ch9

ch9 Student: ___________________________________________________________________________

1.

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

2.

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

3.

False

Purchasing inventory on account decreases the quick ratio. True

9.

False

Selling inventory on account increases the quick ratio. True

8.

False

Quick assets include cash, accounts receivable, and inventory. True

7.

False

Many strong companies intentionally create low quick ratios. True

6.

False

The quick ratio can be manipulated by management through paying off current liabilities before the end of the accounting period. True

5.

False

A quick ratio that is high according to an industry average might mean the company may have excessive inventory levels or slow moving inventory items. True

4.

False

False

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

False

10. Purchasing inventory on account increases the accounts payable turnover ratio. True

False

11. The choice of inventory method has an impact on the accounts payable turnover ratio. True

False

12. The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers. True

False

13. Income taxes payable is an example of an accrued liability. True

False

14. The accounts payable turnover ratio is difficult to manipulate. True

False

15. The accrual of interest on a short-term note payable decreases both the quick ratio and current assets. True

False

16. The FICA (social security) tax is a matching tax with a portion paid by both the employer and the employee. True

False

17. A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entries have been made during the year, the entry to record interest accrued on December 31, 2009 would include a debit to interest expense and a credit to interest payable for $2,000. True

False

18. An estimated liability can't be reported on the balance sheet. True

False

19. A contingent liability is reported on the balance sheet if it is probable and can be estimated. True

False

20. A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated. True

False

21. The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement. True

False

22. A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated. True

False

23. Working capital is a measure of short-run liquidity and is measured by dividing current assets by current liabilities. True

False

24. Working capital decreases when accrued wages expense is recorded at year-end. True

False

25. Working capital decreases when a company pays taxes payable. True

False

26. Working capital increases when a company accrues revenues at year-end. True

False

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

False

28. Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows. True

False

29. For the present value of a single amount, the compounding period may only be once a year. True

False

30. An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year. True

False

31. Which of the following statements is correct? A. B. C. D.

Current liabilities are initially recorded at the amount of their principal plus interest. Current liabilities are those liabilities due within one year. Liquidity refers to the ability to pay all debts within one year. Current liabilities affect both the quick ratio and working capital.

32. Which of the following is not a current liability? A. B. C. D.

A liability due within one-year for a business with a fifteen-month operating cycle. A liability due within three months for a business with a two-month operating cycle. A liability due within one-year for a business with a nine-month operating cycle. A liability due within fifteen months for a business with a one-year operating cycle.

33. Which of the following is incorrect? A. Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer. B. Liquidity is the ability of the company to meet its total obligations. C. Current liabilities impact a company's liquidity. D. Working capital is equal to current assets minus current liabilities.

34. How is the quick ratio calculated? A. B. C. D.

It is current assets minus current liabilities. It is current assets divided by current liabilities. It is quick assets divided by current liabilities. It is current liabilities divided by current assets.

35. Which of the following accounts would not be considered when calculating the quick ratio? A. B. C. D.

Marketable securities. Inventory. Accounts receivable. Accounts payable.

36. Which of the following accounts would not be considered when calculating the quick ratio? A. B. C. D.

Taxes payable Accounts receivable Cash Prepaid rent

37. A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result, what happens to the quick ratio? A. B. C. D.

It is greater than 1.9. It is less than 1.9. It remains equal to 1.9. It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved.

38. A company has a quick ratio of 0.9 before paying off a large current liability with cash. As a result, what happens to the quick ratio? A. B. C. D.

It is greater than 0.9. It is less than 0.9. It remains equal to 0.9. It is either greater than 0.9 or less than 0.9 depending upon the dollar amount involved.

39. The following is a partial list of account balances from the books of Probst Enterprise at the end of 2010:

Based solely upon these balances, what is the quick ratio? A. B. C. D.

0.76 1.15 0.26 0.79

40. At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Which of the following is a potential cause of the decrease in this ratio? A. B. C. D.

An increase in accounts payable and a decrease in inventories. A decrease in inventories and an increase in long-term notes payable. A decrease in short-term borrowings and an increase in cash. An increase in accounts payable and a decrease in cash.

41. If the quick ratio has been increasing over the past several years, which of the following would cause the ratio to continue to increase? A. B. C. D.

An increase in accounts payable. An increase in inventories. An increase in short-term borrowings. A decrease in taxes payable.

42. Chavez Chocolates had a quick ratio of 1.74 at year-end 2009. Which of the following would cause the ratio to decrease during 2010? A. A decrease in both cash and marketable securities. B. An increase in both cash and marketable securities. C. An increase in current assets that exceeded the increase in current liabilities. D Current assets as a percentage of total assets increased while current liabilities as a percentage of total . liabilities and stockholders' equity decreased. 43. Which of the following statements is correct? A. Social Security tax is employer paid only. B. The pay period always ends in conjunction with the company's fiscal year end. C Many fringe benefits such as sick and vacation leave benefits should be recognized when the employee . earns the benefit not when they take the leave. D. Unemployment taxes are paid by the employee only. 44. Which of the following describes an accrued liability? A. B. C. D.

It is an expense that has been both incurred and paid. It is an expense that has been incurred but not yet paid. It is an expense that has been prepaid but not yet consumed. It is a liability where the cash flow has taken place but the revenue has yet to be earned.

45. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. Assuming no adjusting entries have been made during the year, the required adjusting entry at the end of the accounting period, December 31, 2010, would be which of the following?

A. B. C. D.

Option A Option B Option C Option D

46. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. The interest and principal are both due on August 31, 2011. Assume that the appropriate adjusting entry was made on December 31, 2010 and that no adjusting entries have been made during 2011. The required journal entry to pay the note on August 31, 2011 would be which of the following?

A. B. C. D.

Option A Option B Option C Option D

47. Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83 million for 2011. In 2010, cost of goods sold was $258 million and accounts payable was $72 million. What was Landseeker's accounts payable turnover ratio in 2011? A. B. C. D.

4.23 4.15 4.04 3.91

48. Which of the following transactions will decrease the accounts payable turnover ratio? A. B. C. D.

Using cash to pay an accounts payable balance. Selling inventory on account. Selling inventory for cash. A customer returning inventory purchased on account.

49. Which of the following statements incorrectly describes the accounts payable turnover ratio? A. B. C. D.

A high ratio indicates that suppliers are being paid in a timely manner. It increases when inventory is sold on account regardless of the sales price. It can be manipulated by aggressively paying off accounts payable at year-end. It is not affected by the choice of inventory accounting methods.

50. On September 1, 2010, 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 that should be reported in the 2011 income statement? A. B. C. D.

$2,667 $4,000 $1,333 $3,000

51. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that no adjusting entries have been made during the year, the amount of accrued interest payable to be reported on the December 31, 2010 balance sheet is which of the following? A. B. C. D.

$250 $300 $500 $750

52. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest-bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2011 is which of the following? A. B. C. D.

$1,000 $300 $500 $750

53. Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following? A. An understatement of both liabilities and stockholders' equity. B. Net income to be overstated and assets to be understated. C. Net income to be understated and liabilities to be understated. D. An overstatement of net income, an understatement of liabilities, and an overstatement of stockholders' equity.

54. The adjusting entry to record accrued interest on a note payable would not result in which of the following? A. B. C. D.

A decrease in net income. A decrease in stockholders' equity. An increase in liabilities. A decrease in current assets.

55. Which of the following statements is incorrect? A. The currently maturing portion of long-term debt must be classified as a current liability. B. The non-current portion of long-term debt will remain reported as a long-term liability. C When a company plans to refinance the currently maturing debt on a long-term basis, it must still report . the currently maturing debt as a current liability. D The currently maturing portion of long-term debt is a current liability if it is due within the longer of one. year or the operating cycle. 56. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and repayments of the principal are payable annually in $2 million installments. Purdum Farms makes the first payment December 31, 2010 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities respectively in connection with the note at December 31, 2010? A. B. C. D.

$2 million in current liabilities and $8 million in long-term liabilities. $2 million in current liabilities and $6 million in long-term liabilities. Zero in current liabilities and $8 million in long-term liabilities. Zero in current liabilities and $10 million in long-term liabilities.

