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A company receives cash in November, Year 1 for services to be performed in January, Year 2. The company increases both assets and service revenue in November, Year 1.

True or False

Banner Corporation receives $30,000 in May, Year 1 to manufacture and deliver its product in September, Year 1. At the time the product is delivered, Banner will _____.

• debit Deferred Revenue and credit Sales Revenue
• debit Cash and credit Sales Revenue
• debit Cash and credit Accounts Receivable
• debit Sales Revenue and credit Deferred Revenue

When a company collects sales taxes, it debits Cash, and credits both Sales Revenue and Sales Tax Payable.

True or False

Sales taxes collected from customers by the seller are recorded as _____.

• current liabilities
• expenses
• contra-assets
• sales revenues

We classify the portion of long-term debt maturing within one year from the balance sheet date as a long-term liability.

True or False

Clarendon Corporation has a $5 million liability at December 31, Year 1, of which $1 million is payable in Year 2. In its December 31, Year 1 balance sheet, the company will report the $5 million debt as a:

• $5 million current liability.
• $5 million long-term liability.
• $1 million current liability and $4 million long-term liability.
• $4 million current liability and $1 million long-term liability.

A contingent liability is an existing:

• certain situation that might result in a future gain.
• certain situation that might result in a future loss.
• uncertain situation that might result in a future gain.
• uncertain situation that might result in a future loss.

The accounting treatment for a lawsuit depends on:(Select all that apply.)

• the ability to estimate the amount of payment
• the ability to estimate the amount of payment
• the amount of time until the lawsuit is settled
• the amount of time until the lawsuit is settled
• the likelihood of payment
• the likelihood of payment
• the type of contingency

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be $3 million. Which of the following is the company required to do in this scenario?

• Record a $3 million liability.
• Record a $4 million liability.
• Record a $5 million liability.
• The company is not required to report anything because the loss is not certain.

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $2 to $3 million. No amount within the range appears more likely than others. Which of the following is the company required to do in this scenario?

• Record a $3 million liability with no further disclosure.
• Record a $2 million liability and disclose the potential additional loss.
• Record a $5 million liability with no further disclosure.
• Record a $3 million liability and disclose the potential additional loss

In the case of a contingent liability, if the likelihood of payment is reasonably possible, we record no entry but make full disclosure in a note to the financial statements to describe the contingency.

True or False

Star Appliance sells previously owned appliances. Each appliance carries a one-year warranty against defects. Suppose that appliance sales for the entire month of December are $50,000. The company expects future warranty costs to be 3% of sales. What amount should Star Appliance report as a liability on December 31?

• $125
• $150
• $1,500
• $50,000

Diamond Electronics sells previously owned electronics. Each product carries a one-year warranty against defects. Suppose that product sales for the entire month of December are $80,000. The company expects future warranty costs to be 6% of sales. On December 31, Year 1, the company will record a:

• debit to Warranty Expense for $4,800
• debit to Warranty Liability for $4,800
• credit to Warranty Expense for $80,000
• credit to Warranty Liability for $80,000

Barnes Corporation introduces a new e-book reader that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 10 percent of sales. By the end of the first year of selling the product, total sales are $5 million, and actual warranty expenditures are $100,000. What amount should Barnes report as a liability at the end of the year?

• $100,000
• $400,000
• $500,000
• $5 million

Contingent gains are recorded only if a gain is probable and the amount can be reasonably estimated.

True or False

Which of the following is not a measure of liquidity?

• Acid-Test Ratio
• Current Ratio
• Gross Profit Ratio
• Working Capital

Liquidity refers to:

• a company's ability to pay its long-term liabilities.
• having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.
• the ability of reported earnings to reflect the company's true earnings.
• the earnings or operating effectiveness of a company.

Working capital is the best measure of liquidity when comparing one company with another.

True or False

In general, the higher the current ratio, the greater the company's liquidity.

True or False

A current ratio of 2.2 indicates that:

• for every $1 of current assets, the company has $2.20 of current liabilities.
• for every $1 of current liabilities, the company has $2.20 of current assets.
• for every $1 of net income, the company has $2.20 of current assets.
• for every $1 of sales revenue, the company has $2.20 of current assets.

The current ratio is similar to the quick ratio but is based on a more conservative measure of current assets available to pay current liabilities.

True or False

Which of the following is included in calculating the current ratio, but excluded in calculating the acid-test ratio?

• Prepaid expenses
• Cash
• Accounts receivable
• Current investments