OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
Multiple Choice
1. LO 12.1 Which of the following is not considered a current liability?
A. Accounts Payable
B. Unearned Revenue
C. the component of a twenty-year note payable due in year 20
D. current portion of a noncurrent note payable
Solution
C
2. LO 12.1 A company regularly purchases materials from a manufacturer on credit. Payments
for these purchases occur within the company’s operating cycle. They do not include interest and
are established with an invoice outlining purchase details, credit terms, and shipping charges.
Which current liability situation does this best describe?
A. sales tax payable
B. accounts payable
C. unearned revenue
D. income taxes payable
Solution
B
3. LO 12.1 The following is selected financial data from Block Industries:
How much does Block Industries have in current liabilities?
A. $19,800
B. $18,300
C. $12,300
D. $25,800
Solution
D
4. LO 12.1 A ski company takes out a $400,000 loan from a bank. The bank requires eight equal
repayments of the loan principal, paid annually. Assume no interest is paid or accumulated on
the loan until the final repayment. How much of the loan principal is considered a current portion
of a noncurrent note payable in year 3?
A. $50,000
B. $150,000
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
C. $100,000
D. $250,000
Solution
A
5. LO 12.2 Nido Co. has a standing agreement with a supplier for purchasing car parts. The
terms of the agreement are 3/15, n/30 from the invoice date of September 1. The company makes
a purchase on September 1 for $5,000 and pays the amount due on September 13. What amount
does Nido Co. pay in cash on September 13?
A. $5,000
B. $4,850
C. $150
D. $4,250
Solution
B
6. LO 12.2 A client pays cash in advance for a magazine subscription to Living Daily. Living
Daily has yet to provide the magazine to the client. What accounts would Living Daily use to
recognize this advance payment?
A. unearned subscription revenue, cash
B. cash, subscription revenue
C. subscription revenue, unearned subscription revenue
D. unearned subscription revenue, subscription revenue, cash
Solution
A
7. LO 12.2 Lime Co. incurs a $4,000 note with equal principal installment payments due for the
next eight years. What is the amount of the current portion of the noncurrent note payable due in
the second year?
A. $800
B. $1,000
C. $500
D. nothing, since this is a noncurrent note payable
Solution
C
8. LO 12.3 Which of the following best describes a contingent liability that is likely to occur but
cannot be reasonably estimated?
A. reasonably possible
B. probable and estimable
C. probable and inestimable
D. remote
Solution
C
9. LO 12.3 Blake Department Store sells television sets with one-year warranties that cover
repair and replacement of television parts. In the month of June, Blake sells forty television sets
with a per unit cost of $500. If Blake estimates warranty fulfillment at 10% of sales, what would
be the warranty liability reported in June?
A. $1,000
B. $2,000
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
C. $500
D. $20,000
Solution
B. (40 televisions × $500 per television × 10%)
10. LO 12.3 What accounts are used to record a contingent warranty liability that is probable and
estimable but has yet to be fulfilled?
A. warranty liability and cash
B. warranty expense and cash
C. warranty liability and warranty expense, cash
D. warranty expense and warranty liability
Solution
D
11. LO 12.3 Which of the following best describes a contingent liability that is unlikely to
occur?
A. remote
B. probable and estimable
C. reasonably possible
D. probable and inestimable
Solution
A
12. LO 12.4 Which of the following accounts are used when a short-term note payable with 5%
interest is honored (paid)?
A. short-term notes payable, cash
B. short-term notes payable, cash, interest expense
C. interest expense, cash
D. short-term notes payable, interest expense, interest payable
Solution
B
13. LO 12.4 Which of the following is not a characteristic of a short-term note payable?
A. Payment is due in less than a year.
B. It bears interest.
C. It can result from an accounts payable conversion.
D. It is reported on the balance sheet under noncurrent liabilities.
Solution
D
14. LO 12.4 Sunlight Growers borrows $250,000 from a bank at a 4% annual interest rate. The
loan is due in three months. At the end of the three months, the company pays the amount due in
full. How much did the company remit to the bank?