57. How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be reported within the financial statements? A. B. C. D.

It must be recorded and reported as a liability. It does not need to be recorded or reported as a liability. It must only be disclosed as a note to the financial statements. It must be reported as a liability, but not disclosed in a note.

58. Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet? A. B. C. D.

When the loss probability is remote and the amount can be reasonably estimated. When the loss is probable and the amount can be reasonably estimated. When the loss probability is reasonably possible and the amount can be reasonably estimated. When the loss is probable regardless of whether the loss can be reasonably estimated.

59. Houston Company is involved in a lawsuit. In which of the following situations is only footnote disclosure of the contingent liability reported within the financial statements? A. B. C. D.

When the loss is remote and the amount cannot be reasonably estimated. When the loss is probable and the amount can be reasonably estimated. When the loss is reasonably possible and the amount can be reasonably estimated. When the loss is remote and the amount can be reasonably estimated.

60. Which of the following statements about contingent liabilities is incorrect? A. A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated. B. A disclosure note is required when the loss is probable and the amount can be reasonably estimated. C. A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated. D. A disclosure note is required when the loss is remote and the amount can be reasonably estimated. 61. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss can't be reasonably estimated. • Lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated. • Lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is correct? A. B. C. D.

A disclosure note is required for each of the three lawsuits. A disclosure note is required only for lawsuits A & C. A disclosure note is required only for lawsuit A. A disclosure note is required only for lawsuits B & C.

62. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • lawsuit A: The loss is probable, but the loss can't be reasonably estimated. • lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated. • lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is incorrect? A. B. C. D.

A disclosure note is required for Lawsuit A. A disclosure note is required for lawsuit B. A disclosure note is required for lawsuit C. Lawsuit A is reported on the balance sheet as a liability.

63. Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin: • lawsuit A: The loss is probable and the loss can be reasonably estimated. • lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated. • lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated. Which of the following statements is incorrect? A. B. C. D.

A disclosure note is required for lawsuit A. A disclosure note is required for lawsuit C. A disclosure note is not required for lawsuit B. Lawsuit A is reported on the balance sheet as a liability.

64. 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? A. B. C. D.

The inventory purchase on account increased working capital. Collecting an account receivable increases working capital. The equipment purchase decreases working capital. The inventory purchase on account increased the quick ratio.

65. Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the above transactions resulted in an increase in working capital? A. B. C. D.

The inventory purchase on account. Collecting an account receivable. The purchase of equipment using cash. None of the transactions resulted in an increase in working capital.

66. SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the above transactions resulted in a decrease in working capital? A. B. C. D.

The accrual of interest expense. Collecting cash for services to be provided in the future. The accrual of revenue. Both the accrual of interest expense and the accrual of revenue.

67. SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the above transactions resulted in an increase in working capital? A. B. C. D.

The accrual of interest expense. Collecting cash for services to be provided in the future. The accrual of revenue. Both the accrual of revenue and the collection of cash for future services.

68. SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows? A. B. C. D.

The accrual of interest expense is added to net income. Collecting cash for services to be provided in the future is deducted from net income. The accrual of revenue is added to net income. Collecting cash for services to be provided in the future doesn't require an adjustment to net income.

69. 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. A. B. C. D.

The accrual of wages and salaries expense decreases working capital. The cash payment of the note payable decreases working capital. The purchase of the insurance policy increases working capital. The cash payments for the note and insurance both decrease working capital.

70. Rocket 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. B. C. D.

The accrual of wages and salaries expense is deducted from net income. The loss on the equipment sale is deducted from net income. The cash payment to purchase the insurance policy is deducted from net income. The accrual of wages and the equipment loss are both deducted from net income.

71. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. What amount of liability would be reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made? A. B. C. D.

$100,000 $38,550 $61,446 $71,446

72. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. At what amount would the land be reported at on the balance sheet? A. B. C. D.

$100,000 $38,550 $110,000 $71,446

73. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. At what amount would the equipment be reported at on the balance sheet as of the purchase date? A. B. C. D.

$45,000 $38,664 $33,664 $40,000

74. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. At what amount would the liability be reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made? A. B. C. D.

$45,000 $33,664 $38,664 $40,000

75. 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%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $10,000 payment was made? A. B. C. D.

$44,633 $50,000 $54,633 $60,000

76. 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%. At what amount would the vehicle be reported at on the balance sheet as of the purchase date? A. B. C. D.

$44,633 $50,000 $54,633 $60,000

77. 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%. At what amount would the machine be reported at on the balance sheet as of the purchase date? A. B. C. D.

$123,255 $130,000 $80,000 $73,255

78. 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%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 payment was made? A. B. C. D.

$123,255 $130,000 $80,000 $73,255

79. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would the building be reported at on the balance sheet as of the purchase date? A. B. C. D.

$326,500 $460,000 $287,950 $416,500

80. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made? A. B. C. D.

$326,500 $460,000 $287,950 $416,500

81. Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years; the first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. How much will each of the annual payments be? A. B. C. D.

$65,098 $86,821 $55,098 $44,000

82. Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on the purchase date, and agreeing to make payments every three months for the next five years; the first payment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. How much will each of the payments be? A. B. C. D.

$55,041 $61,112 $36,694 $32,400

83. Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years; the first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. How much will each of the payments be? A. B. C. D.

$28,000 $66,940 $37,981 $33,608

84. Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years; the first payment is due three months after the purchase date. Huck's incremental borrowing rate is 8%. How much will each of the payments be? A. B. C. D.

$6,248 $6,689 $8,527 $5,709

85. You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine? A. B. C. D.

Present value of a single amount. Present value of an annuity. Future value of a single amount. Future value of an annuity.

86. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. 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, 2010, 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, 2010, 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, how much interest expense would have accrued at December 31, 2010? A. B. C. D.

$25,402 $32,000 $29,693 $27,493

87. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year ended December 31, 2010, the book value of the liability for notes payable, including accrued interest would be which of the following? A. B. C. D.

$342,922 $349,520 $345,013 $347,213

88. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much is the 2011 interest expense, assuming that the December 31, 2010 adjusting entry was made? A. B. C. D.

$27,434 $27,962 $32,000 $29,693

89. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement will require $10 million in annual payments starting on December 31, 2010 and continuing for a total of five years (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. What is the note and interest payable liability on December 31, 2010 after the first payment was made? A. B. C. D.

$32,908,000 $31,698,800 $40,000,000 $27,908,000

90. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement will require $10 million in annual payments starting on December 31, 2010 and continuing for a total of five years (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. How much is the 2011 interest expense? A. B. C. D.

$3,169,880 $3,290,800 $4,000,000 $2,790,800

91. A company's income statement reported net income of $40,000 during 2010. 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 2011. Which of the following statements is correct assuming a 35% tax rate? A. B. C. D.

A $3,000 deferred tax liability is reported as of December 31, 2010. A $3,000 deferred tax asset is reported as of December 31, 2010. A $1,050 deferred tax liability is reported as of December 31, 2010. A $1,050 deferred tax asset is reported as of December 31, 2010.

92. A company's income statement reported net income of $80,000 during 2010. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2011. Which of the following statements is incorrect assuming a 35% tax rate? A. B. C. D.

Income tax expense on the income statement exceeds the tax liability to the IRS. The $6,000 of revenue creates a deferred tax liability. A $2,100 deferred tax liability is reported as of December 31, 2010. Income tax expense on the income statement is $25,900.

93. A company's 2010 income tax return reported a $75,000 tax liability. During 2010, the deferred income tax liability account increased $9,000. Which of the following statements is correct? A. B. C. D.

Income tax expense on the 2010 income statement was $75,000. Income tax expense on the 2010 income statement was $64,000. Income tax expense on the 2010 income statement was $9,000. Income tax expense on the 2010 income statement was $84,000.

94. If income tax expense reported on the income statement is $45,000 for 2010, and the tax return for 2010 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2010 will be which of the following? Assume a 40% tax rate. A. B. C. D.

A $3,000 liability. A $3,000 asset. A $7,500 liability. A $7,500 asset.

95. How much needs to be invested today if your goal is to have $100,000 five years from today? The return on the investment is expected to be 10% and will be compounded semi-annually. A. B. C. D.

