Accounting Test Solutions

Chic Student: Some liabilities are not contractual obligations and may not be payable in cash. True False Amounts withheld from employees in connection with payroll often represent liabilities to third parties. True False A customer advance produces a liability that is satisfied when the product or service is provided. True False Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called, True False The concept Of substance over form influences the classification Of obligations expected to be refinanced.

True False Under FIRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability. True False Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold. True False For a loss contingency to be accrued, the claim must have been made before the accounting period ended, True False A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential ass can be reasonably estimated.

True False 10. A disclosure note is required for all material loss contingencies for Which the probability of loss is reasonably possible. True False 11. Under FIRS, the term “probable” indicates a threshold of probability that is substantially higher than a SO,’ 50 chance. True False 12. Under FIRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss.

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True False 13.

The cost of promotional offers should be recorded as expenses in the counting period when the offers are redeemed by customers, True false 14, Unlike the Social security tax there is no maximum wage base for the Medicare portion of the PICA tax. True False 15. State and Federal unemployment Taxes (SUTRA and FAJITA) must be withheld from employees’ wages. True Vales 16. Match each phrase With the correct term placing the letter designating the best term in the space provided by the phrase. _ Liabilities when received. _ Confirming event is likely to occur. _ A loss contingency accrued in the period of _ related sales. Most common temporary financing_ arrangement. _ Requires collateral. 1. Short-term note 2 Warranty liability 3. Advances from customers 4. Secured loan 5, Probable 1 7, Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase. 1. Accrued liabilities 2. Discount on notes payable 3. Interest payable 4, Sales tax payable S, Callable Due on demand. Contra liability. A third party liability. Accrues with passage to time. Expenses incurred but not yet paid, 18. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase. . Reasonably possible 2. Uncommitted lines of credit 3. Customer deposits 4. Interest paid on debt Gain contingencies Liabilities until refunded. More than remote but less than likely. Pace amount x rate x time, Not recorded until realized. Informal borrowing agreements. 19. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase. I. Unassisted claims 2. Factoring 3. Subsequent events 4. Accounting liabilities 5. Effective interest Exceeds the stated rate on discounted notes. _ May include items that are not legal liabilities. _ Sales of receivables. Evaluated for recognition only if an unfavorable _ outcome is probable. _ Occur in the current year before prior year financial _ statements are issued. 20. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase. 1. Interestingness notes 2. Loss contingencies 3. Committed lines of credit 4. Accounts payable 5. Pledging arrangements _ use accounts receivable as collateral. Often require compensating balance, Only formal credit instrument is the invoice, Effective interest higher than stated interest. _ Recorded it probable and amount is known or _ reasonably estimable, 21.

Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase Present value of interest plus present value_ of principal, _ _ Required for contingencies. _ Payable with current assets. _ Short-term debt to be refinanced _ with long-term bonds payable. Avoids registration with SEC. I. Current liabilities 2. Usual valuation Of long-term liabilities 3. Disclosure notes 4. Long-term liabilities 5. Commercial paper 22. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. I. Not reported 2.

Disclosure note only . Liability 4. Liability A material gain contingent on a future event that appears_ exceedingly likely. _A penalty assessment that probably will be asserted by _ the EPA, in which case a determinable payment is probable. _ Unsurpassed penalty with a reasonable possibility of being_ asserted, in which case a determinable payment is probable-? An extremely likely loss due to an event that occurred _ previously and whose amount is unknown but estimable. 23. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase. _ How present values affect the assortment _ of contingent liabilities under FIRS. _ Definition of “probable” under FIRS,__ how FIRS refers to an accrued liability _ that would generally be referred to as_ an “accrued contingent loss” under CO. S. GAP. APRS would accrue given a range_ of equally likely outcomes__ _ contingent gains under FIRS. 1. Mid-point of the range The amount _ Treatment of 2. Provision 3. More likely than not 4. Contingent gains are not accrued 5. Report at present value whenever time value of money is material 24.

Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011. I. Current liability 2. Current liability Estimated warranty cost-? A material gain contingent on a future event that appears_ extremely likely to occur in three months. _ Unassisted assessment of penalty that probably will be 3. Not asserted, in which case there would probably be a loss in six_ reported months. _ 4. Unassisted assessment of penalty with a reasonable possibility Disclosure of being asserted, in which case there would probably be a loss in _ note only 13 months. A determinable loss trot a past event that is contingent on S. Current a future event that appears extremely likely to occur in three_ ability months. 25. Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011 _ 26. Indicate (by letter) the pay each of the items listed below should be reported in a balance sheet at December 31, 2011. 27. The most common type of liability is: A. 8. C. D. One that comes into existence due to a loss contingency. One that must be estimated. One that comes into existence due to a gain contingency.

One to be paid in cash and for which the amount and timing are known. 28. Which of the following is not a characteristic off liability? A. B. C. D. It presents 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, 29, Which of the following is the best definition off current liability? A. An obligation payable within one year. A. An obligation payable within one year of the balance sheet date. C. An obligation payable within one year or within the normal operating cycle, whichever is longer.

D. An obligation expected to be satisfied with current assets or by the creation of other current liabilities. 30. Which of the following is not a liability? A 8. C. D. An unused line of credit. Estimated income taxes. Sales tax collected from customers, Advances from customers. 31, Current liabilities normally are recorded at their: A, B. C. D. Present value. Cost. Maturity amount. Expected value. 32. Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAP according to the concept of: A. B. C.

D. Matching. Consistency. Materiality. Conservatism. 33. The key accounting considerations relating to accounts payable are: A. Determining their existence and ensuring that they are recorded in the appropriate accounting period. B. Determining their present value and ensuring that they are recorded in the appropriate accounting period. C. Determining their existence and determining the correct amount. D. Determining the present value of the principal and the amount of the interest, 34. Classifying liabilities as either current or long-term helps creditors assess: A. 8. C. D. Profitability.

The relative risk off firm’s liabilities. The degree of a firm’s liabilities. The amount off firm’s liabilities. 35. When cash is received from customers in the form of a refundable deposit, he cash account is increased with a corresponding increase in: A. B. C, D. A current liability. Revenue. Shareholders’ equity. Paid-in capital. 36. A discount on a interested-bearing note payable is classified in the balance sheet as: A. B. C. D An asset. A component of shareholders’ equity. A contingent liability. A contra liability. 37. The rate of interest printed on the face of a note payable is called the: A. B. C.

D. Yield rate. Effective rate. Market rate. Stated rate. 38 The rate Of interest that actually is incurred on a note payable is called the: A. B. C. D. Face rate. Contract rate. Effective rate. Stated rate. 39. On October 31 , 2011 , Simenon Builders borrowed SIS million cash and issued a 7. Month, interestingness note. The loan was made by Star Finance Co. Whose stated discount rate is 8%. Sky’s effective interest rate on this loan is: A B. C. D. More than the stated discount rate of 8%. Less than the stated discount rate of Equal to the stated discount rate of 8%. Unrelated to the stated discount rate 40.

Cane’s Donuts Co. Borrowed $200,000 on January 1, 2011 and signed a two- year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this note, Cane’s should report interest expense at December 31, 2011, in the amount of: A, B. C. D. $24,000_ $48,000, $50,880. 41. What is the effective interest rate (rounded) on a 3-month, interested- bearing note with a stated rate of 12% and a maturity value of $200,000? A. B. C, D. 12. 4%. 12. 0%. 11. 5%. 3. 0%. 42. On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, interested- bearing note.

