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

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

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?

• $720.
• $0.
• $320.
• $400.

Allied Partners filed suit against Big Sky, Inc., 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?

• As a liability for $600,000 with disclosure of the range.
• As a liability for $700,000 with disclosure of the range.
• As a disclosure only. No liability is reported.
• As a liability for $500,000 with disclosure of the range.

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

• We pay cash and incur interest.
• We incur interest.
• We pay cash for interest.
• We pay cash or incur interest.

Which of the following represents a characteristic of a liability?

• A probable future sacrifice of economic benefits.
• All of these are characteristics of a liability.
• Arising from present obligations to other entities.
• Resulting from past transactions or events.

Which of the following is reported as a current liability?

• Unused line of credit.
• Notes payable due in two years.
• Notes payable due in 15 months.
• Current portion of long-term debt.

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?

• $150,000
• $300,000
• $450,000
• $600,000

Current liabilities

• Are preferred by most companies over long-term liabilities.
• Can be satisfied only with the payment of cash.
• Include obligations payable within one year or one operating cycle, whichever is shorter.
• May include contingent liabilities.