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Exam 9: Reporting and Interpreting Liabilities

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Question 1

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Black Corporation entered into the following transactions: • The accrual of wages and salaries expense. • The cash sale of equipment for a loss. • The cash payment in advance for a one-year insurance policy. Which of the following statements is correct with respect to determining Rocket's cash flows from operating activities on the statement of cash flows?

A) The accrual of wages and salaries expense is subtracted from net income.
B) The loss on the equipment sale is subtracted from net income.
C) The cash payment to purchase the insurance policy is subtracted from net income.
D) The accrual of wages and the equipment loss are both subtracted from net income.

E) C) and D)
F) B) and D)

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Question 2

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When a liability is initially recorded, it is recorded at the future amount of all payments.

A) True
B) False

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Question 3

Multiple Choice

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Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the following statements is correct?

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to:

Which of the following results in a decrease in working capital?

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

Which of the following questions is asked with respect to determining the accounting for leases?

Income taxes payable is an example of an accrued liability.

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,520. On January 1, 2014, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On December 31, 2014, Straight recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The vehicle reported on the balance sheet as of the purchase date is closest to:

On October 1, 2014, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2015 income statement?

A company's income statement reported net income of $40,000 during 2014. The income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 2015. Which of the following statements is correct assuming a 35% tax rate?

Which of the following questions is incorrect with respect to determining the accounting for leases?

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.

An employee has an obligation to pay his payroll taxes to the employer.

A current liability is created when a customer pays cash for services to be provided in the future.

Rocket Corporation entered into the following transactions: • The accrual of wages and salaries expense. • The cash payment of a six-month note payable. • The cash payment in advance for a one-year insurance policy. Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

Which of the following statements is correct?

If income tax expense reported on the income statement is $45,000 for 2014, and the tax return for 2014 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2014 will be which of the following? Assume a 40% tax rate.