Chapter 9: Current Liabilities, Contingencies, and the True Value of Money
True / False
1. A note payable due in two years is a current liability.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
2. The current maturity of long-term debt is a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
3. A note payable that is due in six months is a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
4. If a bank discounts a note, then the borrower needs to only pay the cash received and not the face value of the note.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
5. A possible loss from lawsuit is not reported on the balance sheet as a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
6. Discount on Notes Payable is treated as a reduction of notes payable on the balance sheet.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
7. For users of financial statements, the current liability classification in the balance sheet is important because it is most
closely tied to the concept of profitability.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
8. When a liability is accrued, the account debited in the transaction is a stockholders’ equity account.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Applying
9. U.S. standards require a classified balance sheet, but International accounting standards do not require companies to
present classified balance sheets with liabilities classified as either current or long term.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
10. Accrued wages is a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
11. Income taxes payable is a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
12. A company gives a two-year warranty for its product. The estimated liability for product warranties is a current
liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
13. Income taxes payable are recognized as an expense once they are paid to the respective government or taxing
authority.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
14. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
15. International accounting standards require companies to present classified balance sheets with liabilities classified as
either current or long term.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Remembering
16. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Remembering
17. 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
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Remembering
18. 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
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Remembering
19. Estimated liability for product warranties to be paid in the future is a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
20. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
21. 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
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
22. 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
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
23. Advance ticket sales for a concert next month are a current liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
24. The liability for a premium offer estimated to be redeemed is not a current liability.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
25. A contingent liability is recorded if it is probable and can be reasonably estimated.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
26. 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
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
27. The terms referring to contingencies differ between U.S. GAAP and IFRS.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
28. International accounting standards use the term provision for those contingent items that must be recorded on the
balance sheet.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
29. Contingent assets may be disclosed in the notes if probable and reasonably estimable.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Remembering
30. Accountants need not worry about calculations based upon the concept of the time value of money.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-05 – LO: 09-05
KEYWORDS:
Bloom’s: Remembering
31. Compound interest is a repeated calculation of the interest on the principal over certain periods of time.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-05 – LO: 09-05
KEYWORDS:
Bloom’s: Remembering
32. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-05 – LO: 09-05
KEYWORDS:
Bloom’s: Remembering
33. If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-05 – LO: 09-05
KEYWORDS:
Bloom’s: Remembering
34. $2,000 invested today at 12% with compound interest will yield $2,480 in 2 years.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-05 – LO: 09-05
KEYWORDS:
Bloom’s: Analyzing
35. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-06 – LO: 09-06
KEYWORDS:
Bloom’s: Understanding
36. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-06 – LO: 09-06
KEYWORDS:
Bloom’s: Remembering
37. An annuity is a series of equal payments made at equal intervals in the future.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-06 – LO: 09-06
KEYWORDS:
Bloom’s: Remembering
38. 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
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-06 – LO: 09-06
KEYWORDS:
Bloom’s: Analyzing
39. 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
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-07 – LO: 09-07
KEYWORDS:
Bloom’s: Understanding
44. Current liabilities are defined as those liabilities which will be satisfied
a.
by the end of the operating cycle.
b.
within one year.
c.
within one year or within the operating cycle, whichever is longer.
d.
within one year or within the operating cycle, whichever is shorter.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
45. Which of the following statements is true of liabilities?
a.
Accounts payable are listed in the current liabilities section in alphabetical order by vendor.
b.
Classification of current liabilities is important because of the liquidity concept.
c.
Current liabilities are listed in order of decreasing amounts in the current liability section of the balance sheet.
d.
The accounting principles followed in the U.S. differ from those of other countries; this is especially true for
current liabilities.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
46. Which of the following statements about current liabilities is true?
a.
Current liabilities are listed in order of decreasing amounts in the current liability section of the balance sheet.
b.
The amount of current liabilities has little implication for a company’s liquidity.
c.
The current liability section never contains any portion of long-term liabilities.
d.
