Accounting 201 CONNECT Ch. 8
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Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current? It may cause the firm to appear less risky to investors and creditors. It may increase interest rates on borrowing. It may cause the company to appear more stable commanding a higher stock price for new stock listings. It may reduce interest rates on borrowing.
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It may increase interest rates on borrowing.
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Given a choice, most companies would prefer to report a liability as long-term rather than current because: It may cause the firm to appear less risky to investors and creditors. It may reduce interest rates on borrowing. It may cause the company to appear more stable commanding a higher stock price for new stock listings. All of these.
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All of these
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Which of the following is not a current liability? Accounts payable. A note payable due in 2 years. Current portion of long-term debt. Sales tax payable.
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A note payable due in 2 years.
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Which of the following is not a characteristic of a liability? It represents a probable, future sacrifice of economic benefits. It must be payable in cash. It arises from present obligations to other entities. It results from past transactions or events.
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It must be payable in cash.
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Which of the following is not a liability? Notes payable. Current portion of long-term debt. An unused line of credit. Unearned revenue.
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An unused line of credit.
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Liabilities are defined as: Resources owed by an entity as a result of past transactions. Resources owned by an entity as a result of past transactions. Selling products and services to customers in the current period. Costs of running the business in the current period.
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Resources owed by an entity as a result of past transactions.
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Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc. record? Debit Cash, $8,000; Credit Notes Receivable, $8,000. Debit Notes Receivable, $8,000; Credit Cash, $8,000. Debit Cash, $8,000; Credit Notes Payable, $8,000. Debit Notes Payable, $8,000; Credit Cash, $8,000.
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Debit Cash, $8,000; Credit Notes Payable, $8,000.
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Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should First Bank record? Debit Cash, $8,000; Credit Notes Receivable, $8,000. Debit Notes Receivable, $8,000; Credit Cash, $8,000. Debit Cash, $8,000; Credit Notes Payable, $8,000. Debit Notes Payable, $8,000; Credit Cash, $8,000.
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Debit Notes Receivable, $8,000; Credit Cash, $8,000.
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On November 1, 2015, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2016. The Bagel Factory should report interest payable at December 31, 2015, in the amount of: $0. $1,000. $2,000. $3,000.
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$1,000.
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On November 1, 2015, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2016. The Bagel Factory records the appropriate adjusting entry for the note on December 31, 2015. In recording the payment of the note plus accrued interest at maturity on May 1, 2016, The Bagel Factory would Debit Interest Expense, $2,000. Debit Interest Expense, $1,000. Debit Interest Payable, $2,000. Debit Interest Expense, $3,000.
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Debit Interest Expense, $2,000.
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On September 1, 2015, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2016. Daylight Donuts should report interest payable at December 31, 2015, in the amount of: $0. $1,500. $3,000. $4,500.
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$3,000.
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On September 1, 2015, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2016. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2015. In recording the payment of the note plus accrued interest at maturity on March 1, 2016, Daylight Donuts would Debit Interest Expense, $3,000. Debit Interest Expense, $1,500. Debit Interest Payable, $1,500. Debit Interest Expense, $4,500.
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Debit Interest Expense, $1,500.
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On December 1, 2015, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2016. Old World Deli should record which of the following adjusting entries at December 31, 2015? Debit Interest Expense and credit Interest Payable, $7,500. Debit Interest Expense and credit Cash, $7,500. Debit Interest Expense and credit Interest Payable, $1,250. Debit Interest Expense and credit Cash, $1,250.
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Debit Interest Expense and credit Interest Payable, $1,250.
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On December 1, 2015, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2016. Old World Deli records the appropriate adjusting entry for the note on December 31, 2015. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2016? $300,000. $301,250. $306,250. $307,500.
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$307,500.
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On November 1, 2015, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2016. New Morning Bakery should record which of the following adjusting entries at December 31, 2015? Debit Interest Expense and credit Interest Payable, $2,000. Debit Interest Expense and credit Cash, $2,000. Debit Interest Expense and credit Interest Payable, $6,000. Debit Interest Expense and credit Cash, $6,000.
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Debit Interest Expense and credit Interest Payable, $2,000.
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On November 1, 2015, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2016. New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2015. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2016? $200,000. $202,000. $204,000. $206,000.
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$206,000.
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The Pita Pit borrowed $100,000 on November 1, 2015, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2016. In connection with this note, The Pita Pit should report interest expense at December 31, 2015, in the amount of: $0. $1,000. $2,000. $6,000.
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$2,000.
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The Pita Pit borrowed $100,000 on November 1, 2015, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2016. In connection with this note, The Pita Pit should report interest expense in 2016 for the amount of: $0. $4,000. $2,000. $6,000.
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$4,000.
