Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
1. Receiving payment prior to delivering goods or services causes a current liability to be incurred.
a.
True
b.
False
2. All long-term liabilities eventually become current liabilities.
a.
True
b.
False
3. For a current liability to exist, the liability must be due usually within a year and must be paid out of current assets.
a.
True
b.
False
4. The borrower issues a note payable to a creditor.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
5. Notes payable may be issued to creditors to satisfy previously created accounts payable.
a.
True
b.
False
6. Interest expense is reported in the operating expense section of the income statement.
a.
True
b.
False
7. An interest-bearing note is a loan in which the lender deducts interest from the amount loaned before the money is
advanced to the borrower.
a.
True
b.
False
8. The amount borrowed is equal to the face amount of the note on an interest-bearing note payable.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
9. The amount of money a borrower receives from the lender is called the discount rate.
a.
True
b.
False
10. The proceeds of a discounted note are equal to the face value of the note.
a.
True
b.
False
11. The discount on a note payable is charged to an account that has a normal credit balance.
a.
True
b.
False
12. The proceeds from discounting a $20,000, 60-day, note payable at 6% is $20,200.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
13. Amounts withheld from each employee for social security and Medicare vary by state.
a.
True
b.
False
14. An employee’s take-home pay is equal to gross pay less all voluntary deductions.
a.
True
b.
False
15. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s
federal income taxes.
a.
True
b.
False
16. Taxes deducted from an employee’s earnings to finance social security and Medicare benefits are called FICA taxes.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
17. Generally, all deductions made from an employee’s gross pay are required by law.
a.
True
b.
False
18. Payroll taxes are based on the employee’s net pay.
a.
True
b.
False
19. Most employers are required to withhold federal unemployment taxes from employee earnings.
a.
True
b.
False
20. FICA tax is a payroll tax that is paid only by employers.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
21. Medicare taxes are paid by both the employee and the employer.
a.
True
b.
False
22. Federal unemployment taxes are paid by the employer and the employee.
a.
True
b.
False
23. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the
unemployed but are allocated among the states for use in state programs.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
24. Federal income taxes are subject to a maximum amount per employee per year.
a.
True
b.
False
25. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes.
a.
True
b.
False
26. Federal income taxes withheld increase the employer’s payroll tax expense.
a.
True
b.
False
27. The use of a separate payroll bank account is not an advantageous control, because it creates more complexity in
reconciliation functions for a company and invites theft.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
28. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense
of the period during which the employee earns the benefits.
a.
True
b.
False
29. Depending upon when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a
long-term or a current liability.
a.
True
b.
False
30. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken during the
second year. The vacation pay expense should be recorded in the second year as the vacations are taken by the
employees.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
31. One of the more popular defined contribution plans is the 401k plan.
a.
True
b.
False
32. A defined contribution plan promises employees a fixed annual pension benefit.
a.
True
b.
False
33. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit.
a.
True
b.
False
34. The accounting for defined benefit plans is usually very easy and straightforward.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
35. During the first year of operations, a company granted warranties on its products at an estimated cost of $8,500. The
product warranty expense should be recorded in the years of the expenditures to repair the products covered by the
warranty payments.
a.
True
b.
False
36. Obligations that may arise from past transactions only if certain events occur in the future are contingent liabilities.
a.
True
b.
False
37. In order to be a recorded contingent liability, the liability must be possible and easily estimated.
a.
True
b.
False
38. The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to
sales made in prior years, includes a debit to Warranty Expense.
a.
True
b.
False
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
39. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of
the note.
a.
True
b.
False
40. The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying
amount of the note at the end of the period.
a.
True
b.
False
41. Current liabilities are due
a.
but not receivable for more than one year
b.
but not payable for more than one year
c.
and receivable within one year
d.
and payable within one year
42. Notes may be issued
a.
when assets are purchased
b.
to creditors to temporarily satisfy an account payable created earlier
c.
when borrowing money
d.
for all of these
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
43. On June 8, Smith Technologies issued a $75,000, 6%, 140-day note payable to Johnson Company. What is the due
date of the note?
a.
October 28
b.
October 27
c.
October 26
d.
October 25
44. On June 8, Williams Company issued an $80,000, 5%, 120-day note payable to Brown Industries. Assuming a 360–
day year, what is the maturity value of the note? When required, round your answer to the nearest dollar.
a.
$82,600
b.
$84,000
c.
$81,333
d.
$88,200
Maturity value of the note = [$80,000 + ($80,000 × 5% × 120 ÷ 360)] = $81,333
45. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of
Jones ends July 31. Using a 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal
year? When required, round your answer to the nearest dollar.
a.
$700
b.
$4,200
c.
$307
d.
$1,400
Interest expense recognized = [($80,000 × 6% × 120 ÷ 360) × 23 / 120] = $307
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
46. On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year
of Garcia ends June 30. Using a 360-day year, what is the amount of interest revenue recognized by Garcia in the
following year? When required, round your answer to the nearest dollar.
a.
$700
b.
$1,600
c.
$1,062
d.
$4,200
$1,062
47. On May 18, Rodriguez Co. issued an $84,000, 6%, 120-day note payable on an overdue account payable to Wilson
Company. Assume that the fiscal year of Rodriguez ends on June 30. Which of the following relationships is true?
a.
Rodriguez is the creditor and credits Accounts Receivable
b.
Wilson is the creditor and debits Accounts Receivable
c.
Wilson is the borrower and credits Accounts Payable
d.