The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker’s effective interest rate on this loan (rounded) is: A. B. C. 43. Universal Travel Inc. Borrowed $500,000 on November I , 2011 , and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31 , 2012. In connection with this note, universal Travel Inc. Should report interest payable at December 31, 2011 , in the amount of: A B. C. D. SO,OHO. 530,000. $5,000. $25,000. 44 Unique Shoes issued a $100,000, 8-month, “interested-bearing note. The loan was made by Second Commercial Bank whose stated “discount rate” is 9%. The effective interest rate on this loan (rounded) is: A a. C. D. 9. 28%9. 49%9. 50% 45, Oklahoma Oil Carp, paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year? A. B, C, D, $890,000, $660,000, $555,000, $785,000, 46. On June I, 2011, Dirty Harry Co. Borrowed cash by issuing a 6-month interested-bearing note with a maturity value of $500,000 and a discount rate of What is the carrying value of the note as Of September 30, 2011? A. B. C D. $525,000. $300,000. $495,000. 475,000. 47. 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: A. B. C. D. Liabilities until the product or service is provided. A component of shareholders’ equity. Long. Term assets until the product or service is provided. Revenue upon receipt of the advance payment. 48. M Corp.. Has an employee benefit plan for compensated absences that gives employees 15 paid vacation days, Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days.

At December 31, 201 1 , unadjusted balance of liability for compensated absences was $30,000, M estimated that there were 200 vacation days available at December 31, 2011. Employees earn an average of per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is M required o report? A, B. C. D. $30,000. 5225,000_ $450,000. 49. Which of the following generally is associated with accounts payable? Option A Option B Option C Option D 50. Lake co. Receives nonrefundable advance payments With special orders for containers constructed to customer specifications.

Related information for 201 1 is as follows (S in millions): What amount should Lake report as a current liability for advances from customers in its DCE. 31, 2011, balance sheet? A. B. C. D. $0. $80. $125. $170. 51 All of the following but one represent collections for third parties. Which one f the following is not a collection for a third party? A. B. C. D. Sales tax payable. Customer deposits. Employee insurance deductions. Social security taxes deductions. 52 When a deposit on returnable containers is forfeited, the firm holding the deposit will experience: A.

B. C, D, A decrease in cost of goods sold, An increase in current liabilities. An increase in accounts receivable. An increase in revenue. 53. B Corp.. Has an employee benefit plan for compensated absences that gives employees ICC paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31 201 1, Bi’s unadjusted balance of liability for compensated absences was $42, COO.

B estimated that there were 300 vacation days and 1 50 sick days available at December 31, 2011. Bi’s employees earn an average of 5200 per day. In its December 31 , 2011, balance sheet, What amount Of liability for compensated absences is 8 required to report? A. B. C. D. $60,000. $84,000. 590,000. $144,000. 54 On January 1, 2011 , G Corporation agreed to grant its employees two weeks action each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31 201 1, G’s employees each earned an average of $800 per week. 00 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G’s 2012 wages expense related to 201 1 vacation time? A. B. C. D. $0 $20,000 $400,000 5420. 000 55, Revenue associated with gift card sales should be recognized: A. When the gift card is sold. B. No later than the last day of the operating period in which he gift card is delivered to the customer, C, When the probability of gift card redemption is viewed as remote. D. Ender no circumstances, as gift cards are not themselves a delivered product, but rather a selling technique SO_ All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period? A. Large increase, because unearned revenue becomes revenue when revenue is earned. 8. Large decrease, because unearned revenue implies that less revenue has been earned, which reduces future revenue. C. No effect, because unearned revenue is a liability, o payment Will use assets rather than providing revenue. D.

Large decrease, because unearned revenue indicates collection problems that will reduce net revenues in future periods. 57. Peterson Photos sold $1000 Of gift cards on a special promotion on October 15, 2011, and sold ASSESS of gift cards on another special promotion on November 15, 2011. Of the cards sold in October, 5100 were redeemed in October, SASS in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December, Peterson views the probability of redemption of a gift card as remote f the card has not been redeemed within Vivo months.