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Universal Travel, Inc. borrowed $500,000 on November 1, 2015, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2016. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2015, in the amount of: $8,000. $30,000. $5,000. $25,000.
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$5,000.
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Universal Travel, Inc. borrowed $500,000 on November 1, 2015, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2016. In connection with this note, Universal Travel, Inc. should record interest expense in 2016 in the amount of: $8,000. $30,000. $5,000. $25,000.
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$25,000.
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Large, highly-rated firms sometimes sell commercial paper: To borrow funds at a lower rate than through a bank. To borrow funds when they cannot obtain a loan from a bank. Because they can't borrow anywhere else. To improve their credit rating.
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To borrow funds at a lower rate than through a bank.
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In December, 2014, Quebecor Printing received magazine subscriptions for 2015 from a customer, who paid $500 in cash. What would be the appropriate journal entry for this event? Debit Cash, $500; credit Subscription Revenue, $500. Debit Cash, $500; credit Unearned Revenue, $500. Debit Subscription Revenue, $200; credit Cash, $200. No journal entry is necessary.
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Debit Cash, $500; credit Unearned Revenue, $500.
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At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: Liabilities until the product or service is provided. A component of stockholders' equity. Long-term assets until the product or service is provided. Revenue upon receipt of the advance payment.
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Liabilities until the product or service is provided (Because it's unearned revenue, you still have to work for it).
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The sale of gift cards by a company is a direct example of:
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Unearned revenues.
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When a company delivers a product or service for which a customer has previously paid, the company records the following: A debit to a revenue account and a credit to a liability account. A debit to a revenue account and a credit to an asset account. A debit to an asset account and a credit to a revenue account. A debit to a liability account and a credit to a revenue account.
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A debit to a liability account and a credit to a revenue account. (Debit Unearned Revenue, Credit Cash)
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Sales taxes collected by a company on behalf of the state and local government are recorded by: A debit to an expense account. A credit to a revenue account. A debit to a revenue account. A credit to a liability account.
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A credit to a liability account.
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When a company collects sales tax from a customer, the event is recorded by: A debit to Sales Tax Expense and a credit to Sales Tax Payable. A debit to Cash and a credit to Sales Tax Payable. A debit to Sales Tax Payable and a credit to Sales Tax Expense. A debit to Sales Tax Payable and a credit to Cash.
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A debit to Cash and a credit to Sales Tax Payable.
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Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much do they owe for sales tax? $8.39 for lunch and $0.42 for sales tax. $8.39 for lunch and no sales tax. $8.81 for lunch and $0.42 for sales tax. $7.99 for lunch and $0.40 for sales tax.
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$7.99 for lunch and $0.40 for sales tax.
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Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much do they owe for sales tax? $23.75 for dinner and $1.90 for sales tax. $23.75 for dinner and no sales tax. $21.85 for dinner and $1.90 for sales tax. $21.99 for dinner and $1.76 for sales tax.
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$21.99 for dinner and $1.76 for sales tax.
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Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month? $500,000. $518,128. $520,000. $551,200.
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$520,000.
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The current portion of long-term debt should be Reported as a current liability on the balance sheet. Reported as a long-term liability on the balance sheet. Combined with the rest of the long-term debt on the balance sheet. Paid immediately.
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Reported as a current liability on the balance sheet.
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Region Jet has a $50 million liability at December 31, 2015, of which $10 million is payable in 2016. In its December 31, 2015 balance sheet, the company reports the $50 million debt as A $50 million current liability on the balance sheet. A $50 million long-term liability on the balance sheet. A $10 million current liability and a $40 million long-term liability on the balance sheet. A $40 million current liability and a $10 million long-term liability on the balance sheet.
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A $10 million current liability and a $40 million long-term liability on the balance sheet.
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United Supply has a $5 million liability at December 31, 2015, of which $1 million is payable in each of the next five years. United Supply reports the liability on the balance sheet as: A $5 million current liability. A $5 million long-term liability. A $1 million current liability and a $4 million long-term liability. A $4 million current liability and a $1 million long-term liability.
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A $1 million current liability and a $4 million long-term liability.
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If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be Disclosed, but not reported as a liability. Disclosed and reported as a liability. Neither disclosed nor reported as a liability. Reported as a liability, but not disclosed.
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Disclosed, but not reported as a liability.
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If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be Disclosed, but not reported as a liability. Disclosed and reported as a liability. Neither disclosed nor reported as a liability. Reported as a liability, but not disclosed.
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Disclosed and reported as a liability.
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Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? As a liability for $100,000 with disclosure of the range. As a liability for $150,000 with disclosure of the range. As a liability for $200,000 with disclosure of the range. As a disclosure only. No liability is reported.
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As a liability for $100,000 with disclosure of the range.