$61,390 $62,090 $66,667 $50,000

96. Which of the following correctly describes the accounting for leases? A. B. C. D.

A capital lease is not reported on the balance sheet as a liability. A capital lease reports an asset on the balance sheet. An operating lease reports an operating asset on the balance sheet. An operating lease reports a liability on the balance sheet.

97. Which of the following questions is asked with respect to determining the accounting for leases? A. Is the lease term greater than 90% of the asset's estimated life? B. Is the present value of the payments greater than 75% of the asset's fair market value? C. Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value? D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee? 98. Which of the following questions is incorrect with respect to determining the accounting for leases? A. Is the lease term greater than 75% of the asset's expected economic life? B. Is the present value of the payments greater than 75% of the asset's fair market value? C. Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less than fair market value? D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?

99. How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today? The return on the investment is expected to be 12%. A. B. C. D.

$44,645 $36,291 $28,251 $50,000

100.How much needs to be invested today if your goal is to be able to withdraw $10,000 for each of the next nine years beginning one year from today and $50,000 ten years from today? The return on the investment is expected to be 6%. A. B. C. D.

$68,017 $95,937 $78,176 $132,075

101.Halbur Company reported total assets of $150,000, current assets of $60,000, and total stockholders' equity of $60,000 and noncurrent liabilities of $65,000. Requirements (show computations): Compute working capital. Compute the current ratio.

102.Moore Company has the following partial list of account balances at year-end:

103.Sharp Company borrowed $500,000 on a 6% one-year, interest bearing note dated November 1, 2010 with interest payable at maturity. The annual accounting period ends on December 31. Assuming that adjusting entries are only made at December 31, the company's fiscal year-end, prepare journal entries for each of the following dates: A. November 1, 2010. B. December 31, 2010. C. October 31, 2011.

104.Wolf Company borrowed $5,000 on an 8% note payable on March 1, 2010. The maturity date of the note (and payment of all interest) is September 1, 2011. The accounting period ends December 31. Assuming no adjusting entries are made during the year, prepare the journal entry for each of the following dates: A. March 1, 2010. B. December 31, 2010. C. September 1, 2011.

105.The following data were provided by the detailed payroll records of Mountain Corporation for the month of March 2011:

106.The following is a partial list of account balances for Coen, Inc. as of December 31, 2010:

Required: Prepare the liability section of Coen Inc.'s classified balance sheet for December 31, 2010.

107.The following data is available for Tommy's Toys for the years 2008 through 2011:

108.Answer the following four questions. A. What is a contingent liability? B. When must a contingent liability be recorded through a journal entry? C. When should a contingent liability be disclosed in the footnotes to the financial statements? D. When is disclosure of a contingent liability not required?

109.In a recent year, The Walt Disney Company reported the following increases or decreases in current assets and current liabilities. Identify whether each of these increases or decreases caused cash to increase or decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of the amount in the column labeled cash effect.

110.Border Company purchased a truck that cost $17,000. The company signed a $17,000 note payable that specified four equal annual payments (at each year-end), each of which includes a payment on the principal and interest on the unpaid balance at 10% per annum. Requirements: A. Calculate the amount of each equal payment (round to the nearest dollar). B. Prepare the journal entry to record the purchase of the truck. C. Prepare the journal entry to record the first annual payment on the note (assume no interest has been accrued during the year). D. Will the interest paid with the first annual payment be more or less than the interest paid with the second annual payment? Explain your answer.

111.Fold and Hold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on January 1, 2010. Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the balance, payable in six equal annual installments on each December 31 beginning with December 31, 2010. The note specified a 10% interest rate on the unpaid balance. Requirements: A. Prepare the journal entry to record the purchase on January 1, 2010 (round to the nearest dollar). B. Prepare the entry to record the first installment payment on December 31, 2010 (round to the nearest dollar). Assume that no adjusting entries have been made during the year.

112.Information Company purchased an asset that cost $70,000 on January 1, 2010. Arrangements were made with the supplier to pay $10,000 cash on January 1, 2010, and the balance was to be paid over a threeyear period, with equal annual payments of $24,553 to be made at the end of 2010, 2011, and 2012. Each payment will include principal plus interest on the unpaid balance at 11% per year. Requirements:

113.On January 1, 2010, Mission Company agreed to buy some equipment from Anna Company. Mission Company signed a note, agreeing to pay Anna Company $500,000 for the equipment on December 31, 2012. The market rate of interest for this note was 10%. Requirements: A. Prepare the journal entry Mission Company would record on January 1, 2010 related to this purchase. B. Prepare the December 31, 2010, adjusting entry to record interest expense related to the note for the first year. Assume that no adjusting entries have been made during the year. C. Prepare the December 31, 2011, adjusting entry to record interest expense related to the note for the second year. Assume that no adjusting entries have been made during the year. D. Prepare the entry Mission Company would record on December 31, 2012, the due date of the note to record interest expense for the third year and payment of the note. Assume that no adjusting entries have been made during the year.

114.Why are present value concepts and applications so important when companies purchase equipment financed by the seller?

115.Answer each of the independent problems (show computations):

116.A company's income statement reported net income of $80,000 during 2010. The income tax return excluded a revenue item of $10,000 (reported on the income statement) because under the tax laws the $10,000 would not be reported for tax purposes until 2011. Prepare the journal entry to record the 2010 income tax expense assuming a 40% tax rate.

117.A company's income statement reported income tax expense of $200,000 during 2010. The deferred tax liability on the balance sheet increased $20,000 during 2010. How much was the company's tax liability during 2010?

ch9 Key 1.

When a liability is initially recorded, it is recorded at the future amount of all payments. FALSE Liabilities are initially recorded in terms of their current cash equivalent. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #1 Topic Area: Liabilities Defined And Classified

2.

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date. FALSE A current liability is due within one year or the operating cycle, whichever is longer. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #2 Topic Area: Liabilities Defined And Classified

3.

A quick ratio that is high according to an industry average might mean the company may have excessive inventory levels or slow moving inventory items. FALSE Inventory is not a quick asset. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #3 Topic Area: Liabilities Defined And Classified

4.

The quick ratio can be manipulated by management through paying off current liabilities before the end of the accounting period. TRUE The quick ratio can be manipulated through transactions involving quick assets and current liabilities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #4 Topic Area: Liabilities Defined And Classified

5.

Many strong companies intentionally create low quick ratios. TRUE Many strong companies use sophisticated management techniques to minimize their current asset investment, and as a result, have low quick ratios. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #5 Topic Area: Liabilities Defined And Classified

6.

Quick assets include cash, accounts receivable, and inventory. FALSE Quick assets include cash, marketable securities, and accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #6 Topic Area: Liabilities Defined And Classified

7.

Selling inventory on account increases the quick ratio. TRUE Quick assets include cash, marketable securities, and accounts receivable. Selling inventory on account increases accounts receivable and therefore increases the numerator of the quick ratio. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #7 Topic Area: Liabilities Defined And Classified

8.

Purchasing inventory on account decreases the quick ratio. FALSE Purchasing inventory on account increases current liabilities (the denominator) and therefore decreases the quick ratio. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #8 Topic Area: Liabilities Defined And Classified

9.

A current liability is created when a customer pays cash for services to be provided in the future. TRUE Current liabilities include unearned (deferred) revenues. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #9 Topic Area: Liabilities Defined And Classified

10.

Purchasing inventory on account increases the accounts payable turnover ratio. FALSE Purchasing inventory on account increases accounts payable, the accounts payable turnover ratio denominator, which therefore decreases the ratio. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #10 Topic Area: Liabilities Defined And Classified

11.

The choice of inventory method has an impact on the accounts payable turnover ratio. FALSE The accounts payable turnover numerator ratio is cost of goods sold, which is impacted by the choice of inventory method. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #11 Topic Area: Liabilities Defined And Classified

12.

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers. FALSE The accounts payable turnover ratio is cost of goods sold divided by average accounts payable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #12 Topic Area: Liabilities Defined And Classified

13.

Income taxes payable is an example of an accrued liability. TRUE An accrued liability is created by an expense that has been incurred, but has yet to be paid. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #13 Topic Area: Liabilities Defined And Classified

14.

The accounts payable turnover ratio is difficult to manipulate. FALSE The accounts payable turnover ratio can be manipulated by paying accounts payable at year-end and can also be manipulated by the choice of inventory method. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #14 Topic Area: Liabilities Defined And Classified

15.

