Principles Ch.8

Question 1

Which of the following regarding liabilities is true?

Answer 1

Liabilities represent probable future sacrifices of benefits

Question 2

Which of the following represents a characteristic of a liability?

Answer 2

A probable future sacrifice of economic benefits.

Arising from present obligations to other entities.

Resulting from past transactions or events.

-All of these are characteristics of a liability.-

Question 3

In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

Answer 3

one; one

Question 4

Which of the following is not a current liability?

Answer 4

An unused line of credit.

Question 5

Which of the following statements regarding liabilities is not true?

Answer 5

Liabilities result from future transactions.

Question 6

Current liabilities

Answer 6

May include contingent liabilities.

Question 7

Travel Planners, Incorporated borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

Answer 7

Debit Cash, $5,000; Credit Notes Payable, $5,000.

Question 8

Travel Planners, Incorporated borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record when the note is repaid?

Answer 8

Debit Notes Payable, $5,000; Credit Cash, $5,000.

Question 9

We record interest expense on a note payable in the period in which

Answer 9

We incur interest.

Question 10

If a company fails to accrue interest on notes payable, which of the following will occur?

Answer 10

Liabilities are understated.

Question 11

If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

Answer 11

InterestExpense=Principal×Rate×
12/Time(inmonths)
$450,000

Question 12

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should record the following adjusting entry at December 31, 20X1:

Answer 12

InterestExpense=Principal×Rate×
12/Time(inmonths)
Debit Interest Expense and credit Interest Payable, $4,000.

Question 13

On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?

Answer 13

InterestExpense=Principal×Rate×
12/Time(inmonths)
$8000.00

Question 14

If Speedy Travel, Incorporated borrows $50 million on September 1 for one year at 9% interest, how much interest expense should it record by December 31 of that same year?

Answer 14

InterestExpense=Principal×Rate×
12/Time(inmonths)
$1.5 million

Question 15

Which of the following is paid by both the employee and the employer?

Answer 15

FICA Taxes

Question 16

Which of the following increases an employer’s payroll costs?

Answer 16

Employer’s FICA contribution.

Question 17

Federal and state income taxes withheld by employers from their employees’ payroll are initially recorded with a credit to a(n):

Answer 17

Liability

Question 18

Which of the following is not deducted from an employee’s salary in most states?

Answer 18

Unemployment taxes.

Question 19

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

Answer 19

A debit to an asset and a credit to a liability account.

Question 20

When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as

Answer 20

A debit to a liability and a credit to a revenue account.

Question 21

Which of the following is reported as a current liability?

Answer 21

Current portion of long-term debt.

Question 22

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

Answer 22

DeferredRevenueBalance= TotalGiftCardsSold − GiftCardsRedeemed
DeferredRevenueBalance=TotalGiftCardsSold−GiftCardsRedeemed

DeferredRevenueBalance=10,000−8,000=2,000

Question 23

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Answer 23

Sales tax payable.

Question 24

The city of Summerton has a sales tax rate of 8%. A local convenience store sells merchandise, and the customer pays a total of $38.34. What effect does this transaction have on total liabilities?

Answer 24

P+(P×SalesTaxRate)=TotalPayment
P+(P×0.08)=38.34
𝑃(1+0.08)=38.34
𝑃=38.34/1.08=35.50
​SalesTax=38.34−35.50=2.84

Question 25

A contingent liability that is probable and can be reasonably estimated must be

Answer 25

Recorded

Question 26

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

Answer 26

Disclosed but not reported as a liability.

Question 27

Which of the following is true in comparing the current ratio with the acid-test ratio?

Answer 27

The current ratio will always be at least as large as the acid-test ratio.

Question 28

Assume that Airline Accessories’ current ratio is greater than 1. Which of the following will decrease its current ratio?

Answer 28

Purchasing inventory on account.

Question 29

Which of the following is not included in calculating the acid-test ratio?