Rodriguez is the borrower and debits Accounts Payable
48. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing
note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a
a.
debit to Interest Payable for $750
b.
debit to Interest Expense for $750
c.
credit to Cash for $50,000
d.
credit to Cash for $54,500
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
49. When a borrower receives the face amount of a discounted note less the discount, the amount received is known as
a.
the note proceeds
b.
the note discount
c.
the note deferred interest
d.
the note principal
50. Assuming a 360-day year, the interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable of
$100,000 is
a.
$6,000
b.
$1,500
c.
$500
d.
$3,000
Interest charged = [$100,000 × 6% × (90 ÷ 360)] = $1,500
51. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, total payment will be
a.
$51,125
b.
$54,500
c.
$1,125
d.
$4,500
Total payment = [$50,000 + ($50,000 × 9% × 90 ÷ 360)] = $51,125
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
52. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The
discount rate used by the bank in computing the proceeds was
a.
6.25%
b.
10.00%
c.
10.26%
d.
9.75%
53. Anderson Co. issued a $50,000, 60-day, discounted note to National Bank. The discount rate is 6%. At maturity,
assuming a 360-day year, the borrower will pay
a.
$53,000
b.
$50,500
c.
$50,000
d.
$49,500
54. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360–
day year, the cash proceeds to Chang Co. are
a.
$49,750
b.
$47,000
c.
$49,000
d.
$51,000
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
55. The journal entry to record the issuance of a note for the purpose of converting an existing account payable would be
a.
debit Cash; credit Accounts Payable
b.
debit Accounts Payable; credit Cash
c.
debit Cash; credit Notes Payable
d.
debit Accounts Payable; credit Notes Payable
56. The journal entry used to record the issuance of an interest-bearing note for the purpose of borrowing funds for the
business is
a.
debit Accounts Payable; credit Notes Payable
b.
debit Cash; credit Notes Payable
c.
debit Notes Payable; credit Cash
d.
debit Cash and Interest Expense; credit Notes Payable
57. The journal entry used to record the issuance of a discounted note for the purpose of borrowing funds for the business
is
a.
debit Cash and Interest Expense; credit Notes Payable
b.
debit Cash and Interest Payable; credit Notes Payable
c.
debit Accounts Payable; credit Notes Payable
d.
debit Notes Payable; credit Cash
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
58. The journal entry used to record the payment of a discounted note is
a.
debit Notes Payable and Interest Expense; credit Cash
b.
debit Notes Payable; credit Cash
c.
debit Cash; credit Notes Payable
d.
debit Accounts Payable; credit Cash
59. The journal entry to record the payment of an interest-bearing note is
a.
debit Cash; credit Notes Payable
b.
debit Accounts Payable; credit Cash
c.
debit Notes Payable and Interest Expense; credit Cash
d.
debit Notes Payable and Interest Receivable; credit Cash
60. A current liability is a debt that is reasonably expected to be paid
a.
between 6 months and 18 months
b.
out of currently recognized revenues
c.
within one year
d.
out of cash currently on hand
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
61. Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, 9-month,
interest-bearing note. The entry made by Guarantee Company on January 1 to record the proceeds and issuance of the
note is
a.
Interest Expense 12,000
Cash 138,000
Notes Payable 150,000
b.
Cash 150,000
Notes Payable 150,000
c.
Cash 162,000
Interest Expense 12,000
Notes Payable 150,000
d.
Notes Payable 120,000
Interest Payable 7,200
Cash 120,000
Interest Expense 7,200
62. The journal entry to record the conversion of a $6,300 accounts payable to a note payable would be
a.
Cash 6,300
Notes Payable 6,300
b.
Notes Receivable 6,300
Notes Payable 6,300
c.
Notes Payable 6,300
Cash 6,300
d.
Accounts Payable 6,300
Notes Payable 6,300
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
63. Current liabilities are
a.
due and receivable within one year
b.
due and to be paid out of current assets within one year
c.
due, but not payable for more than one year
d.
payable if a possible subsequent event occurs
64. Which of the following would most likely be classified as a current liability?
a.
two-year notes payable
b.
bonds payable
c.
mortgage payable
d.
unearned rent
65. Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, total payment will be
a.
$21,000
b.
$1,000
c.
$20,250
d.
$250
Total payment = [$20,000 + ($20,000 × 5% × 90 / 360)] = $20,250
Chapter 10 – Liabilities: Current, Installment Notes, and Contingencies
66. The current portion of long-term debt should
a.
be classified as a long-term liability
b.
not be separated from the long-term portion of debt
c.
be paid immediately
d.
be reclassified as a current liability
67. On January 5, Thomas Company, a calendar-year company, issued $1,000,000 of notes payable, of which $250,000 is
due on January 1 each of the next four years. The proper balance sheet presentation on December 31 is
a.
Current Liabilities, $1,000,000
b.
Current Liabilities, $250,000; Long-Term Debt, $750,000
c.
Long-Term Debt, $1,000,000
d.
Current Liabilities, $750,000; Long-Term Debt, $250,000
Current liabilities = $250,000; Long-term debt = $1,000,000 – $250,000 = $750,000
68. Proper payroll accounting methods are important for a business for all the reasons below except
a.
good employee morale requires timely and accurate payroll payments
b.
payroll is subject to various federal and state regulations
c.
to help a business with cash flow problems by delayed payments of payroll taxes to federal and state agencies
d.
payroll and related payroll taxes have a significant effect on the net income of most businesses