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question pool ch 9 Accounting.doc, Lecture notes of Accounting

Abertay University Accounting

question pool ch 9 Accounting.doc

Typology: Lecture notes

2019/2020

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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 9 Liabilities

9.1 Learning Objective 9-1

1) Current liabilities are expected to be paid within one year or the operating cycle,

whichever is longer.

Answer: TRUE

Diff: 1

LO: 9-1

AICPA Bus Persp: Legal/Regulatory

AICPA Functional: Reporting

2) A current liability must be paid out of current profits.

Answer: FALSE

Diff: 1

LO: 9-1

AICPA Bus Persp: Legal/Regulatory

AICPA Functional: Measurement

3) Purchasing merchandise inventory on account results in a liability.

Answer: TRUE

Diff: 1

LO: 9-1

AASCB: Analytical Skills

AICPA Bus Persp: Strategic/Critical Thinking

AICPA Functional: Reporting

4) Notes payable usually require the borrower to accrue interest expense and interest

payable at the end of the accounting period.

Answer: TRUE

Diff: 1

LO: 9-1

AASCB: Analytical Skills

AICPA Bus Persp: Strategic/Critical Thinking

AICPA Functional: Measurement

5) Unearned revenues should be classified as Other Revenues on the Income Statement.

Answer: FALSE

Diff: 1

LO: 9-1

AICPA Bus Persp: Legal/Regulatory

AICPA Functional: Reporting

1

Partial preview of the text

Download question pool ch 9 Accounting.doc and more Lecture notes Accounting in PDF only on Docsity!

Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 9 Liabilities

9.1 Learning Objective 9-

Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
A current liability must be paid out of current profits. Answer: FALSE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
Purchasing merchandise inventory on account results in a liability. Answer: TRUE Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting
Notes payable usually require the borrower to accrue interest expense and interest payable at the end of the accounting period. Answer: TRUE Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Unearned revenues should be classified as Other Revenues on the Income Statement. Answer: FALSE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

When accruing interest expense on a short-term note, the Interest Payable account will decrease. Answer: FALSE Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Interest expense on a note payable is only recorded at maturity. Answer: FALSE Diff: 2 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
Sales tax payable is the tax collected from the customer by the retailer. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
The current ratio is affected by the long-term debt that must be paid in the current period. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
The lower the sales tax rate, the more income a retailer can earn. Answer: FALSE Diff: 2 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
Employee compensation is a major expense for most service companies. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Contingent liabilities are reported on the balance sheet. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
The estimating of warranty expense when a product is sold with a warranty is an example of a contingent liability. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
A current liability is a debt that can reasonably be expected to be paid: A) within one year or the company's normal operating cycle (if it is longer than one year). B) between 6 months and 18 months. C) out of cash on hand. D) out of current revenues. Answer: A Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Liabilities are classified on the balance sheet as current or: A) unearned. B) deferred. C) long-term. D) accrued Answer: C Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction: A) current liabilities increase and current assets increase. B) current liabilities increase and equity increases. C) current liabilities decrease and equity decreases. D) current liabilities increase and equity decreases. Answer: D Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
If at the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year: A) short-term notes payable will appear on the balance sheet and interest payable will appear on the income statement. B) short-term notes payable will be included in the notes to the financial statements. C) short-term notes payable and interest payable will appear on the balance sheet. D) short-term notes payable, interest payable and interest expense will appear on the balance sheet. Answer: C Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
The journal entry to record payroll: A) debits salary expense and credits salary payable for the net pay. B) debits salary expense and credits salary payable for the gross pay. C) debits salary expense for the gross pay and credits salary payable for the net pay. D) debits salary expense for the net pay and credits salary payable for the gross pay. Answer: C Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