Answer 29

Inventory

Question 30

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

Answer 30

No change to the current ratio and decrease the acid-test ratio.

Question 31

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman’s attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

Answer 31

Neuman Exploration Tours should record $0 as a gain. Explanation: Under GAAP (Generally Accepted Accounting Principles), gains from contingencies (e.g., lawsuits) are recognized only when they are both: Realized or realizable, meaning the amount has been settled or received. Certain, with no significant uncertainty remaining. Since the lawsuit has not been settled by the end of the year, and the amount is only an estimate, no gain should be recorded. However, Neuman can disclose the estimated gain in the notes to the financial statements.

Question 32

Allied Partners filed suit against Big Sky, Incorporated, seeking damages for patent infringement. Big Sky’s legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

Answer 32

As a liability for $500,000 with disclosure of the range. Explanation: Under GAAP, when a loss contingency is probable and the amount can be reasonably estimated, the company must record a liability. If there is a range of possible outcomes, and no specific amount within the range is more likely than others, the minimum amount within the range should be accrued. However, if all amounts in the range are equally likely, the midpoint of the range is typically used for the accrual. You're correct! Under GAAP, when there is a range of potential losses and no single amount in the range is more likely than the others, the company should accrue the minimum amount in the range. Correct Reporting: Big Sky should accrue $500,000, which is the lowest amount in the range, and disclose the full range of possible outcomes ($500,000 to $700,000) in the notes to the financial statements.

Question 33

Smith Company filed suit against Western, Incorporated, seeking damages for patent infringement. Smith’s legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?

Answer 33

Smith Company should not report any gain in its financial statements but should disclose the lawsuit in the notes. Explanation: Under GAAP, gain contingencies, such as potential damages from a lawsuit, are not recognized in the financial statements until they are realized or virtually certain. Even though Smith's legal counsel believes it is probable that Western will pay $125,000, the gain is not yet realized because no final settlement has been reached.

Question 34

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?

Answer 34

Step 1: Total Estimated Warranty Costs Number of toaster ovens sold: 100 Total expected repairs: 4 (already repaired) + 5 (estimated future repairs) = 9 ovens Cost per repair: $80 Total Estimated Warranty Costs= 9×80=720 Step 2: Warranty Costs Already Incurred 4 ovens have been repaired at $80 each. Warranty Costs Incurred= 4×80=320 Step 3: Warranty Liability The remaining liability is the difference between the total estimated costs and the costs already incurred: Warranty Liability=720−320= 400 Final Answer: Pizza Shop should report a warranty liability of $400 at the end of the current year.

Question 35

Aviation Systems sells its products with a three-year manufacturing warranty. The company’s sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the warranty expense reported in the income statement this year?

Answer 35

Step 1: Calculate the Estimated Warranty Expense Sales Revenue = $600,000 Estimated Warranty Cost Percentage = 5% Estimated Warranty Expense=600,000×0.05=30,000 Step 2: Warranty Expense for the Income Statement Warranty expense is reported based on the estimated costs for the year, regardless of the actual costs incurred. Final Answer: The warranty expense reported in the income statement is $30,000.

Question 36

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the estimated warranty liability reported in the balance sheet this year?

Answer 36

Step 1: Calculate the Total Estimated Warranty Costs Sales Revenue = $600,000 Estimated Warranty Costs Percentage = 5% Total Estimated Warranty Costs=600,000x0.05=30,000 Step 2: Subtract Actual Warranty Costs Incurred Actual Warranty Costs Incurred During the Year = $5,000 Estimated Warranty Liability=Total Estimated Warranty Costs−Actual Warranty Costs Incurred Estimated Warranty Liability=30,000−5,000=25,000

Question 37

The current ratio is:

Answer 37

Current assets divided by current liabilities.

Question 38

The acid-test ratio is

Answer 38

Cash, current investments, and accounts receivable divided by current liabilities.