The accrual of interest on a short-term note payable decreases both the quick ratio and current assets. FALSE The interest accrual increases current liabilities and therefore decreases the quick ratio. The interest accrual does not affect current assets. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Use the quick ratio. Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #15 Topic Area: Liabilities Defined And Classified

16.

The FICA (social security) tax is a matching tax with a portion paid by both the employer and the employee. TRUE The social security tax is equally shared by the employer and employee. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #16 Topic Area: Liabilities Defined And Classified

17.

A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entries have been made during the year, the entry to record interest accrued on December 31, 2009 would include a debit to interest expense and a credit to interest payable for $2,000. TRUE Interest expense ($2,000) = Amount borrowed ($100,000) × Interest rate (6%) × Number of months borrowed relative to a year (4 ÷ 12) AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #17 Topic Area: Liabilities Defined And Classified

18.

An estimated liability can't be reported on the balance sheet. FALSE Estimated liabilities, such as warranty liabilities, are reported on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #18 Topic Area: Liabilities Defined And Classified

19.

A contingent liability is reported on the balance sheet if it is probable and can be estimated. TRUE Contingent liabilities are reported on the balance sheet when they are both probable and can be estimated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #19 Topic Area: Liabilities Defined And Classified

20.

A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated. TRUE Contingent liabilities are disclosed via a note when they are reasonably possible. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #20 Topic Area: Liabilities Defined And Classified

21.

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement. TRUE The recording of a contingent liability debits a loss account and credits accrued contingency liability. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #21 Topic Area: Liabilities Defined And Classified

22.

A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated. FALSE Contingent liabilities are disclosed via a note when they are reasonably possible, regardless of whether they can be estimated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #22 Topic Area: Liabilities Defined And Classified

23.

Working capital is a measure of short-run liquidity and is measured by dividing current assets by current liabilities. FALSE Working capital is current assets minus current liabilities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #23 Topic Area: Focus On Cash Flows

24.

Working capital decreases when accrued wages expense is recorded at year-end. TRUE Working capital is current assets minus current liabilities. Accruing wages expense at year-end increases current liabilities and therefore decreases working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #24 Topic Area: Focus On Cash Flows

25.

Working capital decreases when a company pays taxes payable. FALSE Working capital is current assets minus current liabilities. Paying taxes payable decreases both current assets and current liabilities, therefore working capital remains the same. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #25 Topic Area: Focus On Cash Flows

26.

Working capital increases when a company accrues revenues at year-end. TRUE Working capital is current assets minus current liabilities. Accruing revenues increases current assets, therefore working capital increases. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #26 Topic Area: Focus On Cash Flows

27.

Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows. FALSE Long-term liabilities are reported on the balance sheet at the present value of the future cash flows. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #27 Topic Area: Long-Term Liabilities

28.

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows. FALSE Operating leases do not meet the criteria to be included on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #28 Topic Area: Long-Term Liabilities

29.

For the present value of a single amount, the compounding period may only be once a year. FALSE Compounding can be many times during a year when finding the present value of a single sum. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #29 Topic Area: Present Value

30.

An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year. FALSE An annuity has equal payments over equal time intervals. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Easy Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #30 Topic Area: Present Value

31.

Which of the following statements is correct? A. B. C. D.

Current liabilities are initially recorded at the amount of their principal plus interest. Current liabilities are those liabilities due within one year. Liquidity refers to the ability to pay all debts within one year. Current liabilities affect both the quick ratio and working capital.

Current liabilities are the denominator in the quick ratio and are deducted from current assets when calculating working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Learning Objective: 09-02 Use the quick ratio. Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #31 Topic Area: Liabilities Defined And Classified

32.

Which of the following is not a current liability? A. B. C. D.

A liability due within one-year for a business with a fifteen-month operating cycle. A liability due within three months for a business with a two-month operating cycle. A liability due within one-year for a business with a nine-month operating cycle. A liability due within fifteen months for a business with a one-year operating cycle.

A current liability is due within one-year or the operating cycle whichever is longer. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #32 Topic Area: Liabilities Defined And Classified

33.

Which of the following is incorrect? A. Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer. B. Liquidity is the ability of the company to meet its total obligations. C. Current liabilities impact a company's liquidity. D. Working capital is equal to current assets minus current liabilities. Liquidity is the ability to pay current liabilities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #33 Topic Area: Liabilities Defined And Classified

34.

How is the quick ratio calculated? A. B. C. D.

It is current assets minus current liabilities. It is current assets divided by current liabilities. It is quick assets divided by current liabilities. It is current liabilities divided by current assets.

The quick ratio is quick assets divided by current liabilities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #34 Topic Area: Liabilities Defined And Classified

35.

Which of the following accounts would not be considered when calculating the quick ratio? A. B. C. D.

Marketable securities. Inventory. Accounts receivable. Accounts payable.

Quick assets include cash, marketable securities, and accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #35 Topic Area: Liabilities Defined And Classified

36.

Which of the following accounts would not be considered when calculating the quick ratio? A. B. C. D.

Taxes payable Accounts receivable Cash Prepaid rent

Quick assets include cash, marketable securities, and accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #36 Topic Area: Liabilities Defined And Classified

37.

A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result, what happens to the quick ratio? A. B. C. D.

It is greater than 1.9. It is less than 1.9. It remains equal to 1.9. It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved.

The decrease in the numerator (quick assets) is less percentage wise relative to the decrease in the denominator, therefore the ratio increases. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #37 Topic Area: Liabilities Defined And Classified

38.

A company has a quick ratio of 0.9 before paying off a large current liability with cash. As a result, what happens to the quick ratio? A. B. C. D.

It is greater than 0.9. It is less than 0.9. It remains equal to 0.9. It is either greater than 0.9 or less than 0.9 depending upon the dollar amount involved.

The decrease in the numerator (quick assets) is greater percentage wise relative to the decrease in the denominator, therefore the ratio decreases. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #38 Topic Area: Liabilities Defined And Classified

39.

The following is a partial list of account balances from the books of Probst Enterprise at the end of 2010:

Based solely upon these balances, what is the quick ratio? A. B. C. D.

0.76 1.15 0.26 0.79

The quick ratio (0.76) equals quick assets ($6,500 + $12,300) divided by current liabilities ($20,500 + $1,200 + $1,300 + $1,900). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #39 Topic Area: Liabilities Defined And Classified

40.

At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Which of the following is a potential cause of the decrease in this ratio? A. B. C. D.

An increase in accounts payable and a decrease in inventories. A decrease in inventories and an increase in long-term notes payable. A decrease in short-term borrowings and an increase in cash. An increase in accounts payable and a decrease in cash.

The decrease in the numerator (cash) and the increase in the denominator (accounts payable), each would cause the quick ratio to decrease. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #40 Topic Area: Liabilities Defined And Classified

41.

If the quick ratio has been increasing over the past several years, which of the following would cause the ratio to continue to increase? A. B. C. D.

An increase in accounts payable. An increase in inventories. An increase in short-term borrowings. A decrease in taxes payable.

The decrease in the denominator (taxes payable), would cause the quick ratio to increase. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #41 Topic Area: Liabilities Defined And Classified

42.

Chavez Chocolates had a quick ratio of 1.74 at year-end 2009. Which of the following would cause the ratio to decrease during 2010? A. A decrease in both cash and marketable securities. B. An increase in both cash and marketable securities. C. An increase in current assets that exceeded the increase in current liabilities. D Current assets as a percentage of total assets increased while current liabilities as a percentage of total . liabilities and stockholders' equity decreased. The increase in the numerator (cash and marketable securities) would cause the quick ratio to increase. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Hard Learning Objective: 09-02 Use the quick ratio. Libby - Chapter 09 #42 Topic Area: Liabilities Defined And Classified

43.

Which of the following statements is correct? A. Social Security tax is employer paid only. B. The pay period always ends in conjunction with the company's fiscal year end. C Many fringe benefits such as sick and vacation leave benefits should be recognized when the . employee earns the benefit not when they take the leave. D. Unemployment taxes are paid by the employee only. Expenses should be recognized when they are incurred. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #43 Topic Area: Liabilities Defined And Classified

44.

