The key accounting considerations relating to accounts payable are:
A. Determining their existence and ensuring that they are recorded in the appropriate accounting
period.
B. Determining their present value and ensuring that they are recorded in the appropriate
accounting period.
C. Determining their existence and determining the correct amount.
D. Determining the present value of the principal and the amount of the interest.
A. Determining their existence and ensuring that they are recorded in the appropriate accounting
period.
Classifying liabilities as either current or long-term helps creditors assess:
A. Profitability.
B. The relative risk of a firm's liabilities.
C. The degree of a firm's liabilities.
D. The amount of a firm's liabilities.
B. The relative risk of a firm's liabilities.
When cash is received from customers in the form of a refundable deposit, the cash account is
increased with a corresponding increase in:
A. A current liability.
B. Revenue.
C. Shareholders' equity.
D. Paid-in capital.
A. A current liability.
A discount on a noninterest-bearing note payable is classified in the balance sheet as:
A. An asset.
B. A component of shareholders' equity.
C. A contingent liability.
D. A contra liability.
D. A contra liability.
The rate of interest printed on the face of a note payable is called the:
A. Yield rate.
B. Effective rate.
C. Market rate.
D. Stated rate.
D. Stated rate.
The rate of interest that actually is incurred on a note payable is called the:
A. Face rate.
B. Contract rate.
C. Effective rate.
D. Stated rate.
C. Effective rate.
On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a 7-month,
noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is
8%. Sky's effective interest rate on this loan is:
A. More than the stated discount rate of 8%.
B. Less than the stated discount rate of 8%.
C. Equal to the stated discount rate of 8%.
D. Unrelated to the stated discount rate of 8%.
A. More than the stated discount rate of 8%.
Jane's Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note bearing
interest at 12%. Interest is payable in full at maturity on January 1, 2013. In connection with this
note, Jane's should report interest expense at December 31, 2011, in the amount of:
A. $0.
B. $24,000.
C. $48,000.
D. $50,880.
B. $24,000.
What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a
stated rate of 12% and a maturity value of $200,000?
A. 12.4%.
B. 12.0 %.
C. 11.5%.
D. 3.0%.
A. 12.4%.
On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The
loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective
interest rate on this loan (rounded) is:
A. 9.0%.
B. 9.5%.
C. 9.6%.
D. 9.7%.
C. 9.6%.
Universal Travel Inc. borrowed $500,000 on November 1, 2011, and signed a 12-month note
bearing interest at 6%. Interest is payable in full at maturity on October 31, 2012. In connection
with this note, Universal Travel Inc. should report interest payable at December 31, 2011, in the
amount of:
A. $8,000.
B. $30,000.
C. $5,000.
D. $25,000.
C. $5,000.
Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by
Second Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this
loan (rounded) is:
A. 9.28%
B. 9.49%
C. 9.50%
D. 9.57%
D. 9.57%
Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account
decreased by $125,000. What was interest expense for the year?
A. $890,000.
B. $660,000.
C. $555,000.
D. $785,000.
B. $660,000.
On June 1, 2011, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note
with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the
note as of September 30, 2011?
A. $525,000.
B. $300,000.
C. $495,000.
D. $475,000.
C. $495,000.
At times, businesses require advance payments from customers that will be applied to the
purchase price when goods are delivered or services provided. These customer advances
represent:
A. Liabilities until the product or service is provided.
B. A component of shareholders' equity.
C. Long-term assets until the product or service is provided.
D. Revenue upon receipt of the advance payment.
A. Liabilities until the product or service is provided.
M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid
vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive
payment in lieu of vacation days. At December 31, 2011, M's unadjusted balance of liability for
compensated absences was $30,000. M estimated that there were 200 vacation days available
at December 31, 2011. M's employees earn an average of $150 per day. In its December 31,
2011, balance sheet, what amount of liability for compensated absences is M required to report?
A. $0.
B. $30,000.
C. $225,000.
D. $450,000.
B. $30,000.
Which of the following generally is associated with accounts payable?