A. $250,000
B. $10,000
C. $252,500
D. $2,500
Solution
C. $250,000 × 4% × (3/12) + $250,000
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
15. LO 12.4 Marathon Peanuts converts a $130,000 account payable into a short-term note
payable, with an annual interest rate of 6%, and payable in four months. How much interest will
Marathon Peanuts owe at the end of four months?
A. $2,600
B. $7,800
C. $137,800
D. $132,600
Solution
A. $130,000 × 6% × (4/12)
16. LO 12.5 An employee earns $8,000 in the first pay period. The FICA Social Security Tax
rate is 6.2%, and the FICA Medicare tax rate is 1.45%. What is the employee’s FICA taxes
responsibility?
A. $535.50
B. $612
C. None, only the employer pays FICA taxes
D. $597.50
E. $550
Solution
B. (FICA SS = $496 [$8,000 × 6.2%] + FICA Medicare = $116 [$8,000 × 1.45%])
17. LO 12.5 Which of the following is considered an employer payroll tax?
A. FICA Medicare
B. FUTA
C. SUTA
D. A and B only
E. B and C only
F. A, B, and C
Solution
F
18. LO 12.5 Employees at Rayon Enterprises earn one day a month of vacation compensation
(twelve days total each year). Vacation compensation is paid at an hourly rate of $45, based on
an eight-hour work day. Rayon’s first pay period is January. It is now April 30, how much
vacation liability has accumulated if the company has four employees and no vacation
compensation has been paid?
A. $1,440
B. $4,320
C. $5,760
D. $7,200
Solution
C. (4 days earned × 4 employees × 8 hours × $45 per hour = $5,760)
19. LO 12.5 An employee and employer cost-share health insurance. If the employee covers
three-fourths of the cost and the employer covers the rest, what would be the employee’s
responsibility if the total premium was $825?
A. $618.75
B. $206.25
C. $412.50
D. $275
Page 4 of 40
Chapter 12: Current Liabilities
Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
Multiple Choice
1. LO 12.1 Which of the following is not considered a current liability?
A. Accounts Payable
B. Unearned Revenue
C. the component of a twenty-year note payable due in year 20
D. current portion of a noncurrent note payable
Solution
C
2. LO 12.1 A company regularly purchases materials from a manufacturer on credit. Payments
for these purchases occur within the company’s operating cycle. They do not include interest and
are established with an invoice outlining purchase details, credit terms, and shipping charges.
Which current liability situation does this best describe?
A. sales tax payable
B. accounts payable
C. unearned revenue
D. income taxes payable
Solution
B
3. LO 12.1 The following is selected financial data from Block Industries:
How much does Block Industries have in current liabilities?
A. $19,800
B. $18,300
C. $12,300
D. $25,800
Solution
D
4. LO 12.1 A ski company takes out a $400,000 loan from a bank. The bank requires eight equal
repayments of the loan principal, paid annually. Assume no interest is paid or accumulated on
the loan until the final repayment. How much of the loan principal is considered a current portion
of a noncurrent note payable in year 3?
A. $50,000
B. $150,000
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
C. $100,000
D. $250,000
Solution
A
5. LO 12.2 Nido Co. has a standing agreement with a supplier for purchasing car parts. The
terms of the agreement are 3/15, n/30 from the invoice date of September 1. The company makes
a purchase on September 1 for $5,000 and pays the amount due on September 13. What amount
does Nido Co. pay in cash on September 13?
A. $5,000
B. $4,850
C. $150
D. $4,250
Solution
B
6. LO 12.2 A client pays cash in advance for a magazine subscription to Living Daily. Living
Daily has yet to provide the magazine to the client. What accounts would Living Daily use to
recognize this advance payment?
A. unearned subscription revenue, cash
B. cash, subscription revenue
C. subscription revenue, unearned subscription revenue
D. unearned subscription revenue, subscription revenue, cash
Solution
A
7. LO 12.2 Lime Co. incurs a $4,000 note with equal principal installment payments due for the
next eight years. What is the amount of the current portion of the noncurrent note payable due in
the second year?