Which of the following describes an accrued liability? A. B. C. D.

It is an expense that has been both incurred and paid. It is an expense that has been incurred but not yet paid. It is an expense that has been prepaid but not yet consumed. It is a liability where the cash flow has taken place but the revenue has yet to be earned.

An accrued liability is recorded when an expense is incurred but not yet paid. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #44 Topic Area: Liabilities Defined And Classified

45.

Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. Assuming no adjusting entries have been made during the year, the required adjusting entry at the end of the accounting period, December 31, 2010, would be which of the following?

A. B. C. D.

Option A Option B Option C Option D

Interest expense ($2,000) = Amount borrowed ($100,000) × Interest rate (6%) × Number of months borrowed relative to a year (4 ÷ 12) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #45 Topic Area: Liabilities Defined And Classified

46.

Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. The interest and principal are both due on August 31, 2011. Assume that the appropriate adjusting entry was made on December 31, 2010 and that no adjusting entries have been made during 2011. The required journal entry to pay the note on August 31, 2011 would be which of the following?

A. B. C. D.

Option A Option B Option C Option D

December 31, 2010: Interest expense ($2,000) = Amount borrowed ($100,000) × Interest rate (6%) × Number of months borrowed relative to a year (4 ÷ 12). August 31, 2011: Interest expense ($4,000) = Amount borrowed ($100,000) × Interest rate (6%) × Number of months borrowed relative to a year (8 ÷ 12). The credit to cash ($106,000) equals the amount borrowed ($100,000) plus the interest for one-year ($6,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #46 Topic Area: Liabilities Defined And Classified

47.

Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83 million for 2011. In 2010, cost of goods sold was $258 million and accounts payable was $72 million. What was Landseeker's accounts payable turnover ratio in 2011? A. B. C. D.

4.23 4.15 4.04 3.91

Accounts payable turnover (4.15) = Cost of goods sold ($322 million) ÷ Average accounts payable ($83 million + $72 million) ÷ 2 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #47 Topic Area: Liabilities Defined And Classified

48.

Which of the following transactions will decrease the accounts payable turnover ratio? A. B. C. D.

Using cash to pay an accounts payable balance. Selling inventory on account. Selling inventory for cash. A customer returning inventory purchased on account.

Accounts payable turnover = Cost of goods sold ÷ Average accounts payable; a return of inventory purchased by a customer decreases cost of goods sold. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #48 Topic Area: Liabilities Defined And Classified

49.

Which of the following statements incorrectly describes the accounts payable turnover ratio? A. B. C. D.

A high ratio indicates that suppliers are being paid in a timely manner. It increases when inventory is sold on account regardless of the sales price. It can be manipulated by aggressively paying off accounts payable at year-end. It is not affected by the choice of inventory accounting methods.

Accounts payable turnover = Cost of goods sold ÷ Average accounts payable; the choice of inventory method affects cost of goods sold and therefore affects the ratio as well. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #49 Topic Area: Liabilities Defined And Classified

50.

On September 1, 2010, 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 that should be reported in the 2011 income statement? A. B. C. D.

$2,667 $4,000 $1,333 $3,000

2011 interest expense ($2,667) = Amount borrowed ($50,000) × Interest rate (8%) × Number of months borrowed relative to a year (8 ÷ 12) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #50 Topic Area: Liabilities Defined And Classified

51.

Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearing note payable with interest payable at maturity. Assuming that no adjusting entries have been made during the year, the amount of accrued interest payable to be reported on the December 31, 2010 balance sheet is which of the following? A. B. C. D.

$250 $300 $500 $750

December 31, 2010 interest payable ($500) = Amount borrowed ($25,000) × Interest rate (8%) × Number of months borrowed during 2010 relative to a year (3 ÷ 12) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #51 Topic Area: Liabilities Defined And Classified

52.

Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2011 is which of the following? A. B. C. D.

$1,000 $300 $500 $750

2011 interest expense ($500) = Amount borrowed ($25,000) × Interest rate (8%) × Number of months borrowed during 2011 relative to a year (3 ÷ 12) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #52 Topic Area: Liabilities Defined And Classified

53.

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following? A. An understatement of both liabilities and stockholders' equity. B. Net income to be overstated and assets to be understated. C. Net income to be understated and liabilities to be understated. D. An overstatement of net income, an understatement of liabilities, and an overstatement of stockholders' equity. The adjusting entry increases interest payable and interest expense, which decreases both net income and stockholders' equity. Failure to make the entry causes both net income and stockholders' equity to be overstated, and liabilities to be understated. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #53 Topic Area: Liabilities Defined And Classified

54.

The adjusting entry to record accrued interest on a note payable would not result in which of the following? A. B. C. D.

A decrease in net income. A decrease in stockholders' equity. An increase in liabilities. A decrease in current assets.

The adjusting entry increases interest payable and interest expense, which decreases both net income and stockholders' equity. An accrual doesn't involve a cash flow and doesn't affect current assets. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #54 Topic Area: Liabilities Defined And Classified

55.

Which of the following statements is incorrect? A. The currently maturing portion of long-term debt must be classified as a current liability. B. The non-current portion of long-term debt will remain reported as a long-term liability. C When a company plans to refinance the currently maturing debt on a long-term basis, it must still . report the currently maturing debt as a current liability. D.The currently maturing portion of long-term debt is a current liability if it is due within the longer of one-year or the operating cycle. If the currently maturing debt is to be refinanced on a long-term basis, it is excluded from current liabilities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #55 Topic Area: Liabilities Defined And Classified

56.

Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and repayments of the principal are payable annually in $2 million installments. Purdum Farms makes the first payment December 31, 2010 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities respectively in connection with the note at December 31, 2010? A. B. C. D.

$2 million in current liabilities and $8 million in long-term liabilities. $2 million in current liabilities and $6 million in long-term liabilities. Zero in current liabilities and $8 million in long-term liabilities. Zero in current liabilities and $10 million in long-term liabilities.

The $2,000,000 payment due on December 31, 2011 is a current liability and the three later (2012, 2013, and 2014) payments ($2,000,000 × 3) are reported as long-term liabilities. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #56 Topic Area: Liabilities Defined And Classified

57.

How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be reported within the financial statements? A. B. C. D.

It must be recorded and reported as a liability. It does not need to be recorded or reported as a liability. It must only be disclosed as a note to the financial statements. It must be reported as a liability, but not disclosed in a note.

A contingent liability that is reasonably possible but cannot reasonably be estimated is disclosed in the notes to the financial statements. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #57 Topic Area: Liabilities Defined And Classified

58.

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet? A. B. C. D.

When the loss probability is remote and the amount can be reasonably estimated. When the loss is probable and the amount can be reasonably estimated. When the loss probability is reasonably possible and the amount can be reasonably estimated. When the loss is probable regardless of whether the loss can be reasonably estimated.

A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #58 Topic Area: Liabilities Defined And Classified

59.

Houston Company is involved in a lawsuit. In which of the following situations is only footnote disclosure of the contingent liability reported within the financial statements? A. B. C. D.

When the loss is remote and the amount cannot be reasonably estimated. When the loss is probable and the amount can be reasonably estimated. When the loss is reasonably possible and the amount can be reasonably estimated. When the loss is remote and the amount can be reasonably estimated.

A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #59 Topic Area: Liabilities Defined And Classified

60.

Which of the following statements about contingent liabilities is incorrect? A. A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated. B. A disclosure note is required when the loss is probable and the amount can be reasonably estimated. C. A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated. D. A disclosure note is required when the loss is remote and the amount can be reasonably estimated. A disclosure note is not required when the loss probability is remote. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #60 Topic Area: Liabilities Defined And Classified

61.

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss can't be reasonably estimated. • Lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated. • Lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is correct? A. B. C. D.

A disclosure note is required for each of the three lawsuits. A disclosure note is required only for lawsuits A & C. A disclosure note is required only for lawsuit A. A disclosure note is required only for lawsuits B & C.

Contingent losses which are either probable or reasonably possible must be disclosed. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #61 Topic Area: Liabilities Defined And Classified

62.

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • lawsuit A: The loss is probable, but the loss can't be reasonably estimated. • lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated. • lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is incorrect? A. B. C. D.

