Financial Accounting, 10e (Libby)
Chapter 9 Reporting and Interpreting Liabilities
1) When a liability is initially recorded, it is recorded at the future amount of all payments.
2) A current liability is always a short-term obligation expected to be paid within one year of the
balance sheet date.
3) The accrual of interest results in an increase liabilities and a decrease in cash.
4) Cash received from customers may result in a current liability.
5) A current liability is created when a customer pays cash for services to be provided in the
future.
6) Accounts payable and accrued liabilities are interchangeable account titles.
7) Income taxes payable is an example of an accrued liability.
8) Wages expense is an example of an accrued liability account.
9) An employee has an obligation to pay his payroll taxes to the employer.
10) The FICA (social security) tax is a matching tax with a portion paid by both the employer
and the employee.
11) Deferred revenues can be classified as either current or long term liabilities.
12) Purchasing inventory on account increases the accounts payable turnover ratio.
13) The choice of inventory method has an impact on the accounts payable turnover ratio.
14) The accounts payable turnover ratio is calculated by dividing accounts payable by cash
payments to suppliers.
15) An accounts payable turnover ratio of 12 indicates that a company takes approximately 30
days, on average, to pay its suppliers.
16) The accrual of interest on a short-term note payable decreases working capital and current
assets.
17) A company borrowed $100,000 at 6% interest on September 1, 2019. Assuming adjusting
entries have not been made during the year, the entry to record interest accrued on December 31,
2019 would include a debit to interest expense and a credit to interest payable for $2,000.
18) A contingent liability is reported on the balance sheet if it is probable and can be estimated.
19) A contingent liability is disclosed in a note to the financial statements when the liability is
reasonably possible and can be estimated.
20) The journal entry to record a contingent liability creates an accrued liability on the balance
sheet and a loss on the income statement.
21) A contingent liability cannot be disclosed in a note to the financial statements unless it can
be estimated.
22) Working capital is a measure of short-run liquidity and is measured by dividing current
assets by current liabilities.
23) Working capital is a measure of long-term liquidity and is calculated by subtracting the
current liabilities from the current assets.
24) Working capital decreases when accrued wages expense is recorded at year-end.
25) Working capital decreases when a company pays taxes payable.
26) Working capital increases when a company purchases equipment and signs a 2-year note
payable.
27) Working capital increases when a company accrues sales revenue at year-end.
28) Long-term liabilities are reported on the balance sheet at an amount equal to the future cash
flows.
29) Operating leases are reported on the balance sheet at an amount equal to the present value of
the future cash flows.
30) For the present value of a single amount, only one compounding period per year is permitted.
31) An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount
over the payment amount of the prior year.
32) An annuity is a series of consecutive and unequal payments over time.
33) In order to calculate the cost of a long-term asset that is financed with long-term debt,
present values concepts are used.
34) Which of the following statements is correct?
A) Current liabilities are initially recorded at the amount of their principal plus interest.
B) Current liabilities are those liabilities due within the shorter of one year or one operating
cycle.
C) Liquidity refers to the ability to pay all debts within one year.
D) Current liabilities affect working capital and the cash flows from operating activities.
35) Which of the following is not a current liability?
A) A liability due within one year for a business with a fifteen-month operating cycle.
B) A liability due within three months for a business with a two-month operating cycle.
C) A liability due within one year for a business with a nine-month operating cycle.
D) A liability due within fifteen months for a business with a one-year operating cycle.
36) Which of the following is incorrect?
A) Current liabilities are those that will be satisfied within one year or the operating cycle,
whichever is longer.
B) Interest that will be paid in the future is included in the reported amount of a current liability.
C) Current liabilities impact a company’s liquidity.
D) Working capital is equal to current assets minus current liabilities.
37) Which of the following is correct?
A) Deferred revenues are considered increases to stockholders’ equity.
B) Working capital is measured as current liabilities minus current assets.
C) Working capital increases when a company pays the principal on a long-term note.
D) Deferred revenues will eventually become revenue earned.
38) When a company receives cash before products or services are provided the following
results:
A) Assets and stockholders’ equity increase.