At 12/31 ‘2011, Peterson would show an unearned revenue account for their gift cards with a balance of: A. B. C. D. $0. 51000. 51350. 31500. 58. When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: A. B, C, D, A debit to a revenue and a credit to a liability account. A debit to a revenue and a credit to an asset account. A debit to an asset and a credit to a revenue account. A debit to a liability and a credit to a revenue account. 59. Clack’s Chemical Company received customer deposits on returnable entertainers in the amount of $100,000 during 2011.

Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost Of goods sold relative to this forfeiture? A. B. C. D. So. $14,400. 60. In May of 2011, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 201 1, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as After the year-end, but before the 2011 financial statements were sued, Raymond accepted an EPA settlement offer of $900,000.

Raymond should have reported an accrued liability on its December 31 , 2011 , balance sheet of: A 8. C. o. $770,000. $900,000. $970,000. 61. Slotting Chemical received customer deposits on returnable containers in the amount of $300,000 during 2011. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotting realize on the forfeited deposits? A. B. C, D. SO, $7,500. $9,000. $45,000. 62. Which of the following is not a current liability? A. B. C. D. Accounts payable. A tote payable due in 2 years, Accrued interest payable, Sales tax payable, 63.

Short-term obligations can be reported as long-term liabilities if: A. B. C. D. The firm has a long-term line of credit. The firm has tentative plans to issue long- term bonds. The firm intends to and has the ability to refinance as long-term. The firm has the ability to refinance on a long-term basis. 54. Of the following, which typically would not be classified as a current liability? A. B. C. D. Estimated liability from cash rebate program. A long-term note payable maturing within the coming year. Rent revenue received in advance. A six-month bank loan to be paid with the proceeds from the sale of common stock. 5. Large, highly rated firms sometimes sell commercial paper: A. B. C. D. To borrow funds at a lower rate than through a bank. To earn a profit on the paper. To avoid paperwork. Because the interest rate is locked in by the Federal Reserve Board. 66, Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? A. B. C. D. The long-term debt is callable by the creditor. The creditor has the right to demand payment due to a contractual violation. The long-term debt matures within the upcoming year.

All of the above require the current classification. 67. A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt A. B. C. D. Is callable by the creditor. Is secured by adequate collateral. Will be refinanced With stock. Will be refinanced with debt. 68. On December 31, 2011, L, Inc. Had a note payable outstanding, due July 31, 2012. L borrowed the money to finance construction Of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily ad excess cash, it prepaid $500,000 Of the note on January 23, 2012.

In February 2012, L completed a bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012, On March 13, 2012, L issued its 201 1 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet? A. B. C, D, $0 $500,000 69. Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under A. B. C. D. US GA. AP. ‘FRR. Either US.

GAP and FIRS. Neither U. S. GA. AP and 70. Kline Company refinanced current debt as long-term debt on January S, 2012. Saline’s fiscal year ended on December 31, 2011, and its financial statements will be issued sometime in early March, 2012. Under APRS, how would Kline classify the debt on its December 31 , 2011 balance sheet? A. In the “mezzanine” between current and non-current liabilities. B. Kline would not classify the debt as current or nonoccurrence, but rather would write a disclosure note explaining the circumstances. C. As nonoccurrence liability. D. As a current liability. 1.

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2012. At December 31, 201 1, Branch signed an agreement With First Bank to borrow up to to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed Of the value of the collateral that Branch provided. At the date of issue of the December 31, 201 1, financial statements, the value of Branch’s collateral was On its December 31, 2011, balance sheet, Branch should classify the notes as follows: A. B. C. D. Long-term and current liabilities. Short-term and current liabilities. F current liabilities. F long-term liabilities. 72 Other things being equal, most managers would prefer to report liabilities as nonoccurrence rather than current. The logic behind this preference is that the long-term classification permits the company to report: A a. C. D. Higher working capital and a higher inventory turnover. Lower working capital and a higher current ratio. Higher working capital and a higher current ratio. Higher working capital and a lower debt to equity ratio, 73. Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: A. B. C. D. Only if the amount is known.