A disclosure note is required for Lawsuit A. A disclosure note is required for lawsuit B. A disclosure note is required for lawsuit C. Lawsuit A is reported on the balance sheet as a liability.

To be reported as a liability on the balance sheet, contingent losses must be both probable and reasonably estimated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #62 Topic Area: Liabilities Defined And Classified

63.

Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin: • lawsuit A: The loss is probable and the loss can be reasonably estimated. • lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated. • lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated. Which of the following statements is incorrect? A. B. C. D.

A disclosure note is required for lawsuit A. A disclosure note is required for lawsuit C. A disclosure note is not required for lawsuit B. Lawsuit A is reported on the balance sheet as a liability.

A contingent liability that is reasonably possible is disclosed in the notes to the financial statements regardless of whether it can be reasonably estimated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #63 Topic Area: Liabilities Defined And Classified

64.

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? A. B. C. D.

The inventory purchase on account increased working capital. Collecting an account receivable increases working capital. The equipment purchase decreases working capital. The inventory purchase on account increased the quick ratio.

The cash payment decreases current assets and therefore working capital. The equipment is a long-term asset. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #64 Topic Area: Focus On Cash Flows

65.

Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the above transactions resulted in an increase in working capital? A. B. C. D.

The inventory purchase on account. Collecting an account receivable. The purchase of equipment using cash. None of the transactions resulted in an increase in working capital.

The inventory purchase and the collection of the receivable didn't affect working capital. The cash payment decreases current assets and therefore working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #65 Topic Area: Focus On Cash Flows

66.

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the above transactions resulted in a decrease in working capital? A. B. C. D.

The accrual of interest expense. Collecting cash for services to be provided in the future. The accrual of revenue. Both the accrual of interest expense and the accrual of revenue.

The interest accrual increases interest payable, which increases current liabilities and decreases working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #66 Topic Area: Focus On Cash Flows

67.

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the above transactions resulted in an increase in working capital? A. B. C. D.

The accrual of interest expense. Collecting cash for services to be provided in the future. The accrual of revenue. Both the accrual of revenue and the collection of cash for future services.

The accrual of revenue increases accounts receivable which increases current assets and increases working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #67 Topic Area: Focus On Cash Flows

68.

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The accrual of revenue. Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows? A. B. C. D.

The accrual of interest expense is added to net income. Collecting cash for services to be provided in the future is deducted from net income. The accrual of revenue is added to net income. Collecting cash for services to be provided in the future doesn't require an adjustment to net income.

Accruing interest expense reduces income but doesn't involve a cash flow; therefore it is added to net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #68 Topic Area: Focus On Cash Flows

69.

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. A. B. C. D.

The accrual of wages and salaries expense decreases working capital. The cash payment of the note payable decreases working capital. The purchase of the insurance policy increases working capital. The cash payments for the note and insurance both decrease working capital.

Accruing wages and salaries expense increases current liabilities which decreases working capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #69 Topic Area: Focus On Cash Flows

70.

Rocket 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. B. C. D.

The accrual of wages and salaries expense is deducted from net income. The loss on the equipment sale is deducted from net income. The cash payment to purchase the insurance policy is deducted from net income. The accrual of wages and the equipment loss are both deducted from net income.

The purchase of the insurance policy creates a deferral which is not reported in net income. Therefore the cash payment is deducted from net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #70 Topic Area: Focus On Cash Flows

71.

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. What amount of liability would be reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made? A. B. C. D.

$100,000 $38,550 $61,446 $71,446

The liability ($61,446) is equal to the present value of the ten remaining payments [$10,000 × 6.1446 (present value of a 10% ordinary annuity)] AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #71 Topic Area: Present Value Concepts

72.

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. At what amount would the land be reported at on the balance sheet? A. B. C. D.

$100,000 $38,550 $110,000 $71,446

The land cost ($71,446) is equal to the present value of the ten remaining payments [$10,000 × 6.1446 (present value of a 10%, 10-period ordinary annuity)] plus the initial payment ($10,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #72 Topic Area: Present Value Concepts

73.

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. At what amount would the equipment be reported at on the balance sheet as of the purchase date? A. B. C. D.

$45,000 $38,664 $33,664 $40,000

The equipment cost ($38,664) is equal to the present value of the eight remaining payments [$5,000 × 6.7327 (present value of a 4%, 8-period ordinary annuity)] plus the initial payment ($5,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #73 Topic Area: Present Value Concepts

74.

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years; the first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. At what amount would the liability be reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made? A. B. C. D.

$45,000 $33,664 $38,664 $40,000

The liability ($33,664) is equal to the present value of the eight remaining payments [$5,000 × 6.7327 (present value of a 4%, 8-period ordinary annuity)]. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #74 Topic Area: Present Value Concepts

75.

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%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $10,000 payment was made? A. B. C. D.

$44,633 $50,000 $54,633 $60,000

The liability ($44,633) is equal to the present value of the twenty remaining payments [$3,000 × 14.8775 (present value of a 3%, 20-period ordinary annuity)]. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #75 Topic Area: Present Value Concepts

76.

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%. At what amount would the vehicle be reported at on the balance sheet as of the purchase date? A. B. C. D.

$44,633 $50,000 $54,633 $60,000

The vehicle ($54,633) is equal to the present value of the twenty remaining payments [$3,000 × 14.8775 (present value of a 3%, 20-period ordinary annuity)] plus the initial $10,000 payment. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #76 Topic Area: Present Value Concepts

77.

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%. At what amount would the machine be reported at on the balance sheet as of the purchase date? A. B. C. D.

$123,255 $130,000 $80,000 $73,255

The machine ($123,255) is equal to the present value of the eight remaining payments [$10,000 × 7.3255 (present value of a 2%, 8-period ordinary annuity)] plus the initial $50,000 payment. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #77 Topic Area: Present Value Concepts

78.

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%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 payment was made? A. B. C. D.

$123,255 $130,000 $80,000 $73,255

The liability ($73,255) is equal to the present value of the eight remaining payments [$10,000 × 7.3255 (present value of a 2%, 8-period ordinary annuity)]. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #78 Topic Area: Present Value Concepts

79.

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would the building be reported at on the balance sheet as of the purchase date? A. B. C. D.

$326,500 $460,000 $287,950 $416,500

The building ($416,500) is equal to the present value of the nine annual payments [$50,000 × 5.7590 (present value of a 10%, 9-period ordinary annuity)], plus the present value of the payment due ten years from today [$100,000 × .3855 (present value of a 10-period, 10% single sum)], plus the initial $90,000 cash payment. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #79 Topic Area: Present Value Concepts

80.

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would the liability be reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made? A. B. C. D.

$326,500 $460,000 $287,950 $416,500

The liability ($326,500) is equal to the present value of the nine annual payments [$50,000 × 5.7590 (present value of a 10%, 9-period ordinary annuity)] plus the present value of the payment due ten years from today [$100,000 × .3855 (present value of a 10-period, 10% single sum)]. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #80 Topic Area: Present Value Concepts

81.

Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years; the first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. How much will each of the annual payments be? A. B. C. D.

$65,098 $86,821 $55,098 $44,000

The annual payment ($69,457) is equal to the amount financed ($400,000) divided by the present value of a 10%, 10-period ordinary annuity factor (6.1446). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #81 Topic Area: Present Value Concepts

82.

Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on the purchase date, and agreeing to make payments every three months for the next five years; the first payment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. How much will each of the payments be? A. B. C. D.

$55,041 $61,112 $36,694 $32,400

The annual payment ($36,694) is equal to the amount financed ($600,000) divided by the present value of a 2%, 20-period ordinary annuity factor (16.3514). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #82 Topic Area: Present Value Concepts

83.

Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years; the first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. How much will each of the payments be? A. B. C. D.

$28,000 $66,940 $37,981 $33,608

The annual payment ($33,608) is equal to the amount financed ($500,000) divided by the present value of a 3%, 20-period ordinary annuity factor (14.8775). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #83 Topic Area: Present Value Concepts

84.

Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years; the first payment is due three months after the purchase date. Huck's incremental borrowing rate is 8%. How much will each of the payments be? A. B. C. D.

$6,248 $6,689 $8,527 $5,709

The annual payment ($6,689) is equal to the amount financed ($49,000) divided by the present value of a 2%, 8-period ordinary annuity factor (7.3255). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #84 Topic Area: Present Value Concepts

85.

