The debt to total assets ratio is computed by dividing

The debt to total assets ratio is computed by dividing

a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.


Answer: total liabilities by total assets

The times interest earned ratio is computed by dividing

The times interest earned ratio is computed by dividing

a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.


Answer: income before income taxes and interest expense by interest expense

Note disclosures for long-term debt generally include all of the following except

Note disclosures for long-term debt generally include all of the following except

a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.


Answer: names of specific creditors

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

a. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next five years.
d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.


Answer: The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years

Long-term debt that matures within one year and is to be converted into stock should be reported

Long-term debt that matures within one year and is to be converted into stock should be reported

a. as a current liability.
b. in a special section between liabilities and stockholders' equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.


Answer: as noncurrent and accompanied with a note explaining the method to be used in its liquidation

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.


Answer: can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost

Which of the following is an example of "off-balance-sheet financing"?

Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.


a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."


Answer: All of these are examples of "off-balance-sheet financing."

Discount on Notes Payable is charged to interest expense

Discount on Notes Payable is charged to interest expense

a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.


Answer: using the effective-interest method

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless

a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current market value of the note.
d. any of these.


Answer: any of these

When a note payable is issued for property, goods, or services, the present value of the note is measured by

When a note payable is issued for property, goods, or services, the present value of the note is measured by

a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.


Answer: any of these

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place

a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair market value of the property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.


Answer: the present value of the debt instrument must be approximated using an imputed interest rate

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?

a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.


Answer: The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period

"In-substance defeasance" is a term used to refer to an arrangement whereby

"In-substance defeasance" is a term used to refer to an arrangement whereby

a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.


Answer: a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.


Answer: a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition

a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.


Answer: all of these

Treasury bonds should be shown on the balance sheet as

Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.


Answer: a deduction from bonds payable issued to arrive at net bonds payable and outstanding

The printing costs and legal fees associated with the issuance of bonds should

The printing costs and legal fees associated with the issuance of bonds should

a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.


Answer: be accumulated in a deferred charge account and amortized over the life of the bonds

Theoretically, the costs of issuing bonds could be

Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.


Answer: any of these

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.


Answer: increased by accrued interest from May 1 to June 1

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.


Answer: credit to Interest Expense

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.


Answer: increase if the bonds were issued at either a discount or a premium

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.


Answer: the market rate multiplied by the beginning-of-period carrying amount of the bonds

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

a. exceed what it would have been had the effective-interest method of amortization been used.
b. be less than what it would have been had the effective-interest method of amortization been used.
c. be the same as what it would have been had the effective-interest method of amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.


Answer: exceed what it would have been had the effective-interest method of amortization been used

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.


Answer: the nominal rate of interest exceeded the market rate

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Another step in calculating the issue price of the bonds is to

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
Another step in calculating the issue price of the bonds is to

a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.
d. none of these.


Answer: none of these

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
One step in calculating the issue price of the bonds is to multiply the principal by the table value for

a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.


Answer: 20 periods and 4% from the present value of 1 table

The rate of interest actually earned by bondholders is called the

The rate of interest actually earned by bondholders is called the

a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.


Answer: effective, yield, or market rate

The interest rate written in the terms of the bond indenture is known as the

The interest rate written in the terms of the bond indenture is known as the

a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.


Answer: coupon rate, nominal rate, or stated rate

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.


Answer: greater than if the straight-line method were used

Bonds that pay no interest unless the issuing company is profitable are called

Bonds that pay no interest unless the issuing company is profitable are called

a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.


Answer: income bonds

Bonds for which the owners' names are not registered with the issuing corporation are called

Bonds for which the owners' names are not registered with the issuing corporation are called

a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.


Answer: bearer bonds

The term used for bonds that are unsecured as to principal is

The term used for bonds that are unsecured as to principal is

a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.


Answer: debenture bonds

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.


Answer: bond indenture

An example of an item which is not a liability is

An example of an item which is not a liability is

a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.


Answer: dividends payable in stock

The times interest earned ratio is computed by dividing income before interest expense by interest expense.

The times interest earned ratio is computed by dividing income before interest expense by interest expense.

Answer: false

If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

Answer: false

The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

Answer: true

Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

Answer: true

The process of interest-rate approximation is called imputation, and the resulting interest rate is called an imputed interest rate.

The process of interest-rate approximation is called imputation, and the resulting interest rate is called an imputed interest rate.

Answer: true

The implicit interest rate is the rate that equates the cash received with the amounts received in the future.

The implicit interest rate is the rate that equates the cash received with the amounts received in the future.

Answer: True

If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

Answer: False

The replacement of an existing bond issue with a new one is called refunding.

The replacement of an existing bond issue with a new one is called refunding.

Answer: True

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

Answer: True

The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

Answer: false

A bond may only be issued on an interest payment date.

A bond may only be issued on an interest payment date.

Answer: False

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

Answer: False

The stated rate is the same as the coupon rate.

The stated rate is the same as the coupon rate.

