51) Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%, interest-
bearing note payable. The interest and principal are both due on March 31, 2020.
The amount of interest expense for the year ended December 31, 2019 is:
A) $6,000.
B) $4,500.
C) $4,000.
D) $1,500.
52) Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%, interest-
bearing note payable. The interest and principal are both due on March 31, 2020.
Assume that the appropriate adjusting entry was made on December 31, 2019 and that no
adjusting entries have been made during 2020. What is the amount of interest expense to be
recorded when the interest and principal are paid on March 31, 2020?
A) $6,000.
B) $4,500.
C) $4,000.
D) $1,500.
53) Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%, interest-
bearing note payable. The interest and principal are both due on March 31, 2020.
What is the amount to be paid to the bank on March 31, 2020 for interest and principal?
A) $50,000.
B) $51,500.
C) $54,000.
D) $56,000.
54) Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%, interest-
bearing note payable. The interest and principal are both due on March 31, 2020.
Assume that no adjusting entries had been made before December 31, 2019. Which of the
following would be the required adjusting entry on December 31, 2019?
A)
Interest expense
xxx
Cash
xxx
B)
Interest expense
xxx
Interest payable
xxx
Notes payable
xxx
C)
Interest expense
xxx
Note payable
xxx
Interest payable
xxx
D)
Interest expense
xxx
Interest payable
xxx
55) Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%, interest-
bearing note payable. The interest and principal are both due on March 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 entire amount due on March 31, 2020?
A)
Interest expense
xxx
Interest payable
xxx
Notes payable
xxx
Cash
xxx
B)
Interest expense
xxx
Notes payable
xxx
Interest payable
xxx
Cash
xxx
C)
Note payable
xxx
Interest payable
xxx
Cash
xxx
D)
Interest payable
xxx
Note payable
xxx
Cash
xxx
56) Failure to make a necessary adjusting entry for accrued interest on a note payable would
result in which of the following?
A) Liabilities and stockholders’ equity would both be understated.
B) Net income would be overstated and assets would be understated.
C) Net income would be understated and liabilities would be understated.
D) Net income and stockholders’ equity would be overstated and liabilities would be understated.
57) Which of the following would not be a result of the adjusting entry to record accrued interest
on a note payable?
A) A decrease in net income.
B) A decrease in stockholders’ equity.
C) An increase in liabilities.
D) A decrease in current assets.
58) The accrual of interest results in the following:
A) Increase in assets and liabilities.
B) Increase in assets and stockholders’ equity.
C) Increase in liabilities and decrease in stockholders’ equity.
D) Increase in liabilities and increase in stockholders’ equity.
59) Which of the following statements is incorrect?
A) The currently maturing portion of long-term debt must be classified as a current liability.
B) The non-current portion of long-term debt will be correctly reported as a long-term liability.
C) When a company plans to refinance the currently maturing debt on a long-term basis, and has
the ability to do so, it may report the currently maturing debt as a long-term liability.
D) The currently maturing portion of long-term debt is a current liability if it is due within one
year from the date of the balance sheet, or within the operating cycle, whichever is longer.
60) Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2017.
Repayments of the principal are payable annually in installments of $2 million each. Purdum
Farms makes the first payment on December 31, 2018 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, 2018, after the first payment is made?
A) $2 million in current liabilities and $8 million in long-term liabilities.
B) $2 million in current liabilities and $6 million in long-term liabilities.
C) Zero in current liabilities and $8 million in long-term liabilities.
D) Zero in current liabilities and $10 million in long-term liabilities.
61) How should a contingent liability that is reasonably possible but cannot reasonably be
estimated be reported within the financial statements?
A) It must be recorded and reported as a liability.
B) It does not need to be recorded as a liability nor disclosed in a note.
C) It must only be disclosed as a note to the financial statements.
D) It must be reported as a liability, but not disclosed in a note.
62) Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability
on the balance sheet?
A) When the loss probability is remote and the amount can be reasonably estimated.
B) When the loss is probable and the amount can be reasonably estimated.
C) When the loss probability is reasonably possible and the amount can be reasonably estimated.
D) When the loss is probable regardless of whether the loss can be reasonably estimated.
63) Houston Company is involved in a lawsuit. In which of the following situations is only a
note disclosure of the contingent liability reported within the financial statements?
A) When the loss is remote and the amount cannot be reasonably estimated.
B) When the loss is probable and the amount can be reasonably estimated.
C) When the loss is reasonably possible and the amount can be reasonably estimated.
D) When the loss is remote and the amount can be reasonably estimated.
64) Which of the following statements about contingent liabilities is incorrect?
A) A disclosure note is required when the loss is reasonably possible and the amount cannot be
reasonably estimated.
B) A disclosure note is required when the loss is probable and the amount cannot be reasonably
estimated.
C) A disclosure note is required when the loss is reasonably possible and the amount can be
reasonably estimated.
D) A disclosure note is required when the loss is remote and the amount can be reasonably
estimated.
65) Rice Corporation’s attorney has provided the following summaries of three lawsuits against
Rice:
• Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?
A) A disclosure note is required for each of the three lawsuits.
B) A disclosure note is required only for lawsuits A & C.