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine? A. B. C. D.

Present value of a single amount. Present value of an annuity. Future value of a single amount. Future value of an annuity.

The two unequal payments must be discounted using the present value of a single amount table values. The payments are unequal, so therefore the annuity table values can't be used. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #85 Topic Area: Present Value Concepts

86.

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. 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, 2010, 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, 2010, 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, how much interest expense would have accrued at December 31, 2010? A. B. C. D.

$25,402 $32,000 $29,693 $27,493

2010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) × Interest rate (8%) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #86 Topic Area: Long-Term Liabilities

87.

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year ended December 31, 2010, the book value of the liability for notes payable, including accrued interest would be which of the following? A. B. C. D.

$342,922 $349,520 $345,013 $347,213

2010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) × Interest rate (8%) December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010 accrued interest expense ($25,402) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #87 Topic Area: Long-Term Liabilities

88.

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2012. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much is the 2011 interest expense, assuming that the December 31, 2010 adjusting entry was made? A. B. C. D.

$27,434 $27,962 $32,000 $29,693

2010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) × Interest rate (8%). December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010 accrued interest expense ($25,402). 2011 interest expense ($27,434) = Note payable liability at the beginning of 2011 ($342,922) × Interest rate (8%). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #88 Topic Area: Long-Term Liabilities

89.

Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement will require $10 million in annual payments starting on December 31, 2010 and continuing for a total of five years (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. What is the note and interest payable liability on December 31, 2010 after the first payment was made? A. B. C. D.

$32,908,000 $31,698,800 $40,000,000 $27,908,000

December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + Interest expense ($37,908,000 × 10%) - First annual payment ($10,000,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #89 Topic Area: Long-Term Liabilities

90.

Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement will require $10 million in annual payments starting on December 31, 2010 and continuing for a total of five years (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. How much is the 2011 interest expense? A. B. C. D.

$3,169,880 $3,290,800 $4,000,000 $2,790,800

December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + 2010 interest expense ($37,908,000 × 10%) - First annual payment ($10,000,000). 2011 interest expense ($3,169,880) = January 1, 2011 book value ($31,698,800) × 10% AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #90 Topic Area: Long-Term Liabilities

91.

A company's income statement reported net income of $40,000 during 2010. 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 2011. Which of the following statements is correct assuming a 35% tax rate? A. B. C. D.

A $3,000 deferred tax liability is reported as of December 31, 2010. A $3,000 deferred tax asset is reported as of December 31, 2010. A $1,050 deferred tax liability is reported as of December 31, 2010. A $1,050 deferred tax asset is reported as of December 31, 2010.

The $3,000 future taxable amount creates a $1,050 deferred tax liability ($3,000 × .35). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #91 Topic Area: Long-Term Liabilities

92.

A company's income statement reported net income of $80,000 during 2010. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2011. Which of the following statements is incorrect assuming a 35% tax rate? A. B. C. D.

Income tax expense on the income statement exceeds the tax liability to the IRS. The $6,000 of revenue creates a deferred tax liability. A $2,100 deferred tax liability is reported as of December 31, 2010. Income tax expense on the income statement is $25,900.

The income tax expense ($80,000 × .35) on the income statement is $28,000. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #92 Topic Area: Long-Term Liabilities

93.

A company's 2010 income tax return reported a $75,000 tax liability. During 2010, the deferred income tax liability account increased $9,000. Which of the following statements is correct? A. B. C. D.

Income tax expense on the 2010 income statement was $75,000. Income tax expense on the 2010 income statement was $64,000. Income tax expense on the 2010 income statement was $9,000. Income tax expense on the 2010 income statement was $84,000.

The income tax expense ($84,000) on the 2010 income statement equals the IRS tax liability ($75,000) plus the increase in the deferred income tax liability ($9,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #93 Topic Area: Long-Term Liabilities

94.

If income tax expense reported on the income statement is $45,000 for 2010, and the tax return for 2010 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2010 will be which of the following? Assume a 40% tax rate. A. B. C. D.

A $3,000 liability. A $3,000 asset. A $7,500 liability. A $7,500 asset.

The income tax expense ($45,000) on the 2010 income statement equals the IRS tax liability ($42,000) plus the deferred income tax liability ($3,000) that was created during 2010. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #94 Topic Area: Long-Term Liabilities

95.

How much needs to be invested today if your goal is to have $100,000 five years from today? The return on the investment is expected to be 10% and will be compounded semi-annually. A. B. C. D.

$61,390 $62,090 $66,667 $50,000

The investment ($61,391) is equal to the future amount ($100,000) multiplied by the present value of $1, 10-period, 5% table value (.6139). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #95 Topic Area: Compute Present Value

96.

Which of the following correctly describes the accounting for leases? A. B. C. D.

A capital lease is not reported on the balance sheet as a liability. A capital lease reports an asset on the balance sheet. An operating lease reports an operating asset on the balance sheet. An operating lease reports a liability on the balance sheet.

A capital lease reports both an asset and a liability on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #96 Topic Area: Long-Term Liabilities

97.

Which of the following questions is asked with respect to determining the accounting for leases? A. Is the lease term greater than 90% of the asset's estimated life? B. Is the present value of the payments greater than 75% of the asset's fair market value? C. Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value? D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee? One of the four questions is with respect to the transfer of title. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #97 Topic Area: Long-Term Liabilities

98.

Which of the following questions is incorrect with respect to determining the accounting for leases? A. Is the lease term greater than 75% of the asset's expected economic life? B. Is the present value of the payments greater than 75% of the asset's fair market value? C. Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less than fair market value? D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee? The present value test uses 90% rather than 75%. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #98 Topic Area: Long-Term Liabilities

99.

How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today? The return on the investment is expected to be 12%. A. B. C. D.

$44,645 $36,291 $28,251 $50,000

The investment ($28,251) is equal to the payments ($5,000) multiplied by the present value of a $1 annuity, 10-period, 12% table value (5.6502). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #99 Topic Area: Computing Present Value

100.

How much needs to be invested today if your goal is to be able to withdraw $10,000 for each of the next nine years beginning one year from today and $50,000 ten years from today? The return on the investment is expected to be 6%. A. B. C. D.

$68,017 $95,937 $78,176 $132,075

The investment ($95,937) = [$10,000 multiplied by the present value of a $1 annuity, 9-period, 6% table value (6.8017)] plus [$50,000 multiplied by the present value of a $1, 10-period, 6% table value (.5584) ] AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #100 Topic Area: Computing Present Value

101.

Halbur Company reported total assets of $150,000, current assets of $60,000, and total stockholders' equity of $60,000 and noncurrent liabilities of $65,000. Requirements (show computations): Compute working capital. Compute the current ratio. Answers will vary Feedback: 1. Total assets ($150,000) = Current liabilities ($X) + Noncurrent liabilities ($65,000) + Stockholders' equity ($60,000) Current liabilities = $25,000 Working Capital ($35,000) = Current assets ($60,000) - Current liabilities ($25,000) 2. Current Ratio (2.4) = Current assets ($60,000) ÷ Current liabilities ($25,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #101 Topic Area: Focus On Cash Flows

102.

Moore Company has the following partial list of account balances at year-end:

Answers will vary

Feedback AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Use the quick ratio. Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #102 Topic Area: Liabilities Defined And Classified

103.

Sharp Company borrowed $500,000 on a 6% one-year, interest bearing note dated November 1, 2010 with interest payable at maturity. The annual accounting period ends on December 31. Assuming that adjusting entries are only made at December 31, the company's fiscal year-end, prepare journal entries for each of the following dates: A. November 1, 2010. B. December 31, 2010. C. October 31, 2011. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #103 Topic Area: Liabilities Defined And Classified

104.

Wolf Company borrowed $5,000 on an 8% note payable on March 1, 2010. The maturity date of the note (and payment of all interest) is September 1, 2011. The accounting period ends December 31. Assuming no adjusting entries are made during the year, prepare the journal entry for each of the following dates: A. March 1, 2010. B. December 31, 2010. C. September 1, 2011. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report notes payable and explain the time value of money. Libby - Chapter 09 #104 Topic Area: Liabilities Defined And Classified

105.