A. Option A
B. Option B
C. Option C
D. Option D
A. Option A
Lake Co. receives nonrefundable advance payments with special orders for containers
constructed to customer specifications. Related information for 2011 is as follows ($ in
millions):
What amount should Lake report as a current liability for advances from customers in its Dec.
31, 2011, balance sheet?
A. $0.
B. $80.
C. $125.
D. $170
B. $80.
All of the following but one represent collections for third parties. Which one of the following is
not a collection for a third party?
A. Sales tax payable.
B. Customer deposits.
C. Employee insurance deductions.
D. Social security taxes deductions.
B. Customer deposits.
When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:
A. A decrease in cost of goods sold.
B. An increase in current liabilities.
C. An increase in accounts receivable.
D. An increase in revenue.
D. An increase in revenue.
B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid
vacation days and 10 paid sick days. Both vacation and sick days can be carried over
indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no
payment is given for sick days not taken. At December 31, 2011, B's unadjusted balance of
liability for compensated absences was $42,000. B estimated that there were 300 vacation days
and 150 sick days available at December 31, 2011. B's employees earn an average of $200 per
day. In its December 31, 2011, balance sheet, what amount of liability for compensated
absences is B required to report?
A. $60,000.
B. $84,000.
C. $90,000.
D. $144,000.
A. $60,000.
On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year,
with the stipulation that vacations earned each year can be taken the following year. For the
year ended December 31, 2011, G's employees each earned an average of $800 per week. 500
vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by
an average of 5 percent by the time vacations actually were taken in 2012. What is the amount
of G's 2012 wages expense related to 2011 vacation time?
A. $0
B. $20,000
C. $400,000
D. $420,000
B. $20,000
Revenue associated with gift card sales should be recognized:
A. When the gift card is sold.
B. No later than the last day of the operating period in which the gift card is delivered to the
customer.
C. When the probability of gift card redemption is viewed as remote.
D. Under no circumstances, as gift cards are not themselves a delivered product, but rather a
selling technique
C. When the probability of gift card redemption is viewed as remote.
All else equal, a large increase in unearned revenue in the current period would be expected to
produce what effect on revenue in a future period?
A. Large increase, because unearned revenue becomes revenue when revenue is earned.
B. Large decrease, because unearned revenue implies that less revenue has been earned, which
reduces future revenue.
C. No effect, because unearned revenue is a liability, so payment will use assets rather than
providing revenue.
D. Large decrease, because unearned revenue indicates collection problems that will reduce net
revenues in future periods.
A. Large increase, because unearned revenue becomes revenue when revenue is earned
Peterson Photoshop sold $1000 of gift cards on a special promotion on October 15, 2011, and
sold $1500 of gift cards on another special promotion on November 15, 2011. Of the cards sold
in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the
cards sold in November, $150 were redeemed in November and $350 were redeemed in
December. Peterson views the probability of redemption of a gift card as remote if the card has
not been redeemed within two months. At 12/31/2011, Peterson would show an unearned
revenue account for their gift cards with a balance of:
A. $0.
B. $1000.
C. $1350.
D. $1500.
B. $1000.
When a product or service is delivered for which a customer advance has been previously
received, the appropriate journal entry includes:
A. A debit to a revenue and a credit to a liability account.
B. A debit to a revenue and a credit to an asset account.
C. A debit to an asset and a credit to a revenue account.
D. A debit to a liability and a credit to a revenue account.
D. A debit to a liability and a credit to a revenue account.
Clark's Chemical Company received customer deposits on returnable containers in the amount
of $100,000 during 2011. Twelve percent of the containers were not returned. The deposits are
based on the container cost marked up 20%. What is cost of goods sold relative to this
forfeiture?
A. $0.
B. $2,000.
C. $10,000.
D. $14,400.
C. $10,000.
In May of 2011, Raymond Financial Services became involved in a penalty dispute with the EPA.