The current ratio is defined as current assets divided by current liabilities.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
47. A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then
the current ratio would be
a.
1.75 to 1
b.
3.50 to 1
c.
3.00 to 1
d.
2.25 to 1
ANSWER:
b
RATIONALE:
$200 (Cash) + $500 (Accounts Receivable) + $ 700 (Inventory) = $1,400 / $400 (Current
Liabilities = 3.50 to 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
48. A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then
the quick ratio would be
a.
1.75 to 1
b.
2.25 to 1
c.
3.00 to 1
d.
3.50 to 1
ANSWER:
a
RATIONALE:
$200 (Cash) + $500 (Accounts Receivable) = $700 / $400 (Current Liabilities) = 1.75 to 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
49. If current assets amount to $150, total assets $350, current liabilities $65, and total liabilities $100, then the current
ratio is
a.
2.12 to 1
b.
2.31 to 1
c.
3.03 to 1
d.
3.50 to 1
ANSWER:
b
RATIONALE:
$150 (Current Assets) / $65 (Current Liabilities) = 2.31 to 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
50. Long-term assets are $800, current liabilities are $500, and long-term liabilities are $600. If the current ratio is 2.5 to
1, then current assets are
a.
$200
b.
$625
c.
$1,250
d.
$2,000
ANSWER:
c
RATIONALE:
$500 (Current Liabilities) × 2.5 = $1,250 (Current Assets)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
51. If a company purchases $3,200 worth of inventory with terms of 3/10, n/30 on March 3 and pays March 12, then the
amount paid to the seller would be
a.
$96
b.
$3,104
c.
$3,200
d.
None of these choices
ANSWER:
b
RATIONALE:
$3,200 × .02 = $64
$3,200 – $64 = $3,136
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
52. The payment of accounts payable results in a(n)
a.
decrease in liabilities and a decrease in assets.
b.
decrease in liabilities and an increase in assets.
c.
increase in liabilities and a decrease in owners’ equity.
d.
decrease in liabilities and an increase in owners’ equity.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Applying
53. If a company purchases $3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays April 2, then the
amount paid to the seller would be
a.
$3,136
b.
$3,150
c.
$3,168
d.
$3,200
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
54. If a company borrows money from its bank and the bank deducts the interest in advance, the company would record
the amount of the interest deduction as
a.
a loss
b.
an expense
c.
a discount
d.
prepaid interest
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Applying
55. A bank loaned Darden Company $10,000 on a 1-year, 6% note, but deducted the interest in advance. The journal entry
made by Darden to record receipt of the cash would include a
a.
an increase in Cash for $9,400
b.
an increase in Cash for $600
c.
a decrease in Notes Payable for $10,600
d.
a decrease in Notes Payable for $9,400
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
56. Assume the current ratio is 2 to 1. Payment on accrued salaries payable would cause the current ratio to
a.
increase
b.
decrease
c.
be unchanged since the effects offset one another
d.
be unchanged since it has no impact on any current accounts
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
57. Assume the current ratio is 3 to 4. Purchases of inventory on account would cause the current ratio to
a.
increase
b.
decrease
c.
be unchanged since the effects offset each other
d.
be unchanged since it has no effects on any current accounts
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
58. Assume the current ratio is 3 to 1. Estimating the warranties expense on the period’s sales would cause the current
ratio to
a.
increase
b.
decrease
c.
be unchanged since the effects offset one another
d.
be unchanged since it has no effect on any current accounts
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
59. The landlord records the security deposit she collects from the tenant as a(n)
a.
asset
b.
liability
c.
contingent liability
d.
contra liability
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
60. A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are
$14,350, then the quick ratio would be
a.
5.0 to 1
b.
2.6 to 1
c.
2.0 to 1
d.
1.2 to 1
ANSWER:
d
RATIONALE:
$8,000 (Cash) + $9,250 (Accounts Receivable) / $14,350 (Current Liabilities) = 1.2 to 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
61. If current assets amount to $62,000, total assets $350,000, current liabilities $31,000, and total liabilities $125,000,
then the current ratio is
a.