Answer: True

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

Answer: False

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

Answer: False

Bond issues that mature in installments are called serial bonds.

Bond issues that mature in installments are called serial bonds.

Answer: True

A mortgage bond is referred to as a debenture bond.

A mortgage bond is referred to as a debenture bond.

Answer: False

Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

Answer: True

Each of the following are included in both the current ratio and the acid-test ratio except

Each of the following are included in both the current ratio and the acid-test ratio except

a. cash.
b. short-term investments.
c. net receivables.
d. inventory.


Answer: inventory

The numerator of the acid-test ratio consists of

The numerator of the acid-test ratio consists of

a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.


Answer: cash, marketable securities, and net receivables

Accrued liabilities are disclosed in financial statements by

Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.


Answer: appropriately classifying them as regular liabilities in the balance sheet

The ratio of current assets to current liabilities is called the

The ratio of current assets to current liabilities is called the

a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.


Answer: current ratio

Which of the following is not acceptable treatment for the presentation of current liabilities?

Which of the following is not acceptable treatment for the presentation of current liabilities?

a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working capital


Answer: Offsetting current liabilities against assets that are to be applied to their liquidation

What does the current ratio inform you about a company?

What does the current ratio inform you about a company?

a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.


Answer: the company's liquidity

How do you determine the acid-test ratio?

How do you determine the acid-test ratio?

a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current liabilities.


Answer: The sum of cash, short-term investments and net receivables divided by current liabilities

Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?

Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?

a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.


Answer: The type of litigation involved

What condition is necessary to recognize an asset retirement obligation?

What condition is necessary to recognize an asset retirement obligation?

a. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.


Answer: Company has an existing legal obligation and can reasonably estimate the amount of the liability

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?

a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.


Answer: The difference between the cost of the video game and the cash received is recognized as premium expense

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.


Answer: Estimated liability under warranties

Which of the following best describes the cash-basis method of accounting for warranty costs?

Which of the following best describes the cash-basis method of accounting for warranty costs?

a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.


Answer: Expensed when warranty claims are certain

Which of the following best describes the accrual method of accounting for warranty costs?

Which of the following best describes the accrual method of accounting for warranty costs?

a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.


Answer: Expensed based on estimate in year of sale.

Use of the accrual method in accounting for product warranty costs

Use of the accrual method in accounting for product warranty costs

a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.


Answer: represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale

Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.


Answer: the cause for action occurred during the accounting period covered by the financial statements.

Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.


Answer: the minimum of the range

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.


Answer: accrued

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2010. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2010. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000


Answer: Operating expense of $800,000 and liability of $800,000

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty

a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.


Answer: should be reported as part current and part long-term

A company is legally obligated for the costs associated with the retirement of a long-lived asset

A company is legally obligated for the costs associated with the retirement of a long-lived asset

a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the activities itself.
d. when it is probable the asset will be retired.


Answer: whether it hires another party to perform the retirement activities or performs the activities itself.

To record an asset retirement obligation (ARO), the cost associated with the ARO is

To record an asset retirement obligation (ARO), the cost associated with the ARO is

a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.


Answer: included in the carrying amount of the related long-lived asset

A contingent liability

A contingent liability

a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.


Answer: is the result of a loss contingency

A contingency can be accrued when

A contingency can be accrued when

a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.


Answer: the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred

Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial statements should include the following related to the incident:

Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial statements should include the following related to the incident:

a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.


Answer: recognition of a loss and creation of a liability for the value of the land

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.


Answer: Amount of loss is reasonably estimable and occurrence of event is probable

Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?

Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?

a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.


Answer: all of these must be disclosed

Which of the following is the proper way to report a gain contingency?

Which of the following is the proper way to report a gain contingency?

a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.


Answer: as a disclosure only

Which of the following terms is associated with recording a contingent liability?

Which of the following terms is associated with recording a contingent liability?

a. Possible.
b. Likely.
c. Remote.
d. Probable.


Answer: probable

Which of the following is an example of a contingent liability?

Which of the following is an example of a contingent liability?

a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.


Answer: Obligations related to product warranties

When is a contingent liability recorded?

When is a contingent liability recorded?

a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably estimated.


Answer: When the future events are probable to occur and the amount can be reasonably estimated

What is a contingency?

What is a contingency?

a. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.


Answer: An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur

Which of the following taxes does not represent a payroll deduction a company may incur?

Which of the following taxes does not represent a payroll deduction a company may incur?

a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.


Answer: federal income taxes

Under what conditions is an employer required to accrue a liability for sick pay?

Under what conditions is an employer required to accrue a liability for sick pay?

a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.


Answer: sick pay benefits vest

Which gives rise to the requirement to accrue a liability for the cost of compensated absences?

Which gives rise to the requirement to accrue a liability for the cost of compensated absences?

a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.


Answer: all of the above

What are compensated absences?

What are compensated absences?

a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.


Answer: paid time off

The amount of the liability for compensated absences should be based on

The amount of the liability for compensated absences should be based on

1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.


