Chapter 13- Current Liabilities and
Contingencies
The most common type of liability is:
A. One that comes into existence due to a loss contingency.
B. One that must be estimated.
C. One that comes into existence due to a gain contingency.
D. One to be paid in cash and for which the amount and timing are known. - ANS-D.
One to be paid in cash and for which the amount and timing are known.
Which of the following is not a characteristic of a liability?
A. It represents a probable, future sacrifice of economic benefits.
B. It must be payable in cash.
C. It arises from present obligations to other entities.
D. It results from past transactions or events. - ANS-B. It must be payable in cash.
Which of the following is the best definition of a current liability?
A. An obligation payable within one year.
B. An obligation payable within one year of the balance sheet date.
C. An obligation payable within one year or within the normal operating cycle, whichever
is longer.
D. An obligation expected to be satisfied with current assets or by the creation of other
current liabilities. - ANS-D. An obligation expected to be satisfied with current assets or
by the creation of other current liabilities.
Which of the following is not a liability?
A. An unused line of credit.
B. Estimated income taxes.
C. Sales tax collected from customers.
D. Advances from customers. - ANS-A. An unused line of credit
Current liabilities normally are recorded at their:
A. Present value.
B. Cost.
C. Maturity amount.
D. Expected value. - ANS-C. Maturity amount.
,Current liabilities are normally recorded at the amount expected to be paid rather than
at their present value. This practice can be supported by GAAP according to the
concept of:
A. Matching.
B. Consistency.
C. Materiality.
D. Conservatism. - ANS-C. Materiality.
The key accounting considerations relating to accounts payable are:
A. Determining their existence and ensuring that they are recorded in the appropriate
accounting period.
B. Determining their present value and ensuring that they are recorded in the
appropriate accounting period.
C. Determining their existence and determining the correct amount.
D. Determining the present value of the principal and the amount of the interest. -
ANS-A. Determining their existence and ensuring that they are recorded in the
appropriate accounting period.
Classifying liabilities as either current or long-term helps creditors assess:
A. Profitability.
B. The relative risk of a firm's liabilities.
C. The degree of a firm's liabilities.
D. The amount of a firm's liabilities. - ANS-B. The relative risk of a firm's liabilities.
When cash is received from customers in the form of a refundable deposit, the cash
account is increased with a corresponding increase in:
A. A current liability.
B. Revenue.
C. Shareholders' equity.
D. Paid-in capital. - ANS-A. A current liability.
A discount on a noninterest-bearing note payable is classified in the balance sheet as:
A. An asset.
B. A component of shareholders' equity.
C. A contingent liability.
D. A contra liability. - ANS-D. A contra liability.
The rate of interest printed on the face of a note payable is called the:
A. Yield rate.
B. Effective rate.
, C. Market rate.
D. Stated rate. - ANS-D. Stated rate.
The rate of interest that actually is incurred on a note payable is called the:
A. Face rate.
B. Contract rate.
C. Effective rate.
D. Stated rate. - ANS-C. Effective rate.
On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a
7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose
stated discount rate is 8%. Sky's effective interest rate on this loan is:
A. More than the stated discount rate of 8%.
B. Less than the stated discount rate of 8%.
C. Equal to the stated discount rate of 8%.
D. Unrelated to the stated discount rate of 8%. - ANS-A. More than the stated discount
rate of 8%.
Jane's Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note
bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In
connection with this note, Jane's should report interest expense at December 31, 2011,
in the amount of:
A. $0.
B. $24,000.
C. $48,000.
D. $50,880. - ANS-B. $24,000.
What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with
a stated rate of 12% and a maturity value of $200,000?
A. 12.4%.
B. 12.0 %.
C. 11.5%.
D. 3.0%. - ANS-A. 12.4%.
On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing
note. The loan was made by Second Commercial Bank whose stated discount rate is
9%. Hiker's effective interest rate on this loan (rounded) is:
A. 9.0%.
B. 9.5%.
C. 9.6%.
Contingencies
The most common type of liability is:
A. One that comes into existence due to a loss contingency.
B. One that must be estimated.
C. One that comes into existence due to a gain contingency.
D. One to be paid in cash and for which the amount and timing are known. - ANS-D.
One to be paid in cash and for which the amount and timing are known.
