported on the financial statements.
D) It should be reported in the notes to the financial statements.
9.1-55 A company has a contingent loss that can be estimated, but the chance of it occurring is remote. What
reporting does the IASB require regarding this contingency?
A) It should not be accrued or reported in the notes to the financial statements.
B) It should be accrued and reported on the financial statements and reported in the notes to the
financial statements.
C) It should be accrued and reported on the financial statements.
D) It should be reported in the notes to the financial statements.
9.1-56 A company has a probable contingent gain that can be reasonably estimated. What reporting does the
IASB require regarding this contingency?
A) It should be ignored until the actual gain materializes.
B) It should either be recorded on the financial statements or reported in the notes to the financial
statements.
C) It should be accrued and reported in the financial statements.
D) It should be reported in the notes to the financial statements.
9.2-1 Since companies cannot borrow millions from a single lender, companies will issue bonds payable to
individual bondholders.
9.2-2 A bond issued at a price below its maturity or par value is sold at a discount.
9.2-3 Bonds payable are reported on the balance sheet as a percentage of their issue price.
9.2-4 The account Discount on Bonds Payable decreases a company’s liabilities.
9.2-5 Market interest is alternatively known as effective interest.
9.2-6 Bond prices are quoted as a percentage of their par value.
9.2-7 Present value expresses the amount of cash that must be invested today to receive a greater amount in
the future.
9.2-8 The time value of money states that money earns interest over time.
9.2-9 The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds
Payable from Bonds Payable.
9.2-10 At maturity, a bond’s carrying value equals its par value.
9.2-11 If the interest rate on a bond is 9% and the market interest rate is 8%, the bond will be issued at a
price below the par value of the bond.
9.2-12 The future value is always less than the present value.
9.2-13 Secured bonds are also called:
A) debenture bonds.
B) convertible bonds.
C) mortgage bonds.
D) callable bonds.
9.2-14 Bonds payable are:
A) debts of the issuing company.
B) issued to multiple lenders called bondholders.
C) groups of notes payable.
D) all of the above.
9.2-15 Another term for the face value of a bond is:
A) principal.
B) maturity value.
C) par value.
D) all of the above.