Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
98. Income taxes payable is a current liability.
a. True
b. False
99. A company gives a two-year warranty for its product. The estimated liability for product warranties is a
current liability.
a. True
b. False
100. Income taxes payable are recognized as an expense once they are paid to the respective government or
taxing authority.
a. True
b. False
101. An amount that has been incurred as an expense, but has not yet been paid should be considered an
accrued liability.
a. True
b. False
102. International accounting standards require companies to present classified balance sheets with liabilities
classified as either current or long term.
a. True
b. False
103. Generally, an increase in a current liability results in an increase in the operating activities category of the cash
flow statement.
a. True
b. False
104. In the statement of cash flows, a decrease in accounts payable would be shown as an increase in the
Operating Activities category.
a. True
b. False
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
105. In the statement of cash flows, an increase in a current liability will appear as an increase in the
Financing category.
a. True
b. False
106. Estimated liability for product warranties to be paid in the future is a current liability.
a. True
b. False
107. Warranty expenses are the result of the selling company’s estimate of the number of units sold during the current
year that may become defective and need repair or replacement during the warranty period.
a. True
b. False
108. When a company uses coupon or premium offers in conjunction with the sale of its products, there is no
need to record any contingent liability.
a. True
b. False
109. Curtain Corp. stands to receive a sufficient cash settlement from a law suit. Curtain needs to record this on
its accounting records.
a. True
b. False
110. Advance ticket sales for a concert next month are a current liability.
a. True
b. False
111. The liability for a premium offer estimated to be redeemed is not a current liability.
a. True
b. False
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
112. A contingent liability is recorded if it is probable and can be reasonably estimated.
a. True
b. False
113. For a given contingent liability, the company has the choice of either recording it on the balance sheet or
disclosing it in the notes.
a. True
b. False
114. The terms referring to contingencies differ between U.S. GAAP and IFRS.
a. True
b. False
115. International accounting standards use the term provision for those contingent items that must be recorded on
the balance sheet.
a. True
b. False
116. Contingent assets may be disclosed in the notes if probable and reasonably estimable.
a. True
b. False
117. Accountants need not worry about calculations based upon the concept of the time value of money.
a. True
b. False
118. Compound interest is a repeated calculation of the interest on the principal over certain periods of time.
a. True
b. False
119. Simple interest on a loan can be calculated by multiplying the principal by the annual interest rate expressed
as a percentage of the time in years or a fraction of the time in years.
a. True
b. False
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
120. If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.
a. True
b. False
121. $2,000 invested today at 12% with compound interest will yield $2,480 in 2 years.
a. True
b. False
122. When borrowing money to be repaid in regular future payments, the payment is based on the present value of
the loan, the interest rate and the length of the loan.
a. True
b. False
123. The present value is the value today of a single amount to be paid or received at a specific date in the future.
a. True
b. False
124. An annuity is a series of equal payments made at equal intervals in the future.
a. True
b. False
125. If you plan to invest $10,000 and want to determine how much will be accumulated in six years if you earn
interest at 7% per year, you would calculate this using the future value of an annuity.
a. True
b. False
126. In a compound interest problem, if you know the future value, the present value, and the number of periods,
then you can solve for the interest rate.
a. True
b. False
127. The classification of current liabilities is closely tied to the concept of .
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
128. A current ratio of or better is usually considered a comfortable margin.
129. Terms of 2/10, n30 mean that if the discount is not taken, full payment is due within
___________________________ days.
130. The difference between notes payable and accounts payable is .
131. At December 31, 2014, an amount due on December 31, 2015, would be classified as a(n)
_______________________ liability.
132. include any amount that has been incurred due to the passage of time, but not
paid as of the balance sheet date.
133. When a bank deducts the interest on a note in advance, the note has been .
134. Almost all current liabilities appear within the Activities category of the Statement
of Cash Flows.
135. Using the indirect method, an increase in accounts payable would be shown as a(n) in the
Activities section of the statement of cash flows.
136. An obligation that involves an existing condition for which the outcome is not known with certainty and
depends on some event that will occur in the future is call a(n) .
137. The interest earned on the principal amount only is referred to as .
138. The issue price of a bond is based on the of the cash flows that the bond will
produce.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
139. If a 12% interest rate is compounded quarterly for 3 years, then there would be __________________________
compounding periods.
140. The of a single sum represents the value today of a single amount to
be received or paid at a future time.
141. If the present and future values are known along with the number of periods, then the
_________________________ can be determined.
142. If the market value that you paid for a car is known and the annual payment and number of payments is
known, the table factor to help find the interest rate can be calculated by dividing .
143. Below are several independent items listed for which the outcome of events is unknown at year-end, December
31, 2015.
a. Maldova Company had a barge that leaked oil into the waters surrounding Alaska. The company’s legal
counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the
possible loss.
b. It is alleged by Maldova Company that Argo Company has infringed on its trademark, during a recent
advertising campaign. Maldova is suing Argo and its legal experts believe that the suit will result in an
award of $750,000 in Maldova’s favor.
c. Maldova offers 2-year warranties on the equipment it sells and believes that 5% of its equipment will
require warranty repairs.
d. A $35 coupon, good for one year is offered by Maldova during December. At December 31,
approximately 10% of the coupons have been redeemed and it is estimated that there will be a total
redemption rate of 45%.
e. Maldova Company has been sued by the federal government for EPA violations. The company’s legal
counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
REQUIRED:
1. Identify which of the items (a) through (e) should be recorded at year-end.
2. Identify which of the items (a) through (e) should not be recorded but should be disclosed in the
year-end financial statements.
