Financial Accounting, 3e (Kemp/Waybright)
Chapter 9 Current Liabilities and Long-Term Debt
9.1 Questions
1) The majority of a company’s liabilities are estimated liabilities.
2) Notes payable would be an example of a known liability.
3) A contingent liability arises because of a past event, but is dependent upon a future event.
4) A known liability is always classified as a current liability.
5) When a liability exists, the amount owed is always known.
6) Which of the following would be considered an estimated liability?
A) Notes payable
B) Warranties payable
C) Pending litigation
D) Sales tax payable
7) Which of the following would be considered a known liability?
A) Federal income tax payable
B) Warranties payable
C) Pending litigation
D) Possible contingency payable
8) Which of the following would be considered a contingent liability?
A) Federal income tax payable
B) Warranties payable
C) Pending litigation
D) Salaries payable
9) An obligation dependent upon an event that has not yet occurred is an example of a(n):
A) contingent liability.
B) estimated liability.
C) known liability.
D) accrued liability.
10) A liability, such as warranties payable, would be an example of a(n):
A) contingent liability.
B) estimated liability.
C) known liability.
D) accrued liability.
11) Accounts Payable would be an example of a(n):
A) contingent liability.
B) estimated liability.
C) known liability.
D) accrued liability.
12) Accrued liabilities, such as interest payable, would be considered a(n):
A) contingent liability.
B) estimated liability.
C) known liability.
D) unknown liability.
13) Contingent liabilities may be classified as:
A) current liabilities only.
B) long-term liabilities only.
C) notes in the financial statements only.
D) either current or long-term liabilities.
14) A known obligation of an unknown amount is a(n):
A) contingent liability.
B) estimated liability.
C) known liability.
D) accrued liability.
15) Current liabilities are expected to be settled within:
A) 3 months.
B) 6 months.
C) 1 year.
D) more than 1 year.
16) Why are contingent liabilities considered unique and different from all other liabilities?
A) Whether or not a company has an obligation depends on the result of a future event.
B) Whether or not a company has an obligation depends on the result of a past event.
C) The company knows the amount of the obligation.
D) Both B and C are unique to contingent liabilities.
17) Which of the following liabilities can be classified as either current or long term?
A) known and estimated
B) estimated and contingent
C) known and contingent
D) known, estimated, and contingent
9.2 Questions
1) The largest portion of Accounts Payable for most merchandising companies is related to the
purchase of inventory on account.
2) A transaction such as a utility bill to be paid in 30 days would be journalized with a debit to
Utilities expense and a credit to Notes payable.
3) Making a payment on an account would be journalized with a debit to Accounts Payable and
credit to Cash.
4) A note payable that is due within one year is classified as a current liability.
5) A 12-month, 8% note dated August 1, 2013 for $5,000 would have accrued interest payable
on December 31, 2013 of $166.67.
6) Sales tax liabilities are classified as long-term payables.
7) Unearned revenues are typically classified as current liabilities.
8) State sales tax collected by a company is generally paid to the state at the end of the year.
9) The current portion of long-term debt represents the principal and interest payments on long-
term installment obligations that are due within one year.
10) On August 15, 2014, Woods Design signed a $20,000 7% 10-year installment note which
requires annual payments of $4,000 plus interest. Woods will classify this loan on the December
31, 2014 Balance Sheet as $4,000 current portion of long-term debt and $20,000 long-term debt.
11) A major difference between Accounts Payable and Notes Payable is that:
A) only Accounts Payable are classified as current assets.
B) Notes Payable are more formal than Accounts Payable.
C) only Notes Payable charge interest.
D) Notes Payable are only long-term assets.
12) A company signs a note payable for $3,500 at 9% for 45 days. How much interest (to the
nearest cent) will the company owe using a 360-day year?
A) $354.38
B) $315.00
C) $39.38
D) $38.84
13) S&C Roofing had sales on account of $28,500 which were subject to state sales tax of 9%.
The entry to record the sales would be to:
A) debit Accounts Receivable, $28,500; credit Sales revenue, $28,500.
B) debit Accounts Receivable, $31,065; credit Sale revenue, $31,065.
C) debit Accounts Receivable, $28,500; debit Sales tax payable, $2,565; credit Sales revenue,
$31,065.
D) debit Accounts Receivable, $31,065; credit Sales revenue, $28,500; credit Sales tax payable,
$2,565.
14) Metropolitan Masonry had sales on account of $7,200 which were subject to state sales tax
of 7%. The entry to record the sales would be to:
A) debit Accounts Receivable, $7,704; credit Sales revenue, $7,200; credit Sales tax payable,
$504.
B) debit Accounts Receivable, $7,704; credit Sale revenue, $7,704.
C) debit Accounts Receivable, $7,200; credit Sales revenue, $7,200.
D) debit Accounts Receivable, $7,200; debit Sales tax payable, $504; credit Sales revenue,
$7,704.
15) Cypress Corp. had sales on account of $16,500 which were subject to state sales tax of 8%.
The entry to record the sales would be to:
A) debit Accounts Receivable $16,500; debit Sales Tax Payable $1,320; credit Sales Revenue
$17,820.