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Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation? As a liability for $100,000 with disclosure of the range. As a liability for $150,000 with disclosure of the range. As a liability for $200,000 with disclosure of the range. As a disclosure only. No liability is reported.
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As a disclosure only. No liability is reported.
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Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation? As a receivable for $100,000 with disclosure of the range. As a receivable for $150,000 with disclosure of the range. As a receivable for $200,000 with disclosure of the range. As a disclosure only. No receivable is reported.
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As a disclosure only. No receivable is reported.
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Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is: Remote and the amount can be reasonably estimated. Probable and the amount can be reasonably estimated. Reasonably possible and the amount can be reasonably estimated. Probable and the amount cannot be reasonably estimated.
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Probable and the amount can be reasonably estimated.
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Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet? Record; decrease stockholders' equity and increase liabilities. Record; increase stockholders' equity and decrease liabilities. Disclose; no effect on the balance sheet. Disclose; decrease stockholders' equity and decrease liabilities.
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Disclose; no effect on the balance sheet.
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Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct? Amplify, Inc. would record a loss and contingent liability for $50,000. Sound City would record a gain and lawsuit receivable for $50,000. Sound City would record nothing. Amplify, Inc. would record a loss and contingent liability for $50,000; Sound City would record nothing.
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Amplify, Inc. would record a loss and contingent liability for $50,000; Sound City would record nothing.
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At the beginning of 2015, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2015 were $180 million. Five percent of the units sold were returned in 2015 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2015 income statement is: $5.3 million. $7.2 million. $9.0 million. $27.0 million.
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$7.2 million.
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Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the Warranty expense for the year? $0. $16,000. $7,000. $9,000.
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$16,000.
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Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the Warranty Liability at the end of the year? $0. $16,000. $7,000. $9,000.
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$7,000.
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Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2015 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2015? A decrease in assets and decrease in stockholders' equity. No journal entry is necessary until products under warranty are returned. An increase in stockholders' equity and a decrease in liabilities. A decrease in stockholders' equity and an increase in liabilities.
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A decrease in stockholders' equity and an increase in liabilities.
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Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2015, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2015. What amount of warranty liability should be reported at December 31, 2015? $2,250. $3,375. $5,625. None, all expected returns from warranties have been received.
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$3,375.
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Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year? $44,000. $80,000. $36,000. $480,000.
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$36,000.
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Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: Only if the amount is known. Only if the amount is known or reasonably estimable. Unless the amount is not reasonably estimable. Even if the amount is not reasonably estimable.
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Even if the amount is not reasonably estimable.
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Gain contingencies usually are recognized in a company's income statement when: The gain is certain. The amount can be reasonably estimated. The gain is reasonably possible and the amount can be reasonable estimated. The gain is probable and the amount can be reasonably estimated.
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The gain is certain.
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A contingent liability should be recorded on a company's financial statements only if the likelihood of a loss occurring is: At least remotely possible and the amount of the loss is known. At least reasonably possible and the amount of the loss is known. At least reasonably possible and the amount of the loss can be reasonably estimated. Probable and the amount of the loss can be reasonably estimated.
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Probable and the amount of the loss can be reasonably estimated.
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When a gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be: Reported in the income statement and disclosed. Offset against stockholders' equity. Disclosed, but not recognized in the income statement. Reported in the income statement, but not disclosed.
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Disclosed, but not recognized in the income statement.
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A contingent liability should be disclosed in a note to the financial statements rather than being recorded if: The likelihood of a loss is remote. The incurrence of a loss is reasonably possible. The incurrence of a loss is probable. The likelihood of a loss is eighty percent.
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The incurrence of a loss is reasonably possible.
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Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: When the equipment is sold. When the repairs are performed. When payments are made to the service firm. Evenly over the life of the warranty.
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When the equipment is sold.
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Which of the following is a contingency that should be recorded? The company is being sued and a loss is reasonably possible and reasonably estimable. The company deducts life insurance premiums from employees' paychecks. The company offers a two-year warranty and the expenses can be reasonably estimated. It is probable that the company will receive $100,000 in settlement of a lawsuit.
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The company offers a two-year warranty and the expenses can be reasonably estimated.
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Skypt is involved in a lawsuit and sued by Cortez for $500,000. Skypt feels it is probable that it will lose the lawsuit. What should Skypt and Cortez record or disclose concerning the lawsuit? Skypt should record a $500,000 contingent liability; Cortez should record a $500,000 contingent gain. Skypt should record a $500,000 contingent liability; Cortez should not record a contingent gain. Skypt should disclose a $500,000 contingent liability; Cortez should disclose a $500,000 contingent gain. Skypt should not record or disclose a contingent liability; Cortez should record a $500,000 contingent gain.
answer
Skypt should record a $500,000 contingent liability; Cortez should not record a contingent gain.