0.5 to 1
b.
2.0 to 1
c.
2.8 to 1
d.
3.0 to 1
ANSWER:
b
RATIONALE:
$62,000 (Current Assets) / $31,000 (Current Liabilities) = 2.0 to 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
62. Long-term assets are $5,000, current liabilities are $700, and long-term liabilities are $3,000. If the current ratio is 3 to
1, then current assets are
a.
$9,000
b.
$6,900
c.
$4,300
d.
$2,100
ANSWER:
d
RATIONALE:
$700 (Current Liabilities) × 3 (the ratio is 3.0 to 1) = $2,100
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
63. If a company purchases $3,000 worth of inventory with terms of 1/15, n30 and pays within 15 days, then the amount
paid to the seller would be
a.
$2,550
b.
$2,970
c.
$3,000
d.
$3,030
ANSWER:
b
RATIONALE:
$3,000 × .01 or 1% = $30
$3,000 – $30 = $2,970
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
64. A bank loaned York Construction Company $35,000 on a 1-year, 6% note, but deducted the interest in advance. The
journal entry made by York to record receipt of the cash would include an
a.
increase in Cash for $35,000.
b.
decrease in Notes Payable for $32,900.
c.
increase in Discount on Notes Payable for $2,100.
d.
increase in Interest Revenue for $2,100.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
65. On November 1, Greenfield Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the
amount of $55,000. If you assume 360 days in year, the November 30 adjusting entry will be:
a.
Debit Interest Expense $550 and credit Cash $550.
b.
Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.
c.
Debit Interest Expense $550 and credit Interest Payable $550.
d.
Debit Interest Expense $550 and credit Notes Payable $550.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
66. Marsh Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After
one month, the company’s total liability for this loan amounts to:
a.
$91,800
b.
$90,900
c.
$90,450
d.
$90,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
67. Interest payable on a loan becomes a liability:
a.
When the borrowed money is received.
b.
When the note payable is issued.
c.
At the maturity date.
d.
As it accrues.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
68. On November 1, 2016, Brownsville Co. borrowed $80,000 from State Bank and signed a 12%, six-month note
payable, all due at maturity. The interest on this loan is stated separately. At December 31, 2016, the adjusting entry for
this note includes a:
a.
Debit to Interest Expense for $3,200.
b.
Credit to Notes Payable for $1,600.
c.
Credit to Cash for $4,800.
d.
Credit to Interest Payable for $1,600.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
69. On November 1, 2016, Brownsville Co. borrowed $80,000 from State Bank and signed a 12%, six-month note
payable, all due at maturity. The interest on this loan is stated separately. At December 31, 2016, Brownsville Co.’s
overall liability for this loan amounts to:
a.
$84,800
b.
$80,000
c.
$81,600
d.
$83,200
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
70. An invoice received from a supplier for $8,000 on January 1 with terms 1/15, n/30 means that the company should pay
a.
$7,920 before the end of January.
b.
either $7,920 before January 16 or $8,000 before the end of the month.
c.
$8,000 between January 2 and January 16.
d.
$6,800 before January 16.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
71. All of the following statements are true except:
a.
U.S. standards do not require a classified balance sheet.
b.
IFRS require companies to present classified balance sheets.
c.
Under IFRS, an unclassified balance sheet based on the order of liquidity is acceptable only when it provides
more reliable information than a classified one.
d.
U.S. standards require a classified balance sheet with liabilities in order by size or by order of liquidity.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
72. There are some liabilities, such as income tax payable, for which the amounts must be estimated. Failure to estimate
these amounts and record them would be a violation of the
a.
matching principle
b.
convention of conservation
c.
practice of consistency
d.
concept of historical cost
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
73. Proctor Inc. has a weekly payroll of $8,000 for a 5-day workweek, Monday through Friday. If December 31, the last
day of the accounting year, falls on Wednesday, Proctor would make an adjusting entry that would
a.
increase wages expense $4,800.
b.
decrease wages payable $4,800.
c.