B) debit Accounts Receivable $17,820; credit Sales Revenue $16,500; credit Sales Tax Payable
$1,320.
C) debit Accounts Receivable $16,500; credit Sales Revenue $16,500.
D) debit Accounts Receivable $17,820; credit Sales Revenue $17,820.
16) The Print Shoppe had sales on account of $4,500 which were subject to state sales tax of
9.5%. The entry to record the sales would be to:
A) debit Accounts Receivable $4,500; credit Sales Revenue $4,500.
B) debit Accounts Receivable $4,500; debit Sales Tax Payable $427.50; credit Sales Revenue
$4,927.50.
C) debit Accounts Receivable $4,927.50; credit Sales Revenue $4,927.50.
D) debit Accounts Receivable $4,927.50; credit Sales Revenue $4,500; credit Sales Tax Payable
$427.50.
17) Lionworks Inc. signed a $45,000 8% 30-year installment note on November 1, 2014. The
note requires semiannual payments of $750 plus interest on May 1 and November 1 of each year.
How will Budget Auto classify this loan on its December 31, 2014 Balance Sheet?
A) Current Portion of Long-term debt, $0; Long-term debt, $45,000
B) Current Portion of Long-term debt, $45,000; Long-term debt, $0
C) Current Portion of Long-term debt, $750; Long-term debt, $44,250
D) Current Portion of Long-term debt, $1,500; Long-term debt, $43,500
18) Tazo Inc. signed a $30,000 10% 15-year installment note on December 1, 2014. The note
requires quarterly payments of $500 plus interest on March 1, June 1, September 1, and
December 1 of each year. How will Budget Auto classify this loan on its December 31, 2014
Balance Sheet?
A) Current Portion of Long-term debt, $1,000; Long-term debt, $29,000
B) Current Portion of Long-term debt, $2,000; Long-term debt, $28,000
C) Current Portion of Long-term debt, $500; Long-term debt, $29,500
D) Current Portion of Long-term debt, $1,500; Long-term debt, $28,500
19) For a liability to exist:
A) a past transaction or event must have occurred.
B) the exact amount must be known.
C) the identity of the party must be known.
D) an obligation to pay cash in the future must exist.
20) Which of the following would NOT be a liability?
A) The signing of a three-year employment contract at a fixed annual salary
B) An obligation to provide goods or services in the future
C) A note payable with no specified maturity date
D) An obligation that is estimated in amount
9.3 Questions
1) Even liabilities of unknown amounts are required to be placed on the Balance Sheet.
2) Warranty expense must be estimated and matched to revenues.
3) Estimated liabilities are generally classified as long-term liabilities.
4) Warranty expense is always recorded in the period that the warranty claims are paid.
5) According to the matching principle, warranty expense must always be recorded in the same
period as the related revenue.
6) A warranty is an example of a(n):
A) contingent liability.
B) known liability.
C) estimated liability.
D) settled liability.
7) The need to create an estimated warranty liability arises from the ________ principle.
A) matching
B) entity
C) conservatism
D) objectivity
8) TNT Construction had cash sales for the month of June totaling $43,700. TNT offers a 1-year
warranty on its construction services. If TNT estimates warranty claims will equal 5% of sales,
the journal entry to record the estimated warranty expense for the month is:
A) debit Warranty expense, $2,185; credit Cash, $2,185.
B) debit Estimated warranty payable, $2,185; credit Warranty expense, $2,185.
C) debit Warranty expense, $2,185; credit Estimated warranty payable, $2,185.
D) debit Warranty expense, $2,185; credit Sales revenue, $2,185.
9) Northwest Electric had cash sales for the month totaling $73,200. Northwest offers a 6-month
warranty on its services. If Northwest estimates warranty claims will equal 2% of sales, the
journal entry to record the estimated warranty expense for the month is:
A) debit Warranty expense, $1,464; credit Cash, $1,464.
B) debit Warranty expense, $1,464; credit Estimated warranty payable, $1,464.
C) debit Warranty expense, $1,464; credit Sales revenue, $1,464.
D) debit Estimated warranty payable, $1,464; credit Warranty expense, $1,464.
10) During the month, TNT Construction paid $278 to settle warranty claims. TNT uses an
estimated warranty account. The journal entry to record the claims payment would have been:
A) debit Warranty expense, $278; credit Cash, $278.
B) debit Warranty expense, $278; credit Estimated warranty payable, $278.
C) debit Estimated warranty payable, 278; credit Warranty expense, $278.
D) debit Estimated warranty payable, $278; credit Cash, $278.
11) During the month, Northwest Electric paid $582 to settle warranty claims. Northwest uses an
estimated warranty account. The journal entry to record the payment would have been:
A) debit Estimated warranty payable, $582; credit Cash, $582.
B) debit Warranty expense, $582; credit Estimated Warranty payable, $582.
C) debit Estimated warranty payable, 582; credit Warranty expense, $582.
D) debit Warranty expense, $582; credit Cash, $582.
12) Evergreen Roofing had cash sales for the month totaling $33,500. Evergreen offers a 1-year
warranty on its roofing services. If Evergreen estimates warranty claims will equal 3% of sales,
the journal entry to record the estimated warranty expense for the month is:
A) debit warranty expense $1,005; credit Cash $1,005.
