Notes Payable

1. Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, 2016. The note carried a oneyear term and a 12% rate of interest. The adjusting entry on Franklin's books to record accrued interest expense on December 31, 2016 will

A. Decrease assets and decrease retained earnings by $2,000.

B. Increase liabilities and decrease equity by $2,000.

C. Increase liabilities and decrease equity by $1,600.

D. Decrease equity and increase liabilities by $4,800.

2. Riley Company borrowed $36,000 on April 1, 2016 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in 2016 and $1,400 in 2017. Assume no other transactions. The amount of net income on the 2017 income statement would be:

A. $770.

B. $630.

C. $(190).

D. $1,890.

Sales Tax

3. Selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%:

A. Sales Tax Payble increases by $8.

B. Sales Revenue increases by $200.

C. Retained Earnings increases by $70.

D. All of these answer choices are correct.

Contingent Liabilities

4. Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet? A. The amount can be reasonably estimated.

B. The outcome is probable.

C. The outcome is reasonably possible.

D. The outcome is probable and can be reasonably estimated.

Warranties

5. When do the effects of product warranties appear on the statement of cash flows?

A. When the sale of merchandise is made.

B. When the warranty obligation is recognized.

C. When there is a settlement of a warranty claim made by a customer.

D. None of these answer choices are correct.