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Name:___________________________ Number______ Current Liabilities and Contingencies MULTIPLE CHOICE 1. All of the following are examples of legal liabilities, except for a. notes payable b. sales tax payable c. sick pay payable (may be taken as time off) d. property taxes payable 2. Under FASB Statement of Financial Accounting Concepts No. 6, liabilities include a. only legal obligations b. both legal and illegal obligations c. both legal and nonlegal obligations d. legal, nonlegal, and illegal obligations 3. Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within a. one year or operating cycle, whichever is longer b. one year c. one year or operating cycle, whichever is shorter d. an operating cycle 4. The operating cycle is typically defined as the time it requires to convert a. cash to inventory to receivables b. raw materials to finished goods c. finished goods to receivables to cash d. cash to inventory to receivables to cash 5. FASB Statement No. 43 on compensated absences a. applies to items such as vacation pay, severance pay, sick pay, and other long-term fringe benefits b. establishes the same accruing standards for vacation pay, holiday pay, and sick pay c. requires the use of current pay rates to accrue for compensated absences d. does not require the accrual of accumulated nonvested sick pay ACCO 202 (Asignacin #5) - Prof. Carlos Alvarez 1-1 6. Discount on Note Payable should be classified as a a. current asset b. contra account to Notes Payable c. part of stockholders' equity d. deferred debit 7. Which of the following dividends are not considered current liabilities when declared? a. property dividends b. stock dividends c. scrip dividends d. cash dividends 8. Which of the following statements regarding the gross and net methods for trade accounts payable is not true? a. the net method overstates accounts payable at the end of the accounting period b. the net method highlights management inefficiency because purchase discounts lost are recorded whenever an invoice is paid after the cash discount period has expired c. the gross method is more widely used in practice d. the net method more accurately measures liquidity 9. Sick pay benefits that are related to an employee's services already rendered, whose payment is probable and the amount reasonably estimated, must be accrued and recognized as a current liability if the obligation relates to rights that Accumulate a. b. c. d. No No Yes Yes Vest No Yes No Yes 10. Theoretically, unearned items (deferred revenues) should not be classified as a. deferred credits b. contra to certain assets c. long-term liabilities d. current liabilities 11. Voluntary payroll deductions may include all of the following deductions, except for: a. union dues b. 401K deductions c. group hospital insurance d. FICA taxes 1-2 12. All of the following payroll taxes are levied against the employer, except for: a. FICA taxes b. federal unemployment taxes c. state unemployment taxes d. federal income taxes withheld 13. Central Products sells a certain press for $20,000. Included in this price is an implied service contract of $800. Fifty machines were sold in 2015. Warranty expense incurred during 2015 amounted to $25,000. The company uses the sales warranty accrual method. Which entry would probably not be made in 2015? a. Unearned Warranty Revenue Warranty Revenue 25,000 b. Cash 1,000,000 c. Cash 40,000 Sales Unearned Warranty Revenue Warranty Revenue d. Warranty Expense Cash 25,000 960,000 40,000 25,000 40,000 25,000 14. The Oklahoma Company includes a premium in each box of its cereal. For five premiums plus $1.50, customers are entitled to a plastic doll that costs Oklahoma $4. Oklahoma expects 40% of the premiums to be redeemed. In 2015, Oklahoma sold 600,000 boxes of cereal and distributed 20,000 dolls. What is Oklahoma's estimated liability for unredeemed premiums on December 31, 2015? a. $ 30,000 b. $ 70,000 c. $ 80,000 d. $160,000 15. The expense warranty accrual method a. violates the matching concept b. requires recognition in the period of sale of the estimated warranty expense and warranty liability c. separates accounting for two components of the sales price: the price of the product and the price of the warranty d. debits warranty costs to expense in the period when warranty expenditures are made ACCO 202 (Asignacin #5) - Prof. Carlos Alvarez 1-3 16. Liabilities whose amounts must be estimated are disclosed in financial statements by a. including details in the footnotes b. describing the estimated liability among the liabilities on the balance sheet, but not including the amounts in the liability totals c. an appropriation of retained earnings d. including the amounts in the liability totals BONOS: 17. Gain contingencies should a. be accrued if they are probable and can be reasonably estimated b. not be accrued in the accounts c. be accrued only if they are the result of litigation or government appropriation d. not be accrued or disclosed in the footnotes 18. Which of the following contingencies is usually not accrued in the accounts? a. uninsured risk of property loss by fire or other hazards b. guarantees of indebtedness of others c. noncollectibility of receivables d. agreements to repurchase receivables that have been sold 19. Which of the following loss contingencies is not usually accrued? a. product warranty obligations b. premium offer obligations c. risk of loss from fire d. noncollectibility of receivables 1-4 PROBLEM: 1. Easy Motor Company makes sales on which an 8% sales tax is assessed. The following summary transactions were made during 2015: a. b. c. Cash sales of $900,000, excluding sales taxes Credit sales of $2,150,000, including sales taxes Sales taxes of $250,000 were paid to the state Required: Prepare journal entries to record