Chapter 09 – Reporting and Interpreting Liabilities
49. Which of the following statements incorrectly describes the accounts payable turnover
ratio?
50. On September 1, 2010, Donna Equipment signed a one-year, 8% interest-bearing note
payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year
basis, how much interest expense that should be reported in the 2011 income statement?
Chapter 09 – Reporting and Interpreting Liabilities
51. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8%
interest-bearing note payable with interest payable at maturity. Assuming that no adjusting
entries have been made during the year, the amount of accrued interest payable to be reported
on the December 31, 2010 balance sheet is which of the following?
52. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8%
interest-bearing note payable with interest payable at maturity. The amount of interest
expense to be reported during 2011 is which of the following?
Chapter 09 – Reporting and Interpreting Liabilities
53. Failure to make a necessary adjusting entry for accrued interest on a note payable would
result in which of the following?
54. The adjusting entry to record accrued interest on a note payable would not result in which
of the following?
Chapter 09 – Reporting and Interpreting Liabilities
55. Which of the following statements is incorrect?
56. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and
repayments of the principal are payable annually in $2 million installments. Purdum Farms
makes the first payment December 31, 2010 and then prepares its balance sheet. What amount
will be reported as current and long-term liabilities respectively in connection with the note at
December 31, 2010?
Chapter 09 – Reporting and Interpreting Liabilities
57. How should a contingent liability that is “reasonably possible” but “cannot reasonably be
estimated” be reported within the financial statements?
58. Young Company is involved in a lawsuit. When would the lawsuit be recorded as a
liability on the balance sheet?
Chapter 09 – Reporting and Interpreting Liabilities
59. Houston Company is involved in a lawsuit. In which of the following situations is only
footnote disclosure of the contingent liability reported within the financial statements?
60. Which of the following statements about contingent liabilities is incorrect?
Chapter 09 – Reporting and Interpreting Liabilities
61. Rice Corporation’s attorney has provided the following summaries of three lawsuits
against Rice:
• Lawsuit A: The loss is probable, but the loss can’t be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss can’t be reasonably estimated
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?
Chapter 09 – Reporting and Interpreting Liabilities
62. Rice Corporation’s attorney has provided the following summaries of three lawsuits
against Rice:
• lawsuit A: The loss is probable, but the loss can’t be reasonably estimated.
• lawsuit B: The loss is reasonably possible, but the loss can’t be reasonably estimated.
• lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is incorrect?
Chapter 09 – Reporting and Interpreting Liabilities
63. Darwin Corporation’s attorney has provided the following summaries of three lawsuits
against Darwin:
• lawsuit A: The loss is probable and the loss can be reasonably estimated.
• lawsuit B: The loss is reasonably possible and the loss can’t be reasonably estimated.
• lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
Which of the following statements is incorrect?
Chapter 09 – Reporting and Interpreting Liabilities
64. Smith Corporation entered into the following transactions:
• Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements is correct?
Chapter 09 – Reporting and Interpreting Liabilities
65. Smith Corporation entered into the following transactions:
• Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the above transactions resulted in an increase in working capital?
Chapter 09 – Reporting and Interpreting Liabilities
66. SRJ Corporation entered into the following transactions:
• The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The accrual of revenue.
Which of the above transactions resulted in a decrease in working capital?
Chapter 09 – Reporting and Interpreting Liabilities
67. SRJ Corporation entered into the following transactions:
• The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The accrual of revenue.
Which of the above transactions resulted in an increase in working capital?
Chapter 09 – Reporting and Interpreting Liabilities
68. SRJ Corporation entered into the following transactions:
• The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The accrual of revenue.
Which of the following statements is correct with respect to determining the net cash flow
from operating activities on a statement of cash flows?
Chapter 09 – Reporting and Interpreting Liabilities
69. Rocket Corporation entered into the following transactions:
• The accrual of wages and salaries expense.
• The cash payment of a six-month note payable.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket’s working
capital? Assume that Rocket’s operating cycle is four months.
Chapter 09 – Reporting and Interpreting Liabilities
70. Rocket Corporation entered into the following transactions:
• The accrual of wages and salaries expense.
• The cash sale of equipment for a loss.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket’s cash flows
from operating activities on the statement of cash flows?
71. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing
to pay $10,000 for each of the next ten years beginning one-year from the purchase date.
Short’s incremental borrowing rate is 10%. What amount of liability would be reported on the
balance sheet as of the purchase date, after the initial $10,000 payment was made?
Chapter 09 – Reporting and Interpreting Liabilities
72. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing
to pay $10,000 for each of the next ten years beginning one-year from the purchase date.
Short’s incremental borrowing rate is 10%. At what amount would the land be reported at on
the balance sheet?
73. Libby Company purchased equipment by paying $5,000 cash on the purchase date and
agreeing to pay $5,000 every six months during the next four years; the first payment is due
six months after the purchase date. Libby’s incremental borrowing rate is 8%. At what amount
would the equipment be reported at on the balance sheet as of the purchase date?
Chapter 09 – Reporting and Interpreting Liabilities
74. Libby Company purchased equipment by paying $5,000 cash on the purchase date and
agreeing to pay $5,000 every six months during the next four years; the first payment is due
six months after the purchase date. Libby’s incremental borrowing rate is 8%. At what amount
would the liability be reported on the balance sheet as of the purchase date, after the initial
$5,000 payment was made?
75. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and
agreeing to pay $3,000 every three months during the next five years; the first payment is due
three months after the purchase date. Rae’s incremental borrowing rate is 12%. At what
amount would the liability be reported at on the balance sheet as of the purchase date, after
the initial $10,000 payment was made?
Chapter 09 – Reporting and Interpreting Liabilities
76. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and
agreeing to pay $3,000 every three months during the next five years; the first payment is due
three months after the purchase date. Rae’s incremental borrowing rate is 12%. At what
amount would the vehicle be reported at on the balance sheet as of the purchase date?
77. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the
purchase date and agreeing to pay $10,000 every three months during the next two years; the
first payment is due three months after the purchase date. Rusty’s incremental borrowing rate
is 8%. At what amount would the machine be reported at on the balance sheet as of the
purchase date?
Chapter 09 – Reporting and Interpreting Liabilities
78. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the
purchase date and agreeing to pay $10,000 every three months during the next two years; the
first payment is due three months after the purchase date. Rusty’s incremental borrowing rate
is 8%. At what amount would the liability be reported at on the balance sheet as of the
purchase date, after the initial $50,000 payment was made?
79. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date,
agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the
purchase date; the first payment is due one year after the purchase date. Rachel’s incremental
borrowing rate is 10%. At what amount would the building be reported at on the balance sheet
as of the purchase date?