ACC 304 Week 9 Quiz – Strayer NEW
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Week 9 Quiz 5: Chapter 13,
Quiz 6: Chapter 14
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A zero-interest-bearing
note payable that is issued at a discount will not result in any interest
expense being recognized.
2. Dividends
in arrears on cumulative preferred stock should be recorded as a current
liability.
3. Magazine
subscriptions and airline ticket sales both result in unearned revenues.
4. Discount
on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All
long-term debt maturing within the next year must be classified as a current
liability on the balance sheet.
6. A
short-term obligation can be excluded from current liabilities if the company
intends to refinance it on a long-term basis.
7. Many
companies do not segregate the sales tax collected and the amount of the sale
at the time of the sale.
8. A
company must accrue a liability for sick pay that accumulates but does not
vest.
9. Companies
report the amount of social security taxes withheld from employees as well as
the companies’ matching portion as current liabilities until they are remitted.
10. Accumulated
rights exist when an employer has an obligation to make payment to an employee
even after terminating his employment.
11. Companies
should recognize the expense and related liability for compensated absences in
the year earned by employees.
12. Companies
should accrue an estimated loss from a loss contingency if information
available prior to the issuance of financial statements indicates that it is
probable that a liability has been incurred.
13. A
company discloses gain contingencies in the notes only when a high probability
exists for realizing them.
14. The
expected profit from a sales type warranty that covers several years should all
be recognized in the period the warranty is sold.
15. The
fair value of an asset retirement obligation is recorded as both an increase to
the related asset and a liability.
16. The
cause for litigation must have occurred on or before the date of the financial
statements to report a liability in the financial statements.
17. Under
the expense warranty approach, companies charge warranty costs only to the
period in which they comply with the warranty.
18. Prepaid
insurance should be included in the numerator when computing the acid-test
(quick) ratio.
19. Paying a current liability with cash will
always reduce the current ratio.
20. Current
liabilities are usually recorded and reported in financial statements at their
full maturity value.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Liabilities are
a. any accounts having credit balances after
closing entries are made.
b. deferred credits that are recognized and
measured in conformity with generally accepted accounting principles.
c. obligations to transfer ownership shares to
other entities in the future.
d. obligations
arising from past transactions and payable in assets or services in the future.
22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is
to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is
to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is
to be converted into common stock
d. None of these
23. Which of the following is true about accounts payable?
1. Accounts payable should not be
reported at their present value.
2. When accounts payable are
recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are
recorded at the gross amount, a Purchase Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.
24. Among the short-term obligations of Lance Company as of December
31, the balance sheet date, are notes payable totaling $250,000 with the
Madison National Bank. These are 90-day
notes, renewable for another 90-day period.
These notes should be classified on the balance sheet of Lance Company
as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25. Which of the following is not
true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a
debit balance.
b. The Discount on Notes Payable account should
be reported as an asset on the balance sheet.
c. When there is a discount on a note payable,
the effective interest rate is higher than the stated discount rate.
d. All of these are true.
26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
27. Which of the following items is a current liability?
a. Bonds (for which there is an
adequate sinking fund properly classified as a long-term investment) due in
three months.
b. Bonds due in three years.
c. Bonds (for which there is an
adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due
in eight months, there being no doubt about the marketability of the refunding
issue.
28. Which of the following should not be included in the current liabilities section of the balance
sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes
payable
c. The discount on short-term notes payable
d. All of these are included
29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional
shares of stock
c. A cash dividend payable to preferred
stockholders
d. All of these
30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders'
equity.
31. Of the following items, the only one which should not be
classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be
refinanced.
d. unearned revenues.
32. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the
next twelve months in excess of the company's insurance coverage.
d. none of these.
33. Which of the following is a characteristic of a current
liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by
probable future transfer or use of cash, goods, or services.
c. Liquidation is reasonably expected to require
use of existing resources classified as current assets or create other current
liabilities.
d. Transaction or other event creating the
liability has already occurred.
34. Which of the following is not considered a part of the
definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the
liability has already occurred.
c. Present obligation that entails settlement by
probable future transfer or use of cash, goods, or services.
d. Liquidation is reasonably expected to require
use of existing resources classified as current assets or create other current
liabilities.
35. Why is the liability section of the balance sheet of primary importance
to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's
liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36. What is the relationship between current liabilities and a
company's operating cycle?
a. Liquidation of current liabilities is
reasonably expected within the company's operating cycle (or one year if less).
b. Current liabilities are the result of
operating transactions.
c. Current liabilities can't exceed the amount
incurred in one operating cycle.
d. There is no relationship between the two.
37. What is the relationship between present value and the concept
of a liability?
a. Present values are used to measure certain
liabilities.
b. Present values are not used to measure
liabilities.
c. Present values are used to measure all
liabilities.
d. Present values are only used to measure
long-term liabilities.
38. What is a discount as it relates to zero-interest-bearing notes
payable?
a. The discount represents the lender's costs to
underwrite the note.
b. The discount represents the credit quality of
the borrower.
c. The discount represents the cost of
borrowing.
d. The discount represents the allowance for
uncollectible amounts.
39. Where is debt callable by the creditor reported on the debtor's
financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to
call the debt within the year, otherwise a long-term liability.
c. Current liability if it is probable that creditor
will call the debt within the year, otherwise a long-term liability.
d. Current liability.
40. Which of the following is not a condition necessary to exclude a
short-term obligation from current liabilities?
a. Intend to refinance the obligation on a
long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the
refinancing.
d. Subsequently refinance the obligation on a
long-term basis.