The current ratio is current assets: A) minus current liabilities. B) divided by current liabilities. C) plus current liabilities. D) multiplied by current liabilities. Answer: B Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Estimated warranty payable are reported on the balance sheet as: A) administrative expenses. B) a long-term liability. C) a current liability. D) part of cost of goods sold. Answer: C Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
The accounting principle requiring that a company record the warranty expense in the same period that it records sales revenue is the: A) going concern principle. B) matching principle. C) conservatism principle. D) consistency principle. Answer: B Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Omaha Bank lends Nebraska Paper Company $100,000 on January 1. Nebraska Paper Company signs a $100,000, 8%, 6-month note. The entry made by Nebraska Paper Company on January 1 to record the proceeds and issuance of the note would include: A) a debit to cash of $92,000. B) a debit to interest expense of $8,000. C) a credit to Notes Payable of $100, D) a credit to Interest Payable of $8,000. Answer: C Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
Monthly sales were $200,000. Warranty costs are estimated at 4% of monthly sales. In the month of sale, the company should record a credit to: A) Warranty Payable for $8,000. B) Warranty Expense for $8,000. C) Sales for $8,000. D) Inventory for $8,000. Answer: A Diff: 1 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Tyler Company paid $1,500 cash to replace a wheel on equipment sold under warranty. The entry to record the payment would be to: A) debit warranty expense and credit cash. B) debit equipment expense and credit cash. C) debit warranty payable and credit cash. D) debit parts expense and credit cash. Answer: C Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The total cash paid at maturity of the note is: A) $108,000. B) $106,000. C) $100,000. D) $104,000. Answer: A Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
The journal entry to record accrued interest on a short-term note payable must include a debit to: A) interest payable and a credit to cash. B) interest expense and a credit to cash. C) interest expense and a credit to interest payable. D) interest payable and a credit to notes payable. Answer: C Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Current liabilities fall into two categories which are referred to as: A) contingent liabilities and contra-liabilities. B) contingent liabilities and noncontingent liabilities. C) unearned liabilities and contra-liabilities. D) liabilities of a known amount and estimated liabilities. Answer: D Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
The current portion of long-term debt should: A) be reclassified as a current liability. B) be paid immediately. C) be classified as a long-term liability. D) not be separated from the long-term debt. Answer: A Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Kathy's Corner Store has total receipts for the month of $36,750 including sales taxes. If the sales tax rate is 5%, what are Kathy's sales for the month? A) $36, B) $35, C) $34,012. D) $1,837.

Answer: B Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Short-term notes payable are: A) shown as a reduction to notes receivable on the balance sheet. B) generally due within six to eight months. C) shown on the balance sheet with current liabilities. D) shown on the balance sheet after long-term liabilities. Answer: C Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Sales taxes collected by a retailer are reported as: A) contingent liabilities. B) revenues. C) current assets. D) current liabilities. Answer: D Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Ironwood Company's sales for May 24 were $29,000. Ironwood is required to collect 6% state sales tax. The total cash received from customers was: A) $1,740. B) $27,260. C) $29,000. D) $30,740. Answer: D Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
Bertha's Pharmacy shows cash sales of $2,500 and sales taxes of $150 for the day. The journal entry to record this information would include a: A) debit to cash of $2,650. B) debit to sales tax expense $150. C) credit to sales $2,650. D) credit to sales tax payable $2,650. Answer: A Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
The total earnings of an employee for the payroll period is the:

AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

A company has a contingent loss that can be estimated and has a probable chance of occurrence. What reporting does FASB require regarding this contingency? A) It should be reported in the notes to the financial statements. B) It should be ignored until the actual loss occurs. C) It should be accrued, reported on the financial statements and disclosed in the notes to the financial statements. D) Nothing is required since there is only a probable chance of occurrence. Answer: C Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
A contingency that is remote: A) should be disclosed in the financial statements. B) does not need to be disclosed. C) must be accrued as a loss. D) is recorded as a contingent liability. Answer: B Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Which of the following items would not be included if a contingent liability were disclosed in the financial statements? A) The nature of the item B) Management's expected outcome C) The amount of the contingency, if known D) A numerical probability of the expected loss Answer: D Diff: 2 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
A company has a probable contingent gain that can be reasonably estimated. What reporting does the FASB require regarding this contingency? A) It should be reported in the notes to the financial statements. B) It should be ignored until the actual gain materializes. C) It should either be reported in the notes to the financial statements or recorded on the financial statements. D) It should be accrued and reported in the financial statements. Answer: B Diff: 2 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
On December 1, Goliath Corporation borrowed $10,000 on a 90-day, 6% note. Goliath Corporation's year end is December 31. Prepare the journal entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note. Answer:

December 1: Cash 10, Notes Payable 10, December 31: Interest Expense 50 Interest Payable 50 March 1: Interest Expense 100 Interest Payable 50 Notes Payable 10, Cash 10, Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