Answer: Either 1 or 2 is acceptable

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.


Answer: be accrued during the period when earned.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.


Answer: All of these are conditions for the accrual

Which of these is not included in an employer's payroll tax expense?

Which of these is not included in an employer's payroll tax expense?

a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes


Answer: federal income taxes

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.


Answer: portion of FICA taxes and any voluntary deductions.

In accounting for compensated absences, the difference between vested rights and accumulated rights is

In accounting for compensated absences, the difference between vested rights and accumulated rights is

a. vested rights are normally for a longer period of employment than are accumu¬lated rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.


Answer: vested rights are normally for a longer period of employment than are accumu¬lated rights

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.


Answer: the number of financing institutions that refused to refinance the debt, if any

Which of the following is not a correct statement about sales taxes?

Which of the following is not a correct statement about sales taxes?

a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.


Answer: sales taxes are an expense of the seller

Which of the following statements is false?

Which of the following statements is false?

a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.


Answer: FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority

The ability to consummate the refinancing of a short-term obligation may be demonstrated by

The ability to consummate the refinancing of a short-term obligation may be demonstrated by

a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
d. all of these.


Answer: all of these

Which of the following statements is correct?

Which of the following statements is correct?

a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these.


Answer: none of these

Which of the following situations may give rise to unearned revenue?

Which of the following situations may give rise to unearned revenue?

a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.


Answer: selling magazine subscriptions

A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?

A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?

a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.


Answer: Disclose the amount of the dividends in arrears

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?

a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.


Answer: Management indicated that they are going to refinance the obligation.

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.


Answer: Subsequently refinance the obligation on a long-term basis

Where is debt callable by the creditor reported on the debtor's financial statements?

Where is debt callable by the creditor reported on the debtor's financial statements?

a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
d. Current liability.


Answer: current liability

What is a discount as it relates to zero-interest-bearing notes payable?

What is a discount as it relates to zero-interest-bearing notes payable?

a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.


Answer: The discount represents the cost of borrowing

What is the relationship between present value and the concept of a liability?

What is the relationship between present value and the concept of a liability?

a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.


Answer: Present values are used to measure certain liabilities

What is the relationship between current liabilities and a company's operating cycle?

What is the relationship between current liabilities and a company's operating cycle?

a. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.


Answer: Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less)

Why is the liability section of the balance sheet of primary importance to bankers?

Why is the liability section of the balance sheet of primary importance to bankers?

a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.


Answer: To assist in understanding the entity's liquidity

Which of the following is not considered a part of the definition of a liability?

Which of the following is not considered a part of the definition of a liability?

a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.


Answer: Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following is a characteristic of a current liability but not a long-term liability?

Which of the following is a characteristic of a current liability but not a long-term liability?

a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.


Answer: Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities

An account which would be classified as a current liability is

An account which would be classified as a current liability is

a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage.
d. none of these.


Answer: none of these

Of the following items, the only one which should not be classified as a current liability is

Of the following items, the only one which should not be classified as a current liability is

a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.


Answer: short-term obligations expected to be refinanced.

Stock dividends distributable should be classified on the

Stock dividends distributable should be classified on the

a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.


Answer: balance sheet as an item of stockholders' equity

Which of the following is a current liability?

Which of the following is a current liability?

a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these


Answer: A cash dividend payable to preferred stockholders

Which of the following should not be included in the current liabilities section of the balance sheet?

Which of the following should not be included in the current liabilities section of the balance sheet?

a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included


Answer: all of these are included

Which of the following items is a current liability?

Which of the following items is a current liability?

a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.


Answer: Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months

Which of the following may be a current liability?

Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these


Answer: all of these

Which of the following is not true about the discount on short-term notes payable?

Which of the following is not true about the discount on short-term notes payable?

a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
d. All of these are true.


Answer: The Discount on Notes Payable account should be reported as an asset on the balance sheet

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as

a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.


Answer: current liabilities

Which of the following is true about accounts payable?

Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.


a. 1
b. 2
c. 3
d. Both 2 and 3 are true.


Answer: 1

Which of the following is a current liability?

Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these

Answer: none of these

Liabilities are

Liabilities are

a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.


Answer: obligations arising from past transactions and payable in assets or services in the future

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

Answer: true

Paying a current liability with cash will always reduce the current ratio.

Paying a current liability with cash will always reduce the current ratio.

Answer: false

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

Answer: false

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

Answer: false

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

Answer: true

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

Answer: true

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

Answer: false

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

Answer: true

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

Answer: false

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Answer: true

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

Answer: false

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

Answer: true

A company must accrue a liability for sick pay that accumulates but does not vest.

A company must accrue a liability for sick pay that accumulates but does not vest.

Answer: false

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

Answer: true

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

Answer: false

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

Answer: false

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

Answer: true

Magazine subscriptions and airline ticket sales both result in unearned revenues.

Magazine subscriptions and airline ticket sales both result in unearned revenues.

Answer: true

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

Answer: false

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

Answer: false