B) debit estimated warranty expense $1,005; credit warranty payable $1,005.
C) debit warranty expense $1,005; credit Sales Revenue $1,005.
D) debit warranty expense $1,005; credit Estimated Warranty Payable $1,005.
13) During the month, Evergreen Roofing settled $300 in warranty claims by replacing the
defective flashing. Evergreen uses an estimated warranty account. The journal entry to record the
settled claims would have been:
A) debit Estimated Warranty Payable $300; credit Cash $300.
B) debit Estimated Warranty Payable $300; credit Inventory $300.
C) debit Warranty Expense $300; credit Estimated Warranty Payable $300.
D) debit Warranty Expense $300; credit Cash $300.
9.4 Questions
1) Contingent liabilities represent actual—NOT potential—obligations.
2) The accounting treatment of a contingent liability depends upon the likelihood of an actual
obligation occurring.
3) A company that cosigns a loan with another company could incur a contingent liability.
4) There are times when contingent liabilities are never recorded.
5) The disclosure of a contingent liability only in the footnotes designates that the possibility of
an actual obligation occurring is:
A) remote.
B) possible.
C) probable.
D) certain.
6) If the likelihood of an obligation is remote:
A) no action is necessary in the accounting treatment.
B) the disclosure with explanation is put into the financial statement footnotes.
C) the obligation with the estimated dollars is recorded on the Balance Sheet.
D) the obligation with the estimated dollars is recorded and put into the footnotes.
7) The disclosure of a contingent liability in the footnotes and on the Balance Sheet indicates that
the potential for the obligation occurring is:
A) remote.
B) possible.
C) probable.
D) certain.
8) Which of the following would NOT be considered a contingent liability?
A) Pending legal action
B) Potential fines from the EPA
C) Mortgage Payable
D) Cosigning a loan
9) Which of the following would be considered a contingent liability?
A) Sales tax obligation
B) Mortgage obligation
C) Accounts Payable obligation
D) Pending legal action
10) Which of the following accurately describes how contingent liabilities are reported on the
Balance Sheet?
A) Contingent liabilities are not reported.
B) Contingent liabilities are disclosed in the footnotes only.
C) Contingent liabilities are reported in the liabilities section.
D) The accounting treatment for contingent liability could be A, B, or C depending on the
likelihood of an actual obligation occurring.
9.5 Questions
1) If the market rate of interest is higher than the stated rate of interest, then investors will be
willing to pay more and the bond is sold at a premium.
2) The Discount on Bonds Payable account is known as an adjunct account.
3) In general it is better to use current liabilities to finance current assets and long-term debt to
finance long-term assets.
4) Debentures are bonds that are backed only by the general credit of the company issuing the
bond.
5) Under a capital lease, the title of an asset remains with the lessor at the end of the lease.
6) Bonds payable are supported by a promissory note.
7) A mortgage is a special type of long-term note payable.
8) A mortgage is a secured note because the building will serve as collateral.
9) Bonds are interest-bearing notes that are issued to a single lender.
10) A person or business who pays another party for the use of an asset is a lessee.
11) On January 1, Greene Autos signed a $210,000, 6%, 30-year mortgage that requires
semiannual payments of $7,585 on June 30 and December 31 of each year. The journal entry to
record the first semiannual payment would be (round interest calculation to the nearest dollar) to:
A) debit Mortgage Payable, $7,585; credit Cash, $7,585.
B) debit Interest Expense, $1,285; debit Mortgage Payable, $6,300; credit Cash, $7,585.
C) debit Interest Expense, $6,300; debit Mortgage expense, $1,285; credit Cash, $7,585.
D) debit Interest Expense, $6,300; debit Mortgage Payable, $1,285; credit Cash, $7,585.
12) On January 1, Greene Autos signed a $210,000, 6%, 30-year mortgage that requires
semiannual payments of $7,585 on June 30 and December 31 of each year. The journal entry to
record the second semiannual payment would be (round interest calculation to the nearest dollar)
to:
A) debit Interest Expense, $6,261; debit Mortgage Payable, $1,324; credit Cash, $7,585.
B) debit Mortgage Payable, $7,585; credit Cash, $7,585.
C) debit Interest Expense, $6,261; debit Mortgage expense, $1,324; credit Cash, $7,585.
D) debit Interest Expense, $1,324; debit Mortgage Payable, $6,261; credit Cash, $7,585.
13) On January 1, Clive Corporation signed a $175,000, 8%, 30-year mortgage that requires
semiannual payments of $7,735 on June 30 and December 31 of each year. The journal entry to
record the first semiannual payment would be (round interest calculation to the nearest dollar) to:
A) debit Interest Expense, $735; debit Mortgage Payable, $7,000; credit Cash, $7,735.
B) debit Interest Expense, $7,000; debit Mortgage Payable, $735; credit Cash, $7,735.
C) debit Mortgage Payable, $7,735; credit Cash, $7,735.
D) debit Interest Expense, $7,000; debit Mortgage expense, $735; credit Cash, $7,735.