C) A disclosure note is required only for lawsuit A.
D) A disclosure note is required only for lawsuits B & C.
66) Rice Corporation’s attorney has provided the following summaries of three lawsuits against
Rice:
• Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is incorrect?
A) A disclosure note is required for lawsuit A.
B) A disclosure note is required for lawsuit B.
C) A disclosure note is required for lawsuit C.
D) Lawsuit A is reported on the balance sheet as a liability.
67) 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 cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
Which of the following statements is incorrect?
A) There is a 70% chance that lawsuit A will result in a future economic sacrifice for Darwin.
B) A disclosure note is required for lawsuit C.
C) A disclosure note is not required for lawsuit B.
D) Lawsuit A is reported on the balance sheet as a liability.
68) With regard to reporting of contingent liabilities, U.S. GAAP and International Financial
Reporting Standards (IFRS) differ in defining the term “probable”. Which of the following is
correct with regard to defining “probable”?
A) Under U.S. GAAP, “probable” means an event is more likely than not to occur.
B) Under IFRS, “probable” means the chance of an event occurring is slight.
C) Under IFRS, “probable” means an event is more likely than not to occur.
D) Under U.S. GAAP, “probable” means the chance of an event occurring is slight but less than
likely.
69) Which of the following results in a decrease in working capital?
A) Supplies purchased with cash.
B) Purchase of a truck in exchange for factory machinery.
C) Acquisition of land in exchange for stock.
D) Purchase of equipment with cash.
70) Smith Corporation entered into the following transactions:
• Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements about Smith’s transactions is correct?
A) The inventory purchase on account increased working capital.
B) Collecting an account receivable increases working capital.
C) The equipment purchase decreases working capital.
D) The inventory purchase on account decreases working capital.
71) Smith Corporation entered into the following transactions:
• Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the transactions for Smith Corporation resulted in an increase in working capital?
A) The inventory purchase on account.
B) Collecting an account receivable.
C) The purchase of equipment using cash.
D) None of the transactions resulted in an increase in working capital.
72) 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 reclassification of short-term debt to long-term debt.
Which of the transactions for SRJ Corporation resulted in a decrease in working capital?
A) The accrual of interest expense.
B) Collecting cash for services to be provided in the future.
C) Collecting cash on accounts receivable.
D) Both the accrual of interest expense and collecting cash for services to be provided in the
future.
73) 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 reclassification of short-term debt to long-term debt.
Which of the transactions for SRJ Corporation resulted in an increase in working capital?
A) The accrual of interest expense.
B) Collecting cash for services to be provided in the future.
C) The reclassification of short-term debt to long-term debt.
D) Both the reclassification of short-term debt to long-term debt and the collection of cash for
future services.
74) 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 reclassification of short-term debt to long-term debt.
Which of the following statements is correct with respect to determining the net cash flow from
operating activities on a statement of cash flows?
A) The increase in interest payable for the accrual of interest expense is added to net income.
B) Collecting cash for services to be provided in the future is subtracted from net income.
C) The reclassification of short-term debt to long-term debt is subtracted from net income.
D) Collecting cash for services to be provided in the future does not require an adjustment to net
income.
75) 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.
A) The accrual of wages and salaries expense decreases working capital.
B) The cash payment on the note payable decreases working capital.
C) The purchase of the insurance policy increases working capital.
D) The cash payments for the note and insurance both decrease working capital.
76) Black 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 Black’s cash flows from
operating activities on the statement of cash flows?
A) The accrual of wages and salaries expense resulted in a cash outflow.
B) The purchase of a one-year insurance policy resulted in a cash inflow.
C) The cash sale of equipment for a loss resulted in a cash inflow.
D) The accrual of wages and the equipment loss both resulted in cash outflows.
77) 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%. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the
appropriate factor(s) from the tables provided.)
On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the
liability reported is closest to:
A) $100,000.
B) $38,550.
C) $61,446.
D) $71,446.
78) 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%. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the
appropriate factor(s) from the tables provided.)
The land reported on the balance sheet is closest to:
A) $100,000.
B) $38,550.
C) $110,000.
D) $71,446.
79) 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%. (FV of $1, PV of $1,
FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)
The equipment reported on the balance sheet as of the purchase date is closest to:
A) $45,000.
B) $38,664.
C) $33,664.
D) $40,000.
80) 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%. (FV of $1, PV of $1,
FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)
The liability reported on the balance sheet as of the purchase date, after the initial $5,000
payment was made, is closest to:
A) $45,000.
B) $33,664.
C) $38,664.
D) $40,000.
81) 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%. (FV of $1, PV of
$1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)
The liability reported on the balance sheet as of the purchase date, after the initial $10,000
payment was made, is closest to:
A) $44,632.
B) $50,000.
C) $54,633.
D) $60,000.
82) 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%. (FV of $1, PV of
$1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)
The vehicle reported on the balance sheet as of the purchase date is closest to:
A) $44,633.
B) $50,000.
C) $54,632.
D) $60,000.
83) 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%. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the
tables provided.)
The machine reported on the balance sheet as of the purchase date is closest to:
A) $123,255.
B) $130,000.
C) $80,000.
D) $73,255.