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Exam 9: Reporting and Interpreting Liabilities

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Question 21

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A liability that is estimated because the final settlement amount is unknown cannot be reported on the balance sheet.

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Question 22

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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.

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Question 23

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Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020) . Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. The amount of principal that is paid at December 31, 2016 is:

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?

A company's 2016 income tax return reported a $75,000 tax liability. During 2016, the deferred income tax liability account increased $9,000. Which of the following statements is correct?

Purchasing inventory on account increases the accounts payable turnover ratio.

Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. Assume that the appropriate adjusting entry was made on December 31, 2016 and that no adjusting entries have been made during 2017. Which of the following would be the required journal entry to pay the entire amount due on March 31, 2017?

Cash received from customers may result in a current liability.

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

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

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.

In order to calculate the cost of a long-term asset that is financed with long-term debt, present values concepts would be used.

On April 1, 2016, Wolf Company borrowed $5,000 on an 8% note payable. The maturity date of the note (and payment of all interest) is July 1, 2017. The accounting period ends December 31. Assume no adjusting entries are made during the year. Required: Prepare the journal entry for each of the following dates: A.April 1, 2016. B.December 31, 2016. C.July 1, 2017.

An annuity is a series of consecutive and unequal payments over time.

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

The accounts payable turnover ratio is difficult to manipulate.

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

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2017 is which of the following?

Commander Appliance Store prepares annual financial statements and at December 31, 2016. Commander needs to analyze the following items to determine the whether adjusting entries are required for 2016. 1. Twenty-two employees worked during 2016 and each of them will take two weeks of vacation in 2017. Twelve of these employees earn $500 per week and 10 employees earn $800 per week. (If an adjusting entry is required, ignore payroll taxes on this item.) 2. Office rent for January, 2017 has not yet been paid. 3. Commander sold 3,000 coffee brewing machines for total sales of $150,000. Commander expects that 30 machines will need warranty repairs in the next two years and estimates the cost of repairs to be $2,400. 4. Commander has been sued by a customer and assesses the probability of losing the lawsuit to be reasonably possible. The estimate of the contingency loss is $20,000. Required: For each item listed, determine whether there should be an accrual and adjusting entry at December 31, 2016. If so, then prepare the adjusting entry. If not, state the reason for not accruing a liability.

The accrual of interest on a short-term note payable decreases working capital and current assets.