ACCT 211: Week 6 - Exam 3 Test
Questions And Answers Graded A+.
Liability - Answer An amount owed by a business.
A probable future payment of assets or services that a company is presently obligated to make as a
result of past transactions or events.
Characteristics of Liability - Answer 1. Past transactions or events
2. Present obligations
3. Future payments of assets or services
Types of Liability - Answer Current and Long-term
Current liability (short-term) - Answer are liabilities due within one year (or the company's operating
cycle if longer). Most are paid using current assets or by creating other current liabilities.
Common examples:
- accounts payable
- short-term notes payable
- wages payable, warranty liabilities
- and taxes payable.
Some liabilities do not have a fixed due date but instead are payable on the creditor's demand. These are
reported as current liabilities because of the possibility of payment in the near term.
Long-term liabilities - Answer are obligations due after one year (or the company's operating cycle if
longer). They include:
- long-term notes payable
- warranty liabilities
, - lease liabilities
- and bonds payable.
A single liability can be divided between the current and noncurrent sections if a company expects to
make payments toward it in both the short and long term. The current portion is reported in current
liabilities.
Three questions in regard to liability - Answer 1. Whom to pay?
2. When to pay?
3. How much to pay?
Answers are usually decided when a liability is incurred. However, sometimes the answers are uncertain.
Uncertainty in whom to pay - Answer A company does not know who the holder is or to whom the
debt is owed.
Example: a company can create a liability with a known amount when issuing a note that is payable to its
holder. In this case, a specific amount is payable to the note's holder at a specified date, but the
company does not know who the holder is until that date. Despite this uncertainty, the company reports
this liability on its balance sheet.
Uncertainty in when to pay - Answer A company can have an obligation of a specific amount to a
known creditor but NOT KNOW WHEN it must be paid. For example, a law firm can accept fees in
advance from a client who plans to use the firm's services in the future. The law firm has a liability
(unearned revenue) that it settles by providing services at an unknown future date. Although uncertainty
exists, the law firm's balance sheet must report this liability. These types of obligations are reported as
current liabilities because they are likely to be settled in the short term.
Uncertainty in how much to pay - Answer A company can be aware of an obligation but not know how
much it will be required to pay.
For example, a company using electrical power is billed only after the meter has been read. This cost is
incurred and the liability created before a bill is received. A liability to the power company is reported as
an estimated amount if the balance sheet is prepared before a bill arrives.
Questions And Answers Graded A+.
Liability - Answer An amount owed by a business.
A probable future payment of assets or services that a company is presently obligated to make as a
result of past transactions or events.
Characteristics of Liability - Answer 1. Past transactions or events
2. Present obligations
3. Future payments of assets or services
Types of Liability - Answer Current and Long-term
Current liability (short-term) - Answer are liabilities due within one year (or the company's operating
cycle if longer). Most are paid using current assets or by creating other current liabilities.
Common examples:
- accounts payable
- short-term notes payable
- wages payable, warranty liabilities
- and taxes payable.
Some liabilities do not have a fixed due date but instead are payable on the creditor's demand. These are
reported as current liabilities because of the possibility of payment in the near term.
Long-term liabilities - Answer are obligations due after one year (or the company's operating cycle if
longer). They include:
- long-term notes payable
- warranty liabilities
, - lease liabilities
- and bonds payable.
A single liability can be divided between the current and noncurrent sections if a company expects to
make payments toward it in both the short and long term. The current portion is reported in current
liabilities.
Three questions in regard to liability - Answer 1. Whom to pay?
2. When to pay?
3. How much to pay?
Answers are usually decided when a liability is incurred. However, sometimes the answers are uncertain.
Uncertainty in whom to pay - Answer A company does not know who the holder is or to whom the
debt is owed.
Example: a company can create a liability with a known amount when issuing a note that is payable to its
holder. In this case, a specific amount is payable to the note's holder at a specified date, but the
company does not know who the holder is until that date. Despite this uncertainty, the company reports
this liability on its balance sheet.
Uncertainty in when to pay - Answer A company can have an obligation of a specific amount to a
known creditor but NOT KNOW WHEN it must be paid. For example, a law firm can accept fees in
advance from a client who plans to use the firm's services in the future. The law firm has a liability
(unearned revenue) that it settles by providing services at an unknown future date. Although uncertainty
exists, the law firm's balance sheet must report this liability. These types of obligations are reported as
current liabilities because they are likely to be settled in the short term.
Uncertainty in how much to pay - Answer A company can be aware of an obligation but not know how
much it will be required to pay.
For example, a company using electrical power is billed only after the meter has been read. This cost is
incurred and the liability created before a bill is received. A liability to the power company is reported as
an estimated amount if the balance sheet is prepared before a bill arrives.