The following data were provided by the detailed payroll records of Mountain Corporation for the month of March 2011:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #105 Topic Area: Liabilities Defined And Classified

106.

The following is a partial list of account balances for Coen, Inc. as of December 31, 2010:

Required: Prepare the liability section of Coen Inc.'s classified balance sheet for December 31, 2010. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Libby - Chapter 09 #106 Topic Area: Liabilities Defined And Classified

107.

The following data is available for Tommy's Toys for the years 2008 through 2011:

Answers will vary Feedback: A1. 2011 accounts payable turnover (7.34) = Cost of goods sold ($7,506) ÷ Average inventory [$1,023 + $1,022] ÷2) A2. 2010 accounts payable turnover (8.05) = Cost of goods sold ($7,646) ÷ Average inventory [$1,022 + $878] ÷ 2) A3. 2009 accounts payable turnover (8.79) = Cost of goods sold ($7,799/ [$878 + $896] ÷ 2). B1. 49.7 days = 365 days ÷ accounts payable turnover (7.34) B2. 45.3 days = 365 days ÷ accounts payable turnover (8.05) B3. 41.5 days = 365 days ÷ accounts payable turnover (8.79) C. Over the three year period, Tommy's Toys accounts payable turnover ratio has decreased and the number of days it takes them to pay vendors has increased from 42 in 2009 to 50 days in 2011. If their suppliers offer them credit terms of 30 days, then Tommy's Toys is taking almost twice that time to pay them. It would be a good idea to compare the accounts payable turnover ratio of competitors with that of Tommy's Toys to see if they are in line with other similar companies. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Libby - Chapter 09 #107 Topic Area: Liabilities Defined And Classified

108.

Answer the following four questions. A. What is a contingent liability? B. When must a contingent liability be recorded through a journal entry? C. When should a contingent liability be disclosed in the footnotes to the financial statements? D. When is disclosure of a contingent liability not required? Answers will vary Feedback: A. Contingent liabilities are potential liabilities that arise due to past events. B. Whether or not the potential liability becomes a recorded liability depends upon the outcome of future events. For example, a company is currently involved in a product liability lawsuit. The company may have to pay the plaintiff if the settlement is unfavorable. A contingent liability must be recorded if it is probable that the future events will occur and the amount can be reasonably estimated. C. Contingent liabilities should be disclosed in the footnotes to the financial statements if it is probable that future events will occur but the amount cannot be reasonably estimated. Footnote disclosure should also occur if it is reasonably possible that the future events will occur whether or not it can be reasonably estimated. D. Disclosure is not required if the probability of future events occurring is remote. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Report contingent liabilities Libby - Chapter 09 #108 Topic Area: Liabilities Defined And Classified

109.

In a recent year, The Walt Disney Company reported the following increases or decreases in current assets and current liabilities. Identify whether each of these increases or decreases caused cash to increase or decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of the amount in the column labeled cash effect.

Answers will vary Feedback: (1) +$366, (2) +$103, (3) -$848, (4) -$179, (5) +$292, (6) +$69. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Libby - Chapter 09 #109 Topic Area: Focus On Cash Flows

110.

Border Company purchased a truck that cost $17,000. The company signed a $17,000 note payable that specified four equal annual payments (at each year-end), each of which includes a payment on the principal and interest on the unpaid balance at 10% per annum. Requirements: A. Calculate the amount of each equal payment (round to the nearest dollar). B. Prepare the journal entry to record the purchase of the truck. C. Prepare the journal entry to record the first annual payment on the note (assume no interest has been accrued during the year). D. Will the interest paid with the first annual payment be more or less than the interest paid with the second annual payment? Explain your answer. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 09-07 Report long-term liabilities. Learning Objective: 09-08 Compute present values. Libby - Chapter 09 #110 Topic Area: Long-Term Liabilities

111.

Fold and Hold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on January 1, 2010. Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the balance, payable in six equal annual installments on each December 31 beginning with December 31, 2010. The note specified a 10% interest rate on the unpaid balance. Requirements: A. Prepare the journal entry to record the purchase on January 1, 2010 (round to the nearest dollar). B. Prepare the entry to record the first installment payment on December 31, 2010 (round to the nearest dollar). Assume that no adjusting entries have been made during the year. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #111 Topic Area: Long-Term Liabilities

112.

Information Company purchased an asset that cost $70,000 on January 1, 2010. Arrangements were made with the supplier to pay $10,000 cash on January 1, 2010, and the balance was to be paid over a three-year period, with equal annual payments of $24,553 to be made at the end of 2010, 2011, and 2012. Each payment will include principal plus interest on the unpaid balance at 11% per year. Requirements:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #112 Topic Area: Long-Term Liabilities

113.

On January 1, 2010, Mission Company agreed to buy some equipment from Anna Company. Mission Company signed a note, agreeing to pay Anna Company $500,000 for the equipment on December 31, 2012. The market rate of interest for this note was 10%. Requirements: A. Prepare the journal entry Mission Company would record on January 1, 2010 related to this purchase. B. Prepare the December 31, 2010, adjusting entry to record interest expense related to the note for the first year. Assume that no adjusting entries have been made during the year. C. Prepare the December 31, 2011, adjusting entry to record interest expense related to the note for the second year. Assume that no adjusting entries have been made during the year. D. Prepare the entry Mission Company would record on December 31, 2012, the due date of the note to record interest expense for the third year and payment of the note. Assume that no adjusting entries have been made during the year. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. Libby - Chapter 09 #113 Topic Area: Long-Term Liabilities

114.

Why are present value concepts and applications so important when companies purchase equipment financed by the seller? Answers will vary Feedback: Present value concepts are very important in seller-financed purchases because the debt payments will include principal and interest payments. The equipment should be capitalized at an amount equal to the present value of the purchase. That is, the asset account should reflect what the equipment could have been acquired for in terms of "today's dollars". The additional amounts for interest are charges for borrowing. These interest amounts should be reported as interest expense as incurred. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #114 Topic Area: Long-Term Liabilities

115.

Answer each of the independent problems (show computations):

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Hard Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 #115 Topic Area: Long-Term Liabilities

116.

A company's income statement reported net income of $80,000 during 2010. The income tax return excluded a revenue item of $10,000 (reported on the income statement) because under the tax laws the $10,000 would not be reported for tax purposes until 2011. Prepare the journal entry to record the 2010 income tax expense assuming a 40% tax rate. Answers will vary Feedback: Income tax expense 32,000 ($28,000 + $4,000) Income taxes payable 28,000 ($80,000 - $10,000) × .40 Deferred tax liability 4,000 ($10,000 × .40) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #116 Topic Area: Long-Term Liabilities

117.

A company's income statement reported income tax expense of $200,000 during 2010. The deferred tax liability on the balance sheet increased $20,000 during 2010. How much was the company's tax liability during 2010? Answers will vary Feedback: Income tax expense 200,000 Income taxes payable 180,000 Deferred tax liability 20,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 09-07 Report long-term liabilities. (S) Libby - Chapter 09 #117 Topic Area: Long-Term Liabilities

ch9 Summary Category AACSB: Analytic AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting AICPA FN: Reporting, Measurement Blooms: Apply Blooms: Remember Blooms: Understand Difficulty: Easy Difficulty: Hard Difficulty: Medium Learning Objective: 09-01 Define; measure; and report current liabilities Learning Objective: 09-02 Use the quick ratio. Learning Objective: 09-03 Analyze the accounts payable turnover ratio. Learning Objective: 09-04 Report notes payable and explain the time value of money. Learning Objective: 09-05 Report contingent liabilities Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows. Learning Objective: 09-07 Report long-term liabilities. Learning Objective: 09-07 Report long-term liabilities. (S) Learning Objective: 09-08 Compute present values. Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities. Libby - Chapter 09 Topic Area: Compute Present Value Topic Area: Computing Present Value Topic Area: Focus On Cash Flows Topic Area: Liabilities Defined And Classified Topic Area: Long-Term Liabilities Topic Area: Present Value Topic Area: Present Value Concepts

# of Questions 57 60 117 48 33 36 68 8 41 30 3 84 14 18 9 12 12 15 14 6 16 7 117 1 2 13 62 22 2 15