Which of the following is not a characteristic of a liability?
A. It represents a probable, future sacrifice of economic benefits.
B. It must be payable in cash.
C. It arises from present obligations to other entities.
D. It results from past transactions or events. - ANS-B. It must be payable in cash.
Which of the following is the best definition of a current liability?
A. An obligation payable within one year.
B. An obligation payable within one year of the balance sheet date.
C. An obligation payable within one year or within the normal operating cycle, whichever
is longer.
D. An obligation expected to be satisfied with current assets or by the creation of other
current liabilities. - ANS-D. An obligation expected to be satisfied with current assets or
by the creation of other current liabilities.
Which of the following is not a liability?
A. An unused line of credit.
B. Estimated income taxes.
C. Sales tax collected from customers.
D. Advances from customers. - ANS-A. An unused line of credit
Current liabilities normally are recorded at their:
A. Present value.
B. Cost.
C. Maturity amount.
D. Expected value. - ANS-C. Maturity amount.
,Current liabilities are normally recorded at the amount expected to be paid rather than
at their present value. This practice can be supported by GAAP according to the
concept of:
A. Matching.
B. Consistency.
C. Materiality.
D. Conservatism. - ANS-C. Materiality.
The key accounting considerations relating to accounts payable are:
A. Determining their existence and ensuring that they are recorded in the appropriate
accounting period.
B. Determining their present value and ensuring that they are recorded in the
appropriate accounting period.
C. Determining their existence and determining the correct amount.
D. Determining the present value of the principal and the amount of the interest. -
ANS-A. Determining their existence and ensuring that they are recorded in the
appropriate accounting period.
Classifying liabilities as either current or long-term helps creditors assess:
A. Profitability.
B. The relative risk of a firm's liabilities.
C. The degree of a firm's liabilities.
D. The amount of a firm's liabilities. - ANS-B. The relative risk of a firm's liabilities.
When cash is received from customers in the form of a refundable deposit, the cash
account is increased with a corresponding increase in:
A. A current liability.
B. Revenue.
C. Shareholders' equity.
D. Paid-in capital. - ANS-A. A current liability.
A discount on a noninterest-bearing note payable is classified in the balance sheet as:
A. An asset.
B. A component of shareholders' equity.
C. A contingent liability.
D. A contra liability. - ANS-D. A contra liability.
The rate of interest printed on the face of a note payable is called the:
A. Yield rate.
B. Effective rate.
, C. Market rate.
D. Stated rate. - ANS-D. Stated rate.
The rate of interest that actually is incurred on a note payable is called the:
A. Face rate.
B. Contract rate.
C. Effective rate.
D. Stated rate. - ANS-C. Effective rate.
On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a
7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose
stated discount rate is 8%. Sky's effective interest rate on this loan is:
A. More than the stated discount rate of 8%.
B. Less than the stated discount rate of 8%.
C. Equal to the stated discount rate of 8%.
D. Unrelated to the stated discount rate of 8%. - ANS-A. More than the stated discount
rate of 8%.
Jane's Donut Co. borrowed $200,000 on January 1, 2011, and signed a two-year note
bearing interest at 12%. Interest is payable in full at maturity on January 1, 2013. In
connection with this note, Jane's should report interest expense at December 31, 2011,
in the amount of:
A. $0.
B. $24,000.
C. $48,000.
D. $50,880. - ANS-B. $24,000.
What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with
a stated rate of 12% and a maturity value of $200,000?
A. 12.4%.
B. 12.0 %.
C. 11.5%.
D. 3.0%. - ANS-A. 12.4%.
On September 1, 2011, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing
note. The loan was made by Second Commercial Bank whose stated discount rate is
9%. Hiker's effective interest rate on this loan (rounded) is:
A. 9.0%.
B. 9.5%.
C. 9.6%.