the preceding transactions. (Round to the nearest whole number.) ACCO 202 (Asignacin #5) - Prof. Carlos Alvarez 1-5 Name:___________________________ Number______ Long-Term Liabilities and Receivables MULTIPLE CHOICE 1. Which of the following is not a reason for the issuance of long-term liabilities? a. Debt financing offers an income tax advantage. b. Ownership interest is diluted. c. Debt may be the only available source of funds. d. Debt financing may have a lower cost. 2. Which of the following may not be equal to the contract rate of interest? a. stated rate b. nominal rate c. face rate d. effective rate 3. Which of the following bonds pay no interest until maturity? a. zero-coupon bonds b. registered bonds c. serial bonds d. debenture bonds 4. In which of the following situations will the book value of a bond be equal to its maturity value? a. The effective rate exceeds the stated rate. b. The nominal rate exceeds the yield rate. c. The yield rate equals the contract rate. d. The effective rate equals the yield rate. 5. If a company sells its bonds at more than face value, the effective interest rate is a. less than the contract interest rate b. more than the contract interest rate c. equal to the contract interest rate d. more than the market interest rate ACCO 202 (Asignacin #6) - Prof. Carlos Alvarez 1-1 6. When is interest expense more than interest paid? a. when bonds are sold at a premium b. when bonds are sold at par c. when bonds are sold at a discount d. when bonds are sold at a yield 7. Premium on Bonds Payable is a(n) a. valuation account b. contra account c. accumulation account d. adjunct account 8. For which of the following types of bonds is interest expense recognized each year even though no interest is paid? a. debenture bonds b. zero-coupon bonds c. serial bonds d. mortgage bonds 9. Interest expense recognized each period on zero-coupon bonds, sold at a discount, is equal to the a. credit to Cash b. difference between the cash payment and the discount amortization c. credit to Discount on Bonds Payable d. sum of the cash payment and the discount amortization 10. The bond interest expense reflected on the income statement should reflect an amount based on the a. effective interest rate b. stated interest rate c. nominal interest rate d. face interest rate 11. Under the straight-line amortization method, interest expense on a bond sold at a premium is equal to the a. interest paid plus bond premium amortization b. interest rate times the book value of the bonds c. interest rate times the face value of the bonds d. interest paid minus bond premium amortization 1-2 12. The assumption of a stable interest expense per year is inherent under which of the following amortization methods? a. present-value method b. effective-interest method c. stated-interest method d. straight-line method 13. The effective-interest method of amortization assumes a stable a. interest expense b. interest rate c. book value d. amortization amount 14. Megan, Inc., sold $500,000 of its 9%, five-year bonds dated January 1, 2016, on May 1, 2016, for $493,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used. The net liability for the bonds after recording the sale would be a. $508,000 b. $507,700 c. $500,000 d. $493,000 15. Megan, Inc., sold $500,000 of its 9%, five-year bonds dated January 1, 2016, on May 1, 2016, for $493,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used. Interest expense after the July 1, 2016, interest payment has been posted is a. $8,200 b. $7,750 c. $7,500 d. $6,800 16. Bond issue costs a. should be amortized by the straight-line method to interest expense b. should be included in bond discount or subtracted from bond premium and amortized by the effective-interest method c. should be subtracted from bonds payable on the balance sheet d. should not be amortized and should be written off at bond retirement ACCO 202 (Asignacin #6) - Prof. Carlos Alvarez 1-3 BONOS: 17. Baron, Inc., issued $100,000 of its 8%, five-year bonds on January 1, 2014, at 98. Interest is paid on January 1 and July 1. The bonds are callable at 103 and straight-line amortization is used. The bonds are recalled on April 1, 2016. The journal entry to record the reacquisition of the bonds will include a a. debit to Loss on Bond Redemption for $5,000 b. credit to Gain on Bond Redemption for $5,000 c. credit to Discount on Bonds Payable for $1,100 d. debit to Loss on Bond Redemption for $4,200 18. Gains or losses from refunding are recognized a. over the remaining life of the old issue b. in the year of refunding c. over the life of the new bond issue d. as a prior period adjustment 19. The portion of proceeds from the sale of bonds with detachable stock warrants attributable to the warrants is accounted for as a(n) a. additional paid-in capital account b. common stock account c. contra-liability account d. adjunct-liability account 1-4 PROBLEM: 1. Match the following bond classifications with the appropriate characteristic by entering the appropriate letter in the space provided. a. b. c. d. Debenture bonds Mortgage bonds Registered bonds Coupon bonds e. f. g. h. Zero-coupon bonds Callable bonds Convertible bonds Serial bonds ____ 1. Portions of the bond mature in periodic installments. ____ 2. Unregistered bonds. ____ 3. Bonds that are secured by a lien against specific assets. ____ 4. Bonds that can be exchanged for a predetermined number of shares of stock. ____ 5. Bonds whose marketability is based on the general credit rating of the issuing company. ____ 6. Bonds whose interest is paid to the individuals listed in the corporate records as owners of the bonds. ____ 7. Bonds that the company has the right to retire before their maturity date. ____ 8. Bonds on which no interest is paid until the maturity date. ACCO 202 (Asignacin #6) - Prof. Carlos Alvarez 1-5