On December 1, Goliath Corporation borrowed $10,000 on a 90-day, 6% note. Goliath Corporation's year end is December 31. Determine the balance in any current liabilities associated with the note as of December 31. Answer: Note Payable $10, Interest Payable $ 50 Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
Davies Accessories Company entered into the following transactions relating to notes payable: August 1 Purchased inventory costing $42,000 by signing an 8-month, 5% note payable. October 1 Purchased inventory costing $15,000 by signing a 1-year, 6% note payable. a. Prepare journal entries to record the above transactions. b. Assuming Davies Accessories Company has a December 31 year-end, prepare any adjusting entries needed for the accrual of interest. Answer: a. August 1 Inventory 42, Note Payable 42, October 1 Inventory 15, Note Payable 15, b. December 31 Interest Expense 1, Interest Payable 1, Computations: 42,000 × .05 × 5/12 = 875 15,000 × .06 × 3/12 = 225

Raleigh Company billed its customers a total of $1,155,000 for the month of November. The total includes a 5% state sales tax. Required: a. Prepare the journal entry to record the revenue and related liabilities for the month. b. Prepare the journal entry to record the sales tax remittance to the state. Answer: a. Cash 1,155, Sales 1,100, Sales Tax Payable 55, (1,155,000 / 1.05 = 1,100,000) b. Sales Tax Payable 55, Cash 55, Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
In the most recent year of operations, Bradley's Video Games sold merchandise costing $25,000 for $ 75,000. All merchandise was sold under a one-year warranty. At the time of sale, Bradley estimated that warranty claims would amount to 3% of sales. During the year, Bradley replaced defective merchandise for $1,290. All transactions were cash transactions. Required: a. Prepare journal entries to record all transactions related to the warranty. b. Based solely on the above information, determine Bradley's operating income for the year. Answer: a. Warranty Expense 2, Estimated Warranty Payable 2, (75,000 × .03) Estimated Warranty Payable 1, Cash 1, b. $75,000 - $25,000 - $2,250 = $47, Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Lansing Company's general ledger shows the following balances for the selected accounts after posting adjusting entries: Accounts Payable $155, Notes Payable, 3-month 180, Accumulated Depreciation-Equipment 114, Salaries Payable 127, Notes Payable, 5-year, 8% 130, Estimated Warranty Liability 134, Payroll Tax Expense 16, Interest Payable 13, Sales Tax Payable 22, Required: Prepare the current liability section of Lansing Company's balance sheet, assuming that the current portion of the 5-year note is $30,000. Answer: Lansing Company Partial Balance Sheet Current Liabilities Notes Payable, 3-month $180, Accounts Payable 155, Estimated Warranty Liability 134, Salaries Payable 127, Notes Payable, 5-year, 8% (current portion)30, Sales Tax Payable 22, Interest Payable 13, Total Current Liabilities $661, Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Wildcat Computers sells all of its computers for $2,500 each. During the month of February Wildcat sold 20 computers. It is estimated that the warranty expense is 2% of gross sales. Wildcat spent $100 in cash and $150 in parts repairing computers for this month. Required: Prepare the journal entries to record the sale, record the estimated warranty expense, and record the warranty repairs. Answer: Date Account Debit Credit

Cash 50, Sales Revenue 50, ($2,500 × 20)
Warranty Expense 1, Estimated warranty payable 1, ($50,000 × .02)
Estimated warranty payable 250 Cash 100 Inventory — parts 150 Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

French's Fine Foods experienced the following transactions during the year:

A customer fell in one of French's stores and is seeking $150,000 in damages. French's attorneys believe that it is remote that the customer will win the lawsuit.
Another customer became seriously ill after eating some bad snails purchased from French's. The customer is seeking $200,000 in damages. French's attorneys believe that it is probable that the customer will win the lawsuit and receive the $200,000.
A competitor is suing French's for a trademark violation and is seeking $1,500,000 in damages. French's attorneys believe that it is reasonably possible that the competitor may win the lawsuit. Required: For each of the situations, determine the accounting treatment required. If a journal entry is needed prepare the journal entry. Answer:
Since it is remote, nothing needs to be recorded or disclosed in the footnotes to the financial statements.
Since it is probable, the liability and expense must be recorded. Lawsuit expense 150, Estimated liability from lawsuit 150,
Since it is reasonably possible, the contingency needs to be reported in the footnotes to the financial statements. Diff: 2 LO: 9- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9.2 Learning Objective 9-

Corporations borrow large amounts of money by issuing (selling) bonds to the public. Answer: TRUE Diff: 1 LO: 9- AICPA Functional: Measurement
If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date. Answer: TRUE Diff: 1 LO: 9- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

question pool ch 9 Accounting.doc, Lecture notes of Accounting

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Partial preview of the text

Download question pool ch 9 Accounting.doc and more Lecture notes Accounting in PDF only on Docsity!

Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 9 Liabilities

9.1 Learning Objective 9-

9.2 Learning Objective 9-