Question 1

Contingent liabilities must be recorded if:

Accepted Answer

A)   the future event is reasonably possible.
B)   the amount owed cannot be reasonably estimated.
C)   the future event is probable and the amount owed can be reasonably estimated.
D)   the future event is remote.E) B) and D)
F) None of the above C

Question 2

Which of the following statements regarding bonds payable net of a discount or premium is NOT true?

Accepted Answer

A)   If a company records a discount or premium with the bonds payable in a single account called Bonds Payable, Net, it can use the simplified effective interest method of amortization.
B)   When bonds payable are accounted for net of a discount, the initial amount recorded in the Bonds Payable, Net account is the issue price of the bond.
C)   When bonds are accounted for net of a premium, the balance in the Bonds Payable, Net account will increase as the bond approaches the maturity date.
D)   If a company issued bonds at their face value, the balance of Bonds Payable, Net account will always beE) C) and D)
F) None of the above

Question 3

Bonds that are not backed by collateral are called debenture bonds.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following are generally recorded as liabilities on the balance sheet?

Accepted Answer

A)   Remote likelihood liabilities.
B)   Possible contingent liabilities.
C)   Probable contingent liabilities.
D)   Immaterial contingent liabilities.E) B) and C)
F) A) and B)

Question 5

Which of the following is not used to calculate the times interest earned ratio?

Accepted Answer

A)   Net income.
B)   Income tax expense.
C)   Interest earned on investments.
D)   Interest expense.E) B) and C)
F) A) and D)

Question 6

Publicly issued debt certificates are also known as bonds.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT true regarding the quick ratio?

Accepted Answer

A)   If a company has more current assets than liquid assets, the current ratio will be larger than the quick ratio.
B)   A high quick ratio suggests a high ability to pay current liabilities.
C)   Liquid assets include cash and cash equivalents, short-term investments, and net accounts receivable.
D)   A quick ratio greater than 1 implies a company could not pay all of its current liabilities.E) A) and C)
F) A) and D)

Question 8

When the effective-interest method of amortization is used, what happens to the amount of discount or premium amortized as a bond moves toward maturity?

Accepted Answer

A)   The amount of discount or premium amortized each period decreases.
B)   The amount of discount or premium amortized each period increases for bonds sold at a discount but decreases for bonds sold at a premium.
C)   The amount of discount or premium amortized each period increases.
D)   The amount of discount or premium amortized each period decreases for bonds sold a discount but increasesE) All of the above
F) A) and B)

Question 9

Which of the following statements best describes a contingent liability?

Accepted Answer

A)   The amount of a contingent liability is known and will definitely have to be paid in the future.
B)   A contingent liability is a potential liability that has arisen because of a past transaction or event, but its ultimate outcome will not be known until a future event occurs or fails to occur.
C)   A contingent liability will only be incurred if a particular future event takes place.
D)   A contingent liability is a potential liability that will be incurred if a natural disaster happens.E) A) and D)
F) A) and C)

Question 10

During one pay period, your company distributes $130,500 to employees as net pay. The income tax withholdings were $19,000 and the FICA withholdings were $5,000. The total compensation expense to the company for this pay period, excluding any unemployment taxes, was:

Accepted Answer

A)   $149,500.
B)   $130,500.
C)   $154,500.
D)   $159,500.E) A) and B)
F) None of the above D

Question 11

Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as :

Accepted Answer

A)   the value today of $10,000 received in 5 years plus $700 a year for 5 years.
B)   the face value of the bonds, $10,000.
C)   the amount investors would have to pay to earn 7% interest.
D)   the amount investors would have to pay to earn an average of the stated interest rate and the market interestE) B) and D)
F) None of the above

Question 12

In October, you borrow $50,000 in order to buy new equipment. The loan is repayable in five years, at 8% annual interest. Semiannual interest payments are due each March and September. Assuming no other long-term debt, what is the initial balance in the long-term debt account?

Accepted Answer

A)   $54,000
B)   $50,000
C)   $46,000
D)   $52,000E) All of the above
F) C) and D)

Question 13

If the market rate equals the stated interest rate, a bond will sell at face value.