decrease cash $4,800.
d.
increase wages payable $8,000.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
74. An example of a current liability that must be accrued is
a.
accounts payable.
b.
current maturity of long-term debt.
c.
revenue received in advance.
d.
income taxes payable.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
75. On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a 1-year, 7% note. If the
company’s fiscal year ends as of December 31, Lawrence should make an entry to increase
a.
interest expense, $4,200.
b.
notes payable, $1,050.
c.
interest payable, $1,050.
d.
prepaid interest, $3,150.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
76. Employees earn $6,000 per day, work five days per week, Monday through Friday, and get paid every Friday. If the
previous payday was January 26 and the accounting period ends on January 31, what amount is the ending balance in the
wages payable account?
a.
$18,000
b.
$6,000
c.
$30,000
d.
None of these choices.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
77. Executive, Inc. has a weekly payroll of $10,000 for a 5-day workweek, Monday through Friday. If December 31, the
last day of the accounting year, falls on Thursday, Executive would make an adjusting entry that would
a.
increase Wages Expense $8,000.
b.
decrease Wages Payable $2,000.
c.
decrease Cash $8,000.
d.
increase Wages Payable $2,000.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
78. A company’s weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days
per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period,
Monday, March 31, 2016. What amount is wages expense for April for the payday, Friday, April, 4, 2016?
a.
$ -0-
b.
$40,000
c.
$10,000
d.
$50,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
79. On May 1, the Chris Company borrowed $30,000 from the Third Street Bank on a 1-year, 6% note. If the company
keeps its records on a calendar year, an entry is needed on December 31 to increase
a.
Interest Expense, $600.
b.
Interest Expense, $1,800.
c.
Interest Payable, $900.
d.
Interest Payable, $1,200.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
80. Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect
cash provided by operating activities is
a.
accounts payable.
b.
interest payable.
c.
notes payable.
d.
taxes payable.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Understanding
81. Which of the following statements regarding the inclusion of liabilities on the statement of cash flows is true?
a.
All current liabilities affect the operating activities section.
b.
Long-term liabilities generally affect the investing activities section.
c.
A decrease in a current liability from the beginning to the end of the year is accompanied by a decrease of
cash.
d.
A decrease in a current liability from the beginning to the end of the year is accompanied by an inflow of cash.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Understanding
82. A company’s balance sheet shows the account, Notes Payable. This resulted from a loan made by the company’s bank.
If the end-of-year balance in the notes payable account exceeds the beginning-of-year balance by $5,000, this is shown on
the cash flow statement as an
a.
inflow of cash of $5,000 in the operating activities category.
b.
outflow of cash of $5,000 in the operating activities category.
c.
inflow of cash of $5,000 in the financing activities category.
d.
outflow of cash of $5,000 in the financing activities category.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Analyzing
83. Carrington, Inc. recorded $97,000 in salary expense for January 2016. Its beginning balance in salaries payable was
$3,000 and its ending balance was $4,000. How much was paid in cash for salaries during January 2016?
a.
$96,000
b.
$97,000
c.
$98,000
d.
$99,000
ANSWER:
a
RATIONALE:
$3,000 (Beginning Balance) + $97,000 (Salary Expense) – $4,000 (Ending Balance) =
$96,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Analyzing
84. Which of the following would appear on the balance sheet as a current liability?
a.
A loss from an anticipated strike by employees.
b.
Potential damages from possible explosions in a fireworks factory.
c.
Premium offers in cereal boxes.
d.
The possible loss from a lawsuit.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Applying
85. All of the following statements are true except:
a.
The threshold for recording items as liabilities is a lower under IFRS than under U.S. GAAP.
b.
The threshold for recording items as liabilities is a lower under U.S. GAAP than under IFRS.
c.
IFRS requires a liability to be recorded as a present value amount.
d.
Under U.S. GAAP, a contingent item should be recorded as a liability if the loss or outflow is probable and
can be reasonably estimated.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-04 – LO: 09-04
KEYWORDS:
Bloom’s: Understanding