144. What is meant by the term “current maturities of long-term debt” in the current liabilities section of the
balance sheet?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
145. What is the purpose of the current ratio? How does the quick ratio differ from the current ratio?
146. Cole Company had the following accounts and balances on December 31, 2015:
Income Taxes Payable
$ 51,250
Cash
20,000
Notes Payable, 10%, due June 2, 2016
1,000
Accounts Receivable
267,500
Equipment
950,000
Accounts Payable
104,400
Inventory
85,000
Land
600,000
Allowance for Doubtful Accounts
12,000
Discount on Notes Payable
150
Notes Receivable, maturity 2/1/2022
5,000
Current Maturities of Long-Term Debt
6,900
Unearned Revenue
4,320
Interest Payable
1,010
Wages Payable
6,000
Marketable Securities
40,000
Capital Stock
900,000
REQUIRED:
1. Compute Cole’s working capital.
2. Compute Cole’s current ratio. What does this ratio indicate about Cole’s condition?
liabilities).
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Dec. 30, 2015
Dec. 31, 2014
Inventories
$1,780
$1,649
=====
Total current assets
$9,428
$8,625
=====
=====
Liabilities in order of significance:
Long–term debt
$14,465
$15,001
Other noncurrent liabilities
4,421
3,148
Deferred income taxes
3,504
3,543
Accounts payable
2,556
2,468
Other current liabilities
2,066
1,738
Accrued salaries and wages
1,538
1,082
Short–term borrowings
1,200
1,126
Accrued advertising expense
793
928
Income taxes payable
658
1,142
Auto Designs, Inc.
Use the selected data from the comparative financial statements for Auto Designs, Inc. to answer the
questions that follow.
Auto Designs, Inc.
Balance Sheet Accounts
(all accounts have normal balances)
(in millions)
147. Refer to the account information for Auto Designs, Inc.
REQUIRED:
Compute the total current liabilities for the years 2015 and 2014. Calculate the percentage change in the total
current liabilities.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
148. Refer to the account information for Auto Designs, Inc.
REQUIRED:
(1) Calculate percentage changes in accounts payable and income taxes payable. Give a possible explanation
for the changes in these accounts.
(2) By how much did Auto Designs’ longterm and shortterm borrowings change from 2014 to 2015? Give a
possible explanation for the change in debt. What other financial statement would be useful in analyzing the
change in borrowings? Why?
149. Refer to the account information for Auto Designs, Inc.
REQUIRED:
Calculate the current and quick ratios for 2015 and 2014. Comment on the direction and significance of the
change in the ratios.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
150. What are examples of accounts that might be classified as accrued liabilities in the current liabilities section
of the balance sheet?
151. Each of the following situations involves the use of discounts:
1. How much discount may Mallory Inc. take in each of the following transactions? What was the
annualized interest rate?
a. Mallory purchases inventory costing $970, terms 3/10, n/40.
b. Mallory purchases new office furniture costing $2,100, terms 2/10, n/30.
2. Calculate the discount rate that Mallory received in each of these transactions.
a. Mallory purchased office supplies costing $450 and paid within the discount period with a check for
$425.
b. Mallory purchased merchandise for $1,900. It paid within the discount period with a check for $1,870.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
152. Newton Industries had the following transactions during the year:
a. Newton purchased inventory on account from a supplier for $12,000. Assume that Appleton uses a
periodic inventory system.
b. On May 1, land was purchased for $68,500. A 25% down payment was made, and an 18-month, 9% note
was signed for the remainder.
c. Newton returned $545 worth of inventory purchased in (a), which was found broken when the inventory
was received.
d. Newton paid the balance due on the purchase of inventory.
e. On June 1, Newton signed a one-year, $14,000 note to Plains State Bank and received $12,750.
f. Newton sold 350 gift certificates for $30 each for cash. Sales of gift certificates are recorded as a liability.
At year-end, 40% of the gift certificates had been redeemed.
g. Sales for the year were $100,000, of which 85% were for cash. State sales tax of 7% applied to all sales must
be remitted to the state by January 31.
REQUIRED:
1. Record all necessary journal entries relating to these transactions.
2. Assume that Newton’s accounting year ends on December 31. Prepare any necessary adjusting journal entries.
3. What is the total of the current liabilities at the end of the year?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
153. On July 1, 2015, Clayton Shop borrowed $33,000 from the bank. Clayton signed a ten-month, 6%
promissory note for the entire amount. Clayton uses a calendar year-end.
REQUIRED:
1. Prepare the journal entry on July 1, 2015 to record the issuance of the promissory note.
2. Prepare any adjusting entries needed at year-end.
3. Prepare the journal entry on May 1, 2016 to record the payment of principal and interest.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
154. On September 1, 2015, Ensign Inc. borrowed $21,000 from Emerald City National Bank by issuing a 12-
month note. The bank discounted the note at 7.5%.
REQUIRED:
1. Prepare the journal entry needed to record the issuance of the note.
2. Prepare the journal entry needed at December 31, 2015, to accrue interest.
3. Prepare the journal entry to record the payment of the note on September 1, 2016.
4. What effective rate of interest did Ensign pay?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money