B) Assets and revenue increase.
C) Liabilities and revenues increase.
D) Liabilities and assets increase.
39) Which of the following statements is correct?
A) Social Security tax is paid only by the employer.
B) The pay period always ends in conjunction with the company’s fiscal year-end.
C) Employee benefits such as vacation time and sick days should be recognized when the
employees earn the benefit and not when they take the days off from work.
D) Unemployment taxes are paid by both the employer and the employee.
40) Which of the following describes an accrued liability?
A) It is an expense that has been both incurred and paid.
B) It is an expense that has been incurred but not yet paid.
C) It is an expense that has been prepaid but not yet consumed.
D) It is a liability where the cash flow has taken place but the revenue has yet to be earned.
41) Landseeker’s Restaurants reported cost of goods sold of $322 million and accounts payable
of $84 million for 2020. In 2019, cost of goods sold was $258 million and accounts payable was
$72 million. Landseeker’s accounts payable turnover ratio in 2020 is closest to:
A) 4.25
B) 4.13
C) 3.45
D) 3.31
42) Which of the following transactions will decrease the accounts payable turnover ratio?
A) Using cash to pay an accounts payable balance.
B) Selling inventory on account.
C) Selling inventory for cash.
D) A customer returning inventory sold on account.
43) Which of the following statements incorrectly describes the accounts payable turnover
ratio?
A) A high ratio indicates that suppliers are being paid in a timely manner.
B) The ratio increases when inventory is sold on account regardless of the sales price.
C) The ratio can be manipulated by aggressively paying off accounts payable at year-end.
D) The ratio is not affected by the choice of inventory accounting methods.
44) Which of the following best describes the accrual of interest?
A) Assets and stockholders’ equity decrease.
B) Assets and liabilities decrease.
C) Net income and expenses decrease.
D) Expenses and liabilities increase.
45) On October 1, 2019, 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 should be reported in the 2020 income statement?
A) $1,000.
B) $2,000.
C) $3,000.
D) $4,000.
46) Phipps Company borrowed $25,000 cash on October 1, 2019, and signed a nine-month, 8%
interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries
have not been made during the year, the amount of accrued interest payable to be reported on the
December 31, 2019 balance sheet is which of the following?
A) $250.
B) $300.
C) $500.
D) $750.
47) Miranda Company borrowed $100,000 cash on September 1, 2019, and signed a one-year
6%, interest-bearing note payable. Assume no adjusting entries have been made during the year.
Which of the following would be the required adjusting entry at the end of the December 31,
2019 accounting period?
A)
Interest expense
2,000
Interest payable
2,000
B)
Interest expense
6,000
Interest payable
6,000
C)
Notes payable
100,000
Interest expense
6,000
Cash
106,000
D)
Interest payable
2,000
Interest expense
2,000
48) Melanie Corp. borrowed $100,000 cash on September 1, 2019, and signed a one-year 6%,
interest-bearing note payable. The interest and principal are both due on August 31, 2020.
Assume that the appropriate adjusting entry was made on December 31, 2019 and that no
adjusting entries have been made during 2020. Which of the following would be the required
journal entry to pay the note on August 31, 2020?
A)
Interest expense
6,000
Cash
6,000
B)
Interest expense
4,000
Interest payable
2,000
Notes payable
100,000
Cash
106,000
C)
Notes payable
100,000
Interest expense
6,000
Cash
106,000
D)
Interest payable
2,000
Notes payable
100,000
Cash
102,000
49) Phipps Company borrowed $25,000 cash on October 1, 2019, and signed a nine-month, 8%
interest-bearing note payable with interest payable at maturity. The amount of interest expense to
be reported during 2020 is which of the following?
A) $1,000.
B) $300.
C) $500.
D) $750.
50) Thomas Company borrowed $30,000 on March 1, 2019. Thomas signed a 2-year 6%
interest-bearing note. What is the adjustment amount to accrue interest on December 31, 2020?
A) $1,800.
B) $3,600.
C) $300.
D) $1,200.