At December 31, 2011, the environmental attorney for Raymond indicated that an unfavorable
outcome to the dispute was probable. The additional penalties were estimated to be $770,000
but could be as high as $1,170,000. After the year-end, but before the 2011 financial statements
were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have
reported an accrued liability on its December 31, 2011, balance sheet of:
A. $770,000.
B. $900,000.
C. $970,000.
D. $1,170,000.
B. $900,000.
Slotnick Chemical received customer deposits on returnable containers in the amount of
$300,000 during 2011. Fifteen percent of the containers were not returned. The deposits are
based on the container cost marked up 20%. How much profit did Slotnick realize on the
forfeited deposits?
A. $0.
B. $7,500.
C. $9,000.
D. $45,000.
B. $7,500.
Which of the following is not a current liability?
A. Accounts payable.
B. A note payable due in 2 years.
C. Accrued interest payable.
D. Sales tax payable.
B. A note payable due in 2 years.
Short-term obligations can be reported as long-term liabilities if:
A. The firm has a long-term line of credit.
B. The firm has tentative plans to issue long-term bonds.
C. The firm intends to and has the ability to refinance as long-term.
D. The firm has the ability to refinance on a long-term basis.
C. The firm intends to and has the ability to refinance as long-term.
Of the following, which typically would not be classified as a current liability?
A. Estimated liability from cash rebate program.
B. A long-term note payable maturing within the coming year.
C. Rent revenue received in advance.
D. A six-month bank loan to be paid with the proceeds from the sale of common stock.
D. A six-month bank loan to be paid with the proceeds from the sale of common stock.
Large, highly rated firms sometimes sell commercial paper:
A. To borrow funds at a lower rate than through a bank.
B. To earn a profit on the paper.
C. To avoid paperwork.
D. Because the interest rate is locked in by the Federal Reserve Board.
A. To borrow funds at a lower rate than through a bank.
Which of the following situations would not require that long-term liabilities be reported as
current liabilities on a classified balance sheet?
A. The long-term debt is callable by the creditor.
B. The creditor has the right to demand payment due to a contractual violation.
C. The long-term debt matures within the upcoming year.
D. All of the above require the current classification.
D. All of the above require the current classification.
A long-term liability should be reported as a current liability in a classified balance sheet if the
long-term debt
A. is callable by the creditor.
B. is secured by adequate collateral.
C. will be refinanced with stock.
D. will be refinanced with debt.
A. is callable by the creditor.
On December 31, 2011, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2012. L
borrowed the money to finance construction of a new plant. L planned to refinance the note by
issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the
note on January 23, 2012. In February 2012, L completed a $3,000,000 bond offering. L will use
the bond offering proceeds to repay the note payable at its maturity and to pay construction
costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of
the note payable should L include in the current liabilities section of its December 31, 2011,
balance sheet?
A. $0
B. $500,000
C. $1,000,000
D. $1,500,000
B. $500,000
Liabilities payable within the coming year are classified as long-term liabilities if refinancing is
completed before date of issuance of the financial statements under
A. US GAAP.
B. IFRS.
C. Either U.S. GAAP and IFRS.
D. Neither U.S. GAAP and IFRS.
A. US GAAP.
Kline Company refinanced current debt as long-term debt on January 5, 2012. Kline's fiscal year
ended on December 31, 2011, and its financial statements will be issued sometime in early
March, 2012. Under IFRS, how would Kline classify the debt on its December 31, 2011 balance
sheet?
A. In the "mezzanine" between current and non-current liabilities.
B. Kline would not classify the debt as current or noncurrent, but rather would write a disclosure
note explaining the circumstances.
C. As a noncurrent liability.
D. As a current liability.
D. As a current liability.
Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12,
2012. At December 31, 2011, Branch signed an agreement with First Bank to borrow up to
$18,000,000 to refinance the notes on a long-term basis. The agreement specified that
borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date
of issue of the December 31, 2011, financial statements, the value of Branch's collateral was
$20,000,000. On its December 31, 2011, balance sheet, Branch should classify the notes as
follows:
A. $15,000,000 long-term and $3,000,000 current liabilities.
B. $4,500,000 short-term and $13,500,000 current liabilities.
C. $18,000,000 of current liabilities.
D. $18,000,000 of long-term liabilities.
A. $15,000,000 long-term and $3,000,000 current liabilities.
Other things being equal, most managers would prefer to report liabilities as noncurrent rather
than current. The logic behind this preference is that the long-term classification permits the
company to report:
A. Higher working capital and a higher inventory turnover.
B. Lower working capital and a higher current ratio.
C. Higher working capital and a higher current ratio.
D. Higher working capital and a lower debt to equity ratio.
C. Higher working capital and a higher current ratio.
Footnote disclosure is required for material potential losses when the loss is at least reasonably
possible:
A. Only if the amount is known.
B. Only if the amount is known or reasonably estimable.
C. Unless the amount is not reasonably estimable.
D. Even if the amount is not reasonably estimable.
D. Even if the amount is not reasonably estimable.
Gain contingencies usually are recognized in a company's income statement when:
A. Realized.
B. The amount can be reasonably estimated.
C. The gain is reasonably possible and the amount can be reasonable estimated.
D. The gain is probable and the amount can be reasonably estimated.
A. Realized.
A company should accrue a loss contingency only if the likelihood that a liability has been
incurred is:
A. More likely than not and the amount of the loss is known.
B. At least reasonably possible and the amount of the loss is known.
C. At least reasonably possible and the amount of the loss can be reasonably estimated.
D. Probable and the amount of the loss can be reasonably estimated.
D. Probable and the amount of the loss can be reasonably estimated.
A contingent loss should be reported in a footnote to the financial statements rather than being
accrued if:
A. The likelihood of a loss is remote.
B. The incurrence of a loss is reasonably possible.
C. The incurrence of a loss is more likely than not.
D. The likelihood of a loss is probable.
B. The incurrence of a loss is reasonably possible.
Which of the following is a contingency that should be accrued?
A. The company is being sued and a loss is reasonably possible and reasonably estimable.
B. The company deducts life insurance premiums from employees' paychecks.
C. The company offers a two-year warranty and the expenses can be reasonably estimated.
D. It is probable that the company will receive $100,000 in settlement of a lawsuit.
C. The company offers a two-year warranty and the expenses can be reasonably estimated.
A loss contingency should be accrued in a company's financial statements only if the likelihood
that a liability has been incurred is:
A. at least remotely possible and the amount of the loss is known.
B. reasonably possible and the amount of the loss is known.
C. reasonably possible and the amount of the loss can be reasonably estimated.
D. probable and the amount of the loss can be reasonably estimated.
D. probable and the amount of the loss can be reasonably estimated.
Paul Company issues a product recall due to an apparently pre-existing and material defect
discovered after the end of its fiscal year. Financial statements have not yet been issued. The
action required of Paul Company for this reasonably estimable contingency for the year just
ended is:
A. To disclose it in a footnote.
B. To accrue a long-term liability.
C. To accrue the liability and explain it in a footnote.
D. To do nothing relative to the contingency.
C. To accrue the liability and explain it in a footnote.
Accounting for costs of incentive programs for customer purchases:
A. Requires probability estimation.
B. Follows the matching principle.
C. Is a loss contingency situation.
D. All of the above are correct.
D. All of the above are correct.
Providing a monetary rebate program for purchasing a product:
A. Is accounted for similarly to product warranties.
B. Creates an expense for the seller in the period of sale.
C. Creates a contingent liability for the seller at the time of sale.
D. All of the above are correct.
D. All of the above are correct.
The main difference between accounting for rebate and cash discount coupons is:
A. The latter is not treated as an expense.
B. Only the former creates a contingent liability when issued.
C. The expense for the latter is usually deferred until redemption of the coupon.
D. There are no significant differences in accounting between the two.
C. The expense for the latter is usually deferred until redemption of the coupon.
Which of the following entail essentially the same accounting treatment?
A. Coupons for cash rebates and coupons for other premiums
B. Cents-off coupons and coupons for other premiums
C. Cents-off coupons and coupons for cash rebates
D. All of the above are correct.
A. Coupons for cash rebates and coupons for other premiums
Blue Co. can es