Accepted Answer

A) True 
 B)False  True

Question 14

FICA payments consist of Social Security taxes and Medicare taxes.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements regarding bond discounts or premiums is true?

Accepted Answer

A)   discount on a bond reduces the amount that the issuer has to repay to the lenders.
B)   premium on a bond increases the interest expense of the loan to the issuer.
C)   premium on a bond increases the amount that the issuer has to repay to the lenders.
D)   discount on a bond increases the interest expense of the loan to the issuer.E) A) and B)
F) B) and D)

Question 16

A negative times interest earned ratio suggests that the company:

Accepted Answer

A)   is using resources very efficiently.
B)   has a serious financial problem.
C)   has a very high interest expense.
D)   has a high level of sales revenue.E) B) and C)
F) A) and B)

Question 17

Sales taxes are charged to all customers in states that have a sales tax.

Accepted Answer

A) True 
 B)False

Question 18

The entry to record the issuance of the bonds on January 1, 2011, would include:

Accepted Answer

A)   a credit to Discount on Bonds Payable of $57,500.
B)   a debit to Cash of $442,500.
C)   a debit to Bonds Payable of $500,000.
D)   a credit to Premium on Bonds Payable of $90,000.E) All of the above
F) B) and C)

Question 19

Contingent liabilities arise from past transactions or events but also depend on future events.

Accepted Answer

A) True 
 B)False

Question 20

What is the adjusting journal entry at December 31 to record the accrued interest on the note payable?

Accepted Answer

A)   Option: A
B)   Option: B
C)   Option: C
D)   Option: DE) A) and D)
F) A) and C)

Exam 10: Reporting and Interpreting Liabilities

Contingent liabilities must be recorded if:

Correct AnswerverifiedC

Which of the following statements regarding bonds payable net of a discount or premium is NOT true?

Correct AnswerverifiedShow Answer

Bonds that are not backed by collateral are called debenture bonds.

Correct AnswerverifiedShow Answer

Which of the following are generally recorded as liabilities on the balance sheet?

Correct AnswerverifiedShow Answer

Which of the following is not used to calculate the times interest earned ratio?

Correct AnswerverifiedShow Answer

Publicly issued debt certificates are also known as bonds.

Correct AnswerverifiedShow Answer

Which of the following is NOT true regarding the quick ratio?

Correct AnswerverifiedShow Answer

When the effective-interest method of amortization is used, what happens to the amount of discount or premium amortized as a bond moves toward maturity?

Correct AnswerverifiedShow Answer

Which of the following statements best describes a contingent liability?

Correct AnswerverifiedShow Answer

During one pay period, your company distributes $130,500 to employees as net pay. The income tax withholdings were $19,000 and the FICA withholdings were $5,000. The total compensation expense to the company for this pay period, excluding any unemployment taxes, was:

Correct AnswerverifiedD

Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as :

Correct AnswerverifiedShow Answer

In October, you borrow $50,000 in order to buy new equipment. The loan is repayable in five years, at 8% annual interest. Semiannual interest payments are due each March and September. Assuming no other long-term debt, what is the initial balance in the long-term debt account?

Correct AnswerverifiedShow Answer

If the market rate equals the stated interest rate, a bond will sell at face value.

Correct AnswerverifiedTrue

FICA payments consist of Social Security taxes and Medicare taxes.

Correct AnswerverifiedShow Answer

Which of the following statements regarding bond discounts or premiums is true?

Correct AnswerverifiedShow Answer

A negative times interest earned ratio suggests that the company:

Correct AnswerverifiedShow Answer

Sales taxes are charged to all customers in states that have a sales tax.

Correct AnswerverifiedShow Answer

The entry to record the issuance of the bonds on January 1, 2011, would include:

Correct AnswerverifiedShow Answer

Contingent liabilities arise from past transactions or events but also depend on future events.

Correct AnswerverifiedShow Answer

What is the adjusting journal entry at December 31 to record the accrued interest on the note payable?

Correct AnswerverifiedShow Answer

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C

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D

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True

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