41. Which of the following does not demonstrate evidence regarding
the ability to consummate a refinancing of short-term debt?
a. Management indicated that they are going to
refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing
agreements that can be used to refinance the obligation.
d. Enter into a financing agreement that clearly
permits the entity to refinance the obligation.
42. A company has not declared a dividend on its cumulative
preferred stock for the past three years. What is the required accounting
treatment or disclosure in this situation?
a. Record a liability for cumulative amount of
preferred stock dividends not declared.
b. Disclose the amount of the dividends in
arrears.
c. Record a liability for the current year's
dividends only.
d. No disclosure or recognition is required.
43. Which of the following situations may give rise to unearned
revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
44. Which of the following statements is correct?
a. A company may exclude a short-term obligation
from current liabilities if the firm intends to refinance the obligation on a
long-term basis.
b. A company may exclude a short-term obligation
from current liabilities if the firm can demonstrate an ability to consummate a
refinancing.
c. A company may exclude a short-term obligation
from current liabilities if it is paid off after the balance sheet date and
subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing
of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by
issuing a long-term obligation after the date of the balance sheet but before
it is issued.
b. entering into a financing agreement that
permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by
issuing equity securities after the date of the balance sheet but before it is
issued.
d. all of these.
46. Which of the following statements is false?
a. A company may exclude a
short-term obligation from current liabilities if the firm intends to refinance
the obligation on a long-term basis and demonstrates an ability to complete the
refinancing.
b. Cash dividends should be
recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as
they are paid.
d. FICA taxes withheld from
employees' payroll checks should never be recorded as a liability since the
employer will eventually remit the amounts withheld to the appropriate taxing
authority.
47. Which of the following is not
a correct statement about sales taxes?
a. Sales taxes are an expense of
the seller.
b. Many companies record sales
taxes in the sales account.
c. If sales taxes are included in
the sales account, the first step to find the amount of sales taxes is to
divide sales by 1 plus the sales tax rate.
d. All of these are true.
S48. If
a short-term obligation is excluded from current liabilities because of
refinancing, the footnote to the financial statements describing this event
should include all of the following information except
a. a general description of the financing
arrangement.
b. the terms of the new obligation incurred or
to be incurred.
c. the terms of any equity security issued or to
be issued.
d. the number of financing institutions that
refused to refinance the debt, if any.
S49. In
accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer
period of employment than are accumulated rights.
b. vested rights are not contingent upon an
employee's future service.
c. vested rights are a legal and binding obligation
on the company, whereas accumulated rights expire at the end of the accounting
period in which they arose.
d. vested rights carry a stipulated dollar
amount that is owed to the employee; accumulated rights do not represent
monetary compensation.
P50. An
employee's net (or take-home) pay is determined by gross earnings minus amounts
for income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and
unemployment taxes.
c. portion of FICA taxes, unemployment taxes,
and any voluntary deductions.
d. portion of FICA taxes and any voluntary
deductions.
51. Which of these is not
included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
52. Which of the following is a condition for accruing a liability
for the cost of compensation for future absences?
a. The obligation relates to the rights that
vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee
services already performed.
d. All of these are conditions for the accrual.
53. A liability for compensated absences such as vacations, for
which it is expected that employees will be paid, should
a. be accrued during the period when the
compensated time is expected to be used by employees.
b. be accrued during the period following
vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual
obligation exists.
54. The amount of the liability for compensated absences should be
based on
1. the current rates of pay in
effect when employees earn the right to compensated absences.
2. the future rates of pay
expected to be paid when employees use compensated time.
3. the present value of the amount
expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.
55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.
56. Which gives rise to the requirement to accrue a liability for
the cost of compensated absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.
57. Under what conditions is an employer required to accrue a
liability for sick pay?
a. Sick pay benefits can be reasonably
estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.
58. Which of the following taxes does not represent a common payroll
deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
59. What is a contingency?
a. An existing situation where certainty exists
as to a gain or loss that will be resolved when one or more future events occur
or fail to occur.
b. An existing situation where uncertainty
exists as to possible loss that will be resolved when one or more future events
occur.
c. An existing situation where uncertainty exists
as to possible gain or loss that will not be resolved in the foreseeable
future.
d. An existing situation where uncertainty
exists as to possible gain or loss that will be resolved when one or more
future events occur or fail to occur.
60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur
and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur
and the amount can be reasonably estimated.
61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation
settlement.
c. Pending court case with a probable favorable
outcome.
d. Tax loss carryforwards.
62. Which of the following terms is associated with recording a
contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional
disclosure explaining the nature of the contingency.
d. As a disclosure only.
64. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be
reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
65. Which of the following sets of conditions would give rise to the
accrual of a contingency under current generally accepted accounting
principles?
a. Amount of loss is reasonably estimable and
event occurs infrequently.
b. Amount of loss is reasonably estimable and
occurrence of event is probable.
c. Event is unusual in nature and occurrence of
event is probable.
d. Event is unusual in nature and event occurs
infrequently.
66. Jeff Beck is a farmer who owns land which borders on the
right-of-way of the Northern Railroad. On August 10, 2012, due to the admitted
negligence of the Railroad, hay on the farm was set on fire and burned. Beck
had had a dispute with the Railroad for several years concerning the ownership
of a small parcel of land. The representative of the Railroad has offered to
assign any rights which the Railroad may have in the land to Beck in exchange
for a release of his right to reimbursement for the loss he has sustained from
the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's
2012 financial statements should include the following related to the incident:
a. recognition of a loss and creation of a
liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67. A contingency can be accrued when
a. it is certain that funds are available to
settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably
estimated and it is probable that an asset has been impaired or a liability
incurred.
d. it is probable that an asset has been
impaired or a liability incurred even though the amount of the loss cannot be
reasonably estimated.
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