A. $800
B. $1,000
C. $500
D. nothing, since this is a noncurrent note payable
Solution
C
8. LO 12.3 Which of the following best describes a contingent liability that is likely to occur but
cannot be reasonably estimated?
A. reasonably possible
B. probable and estimable
C. probable and inestimable
D. remote
Solution
C
9. LO 12.3 Blake Department Store sells television sets with one-year warranties that cover
repair and replacement of television parts. In the month of June, Blake sells forty television sets
with a per unit cost of $500. If Blake estimates warranty fulfillment at 10% of sales, what would
be the warranty liability reported in June?
A. $1,000
B. $2,000
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
C. $500
D. $20,000
Solution
B. (40 televisions × $500 per television × 10%)
10. LO 12.3 What accounts are used to record a contingent warranty liability that is probable and
estimable but has yet to be fulfilled?
A. warranty liability and cash
B. warranty expense and cash
C. warranty liability and warranty expense, cash
D. warranty expense and warranty liability
Solution
D
11. LO 12.3 Which of the following best describes a contingent liability that is unlikely to
occur?
A. remote
B. probable and estimable
C. reasonably possible
D. probable and inestimable
Solution
A
12. LO 12.4 Which of the following accounts are used when a short-term note payable with 5%
interest is honored (paid)?
A. short-term notes payable, cash
B. short-term notes payable, cash, interest expense
C. interest expense, cash
D. short-term notes payable, interest expense, interest payable
Solution
B
13. LO 12.4 Which of the following is not a characteristic of a short-term note payable?
A. Payment is due in less than a year.
B. It bears interest.
C. It can result from an accounts payable conversion.
D. It is reported on the balance sheet under noncurrent liabilities.
Solution
D
14. LO 12.4 Sunlight Growers borrows $250,000 from a bank at a 4% annual interest rate. The
loan is due in three months. At the end of the three months, the company pays the amount due in
full. How much did the company remit to the bank?
A. $250,000
B. $10,000
C. $252,500
D. $2,500
Solution
C. $250,000 × 4% × (3/12) + $250,000
Page 3 of 40
, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 12: Current Liabilities
15. LO 12.4 Marathon Peanuts converts a $130,000 account payable into a short-term note
payable, with an annual interest rate of 6%, and payable in four months. How much interest will
Marathon Peanuts owe at the end of four months?
A. $2,600
B. $7,800
C. $137,800
D. $132,600
Solution
A. $130,000 × 6% × (4/12)
16. LO 12.5 An employee earns $8,000 in the first pay period. The FICA Social Security Tax
rate is 6.2%, and the FICA Medicare tax rate is 1.45%. What is the employee’s FICA taxes
responsibility?
A. $535.50
B. $612
C. None, only the employer pays FICA taxes
D. $597.50
E. $550
Solution
B. (FICA SS = $496 [$8,000 × 6.2%] + FICA Medicare = $116 [$8,000 × 1.45%])
17. LO 12.5 Which of the following is considered an employer payroll tax?
A. FICA Medicare
B. FUTA
C. SUTA
D. A and B only
E. B and C only
F. A, B, and C
Solution
F
18. LO 12.5 Employees at Rayon Enterprises earn one day a month of vacation compensation
(twelve days total each year). Vacation compensation is paid at an hourly rate of $45, based on
an eight-hour work day. Rayon’s first pay period is January. It is now April 30, how much
vacation liability has accumulated if the company has four employees and no vacation
compensation has been paid?
A. $1,440
B. $4,320
C. $5,760
D. $7,200
Solution
C. (4 days earned × 4 employees × 8 hours × $45 per hour = $5,760)
19. LO 12.5 An employee and employer cost-share health insurance. If the employee covers
three-fourths of the cost and the employer covers the rest, what would be the employee’s
responsibility if the total premium was $825?
A. $618.75
B. $206.25
C. $412.50
D. $275
Page 4 of 40
