Accounting Quiz: Current Liabilities and Sales Taxes

Questions and Answers

Which of the following is a current liability?

A long-term debt maturing currently, which is to be paid with cash in a sinking fund

None of these (correct)

A long-term debt maturing currently, which is to be converted into common stock

A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue

Which of the following is true about accounts payable?

Both 2 and 3 are true.

Accounts payable should not be reported at their present value. (correct)

When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.

When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000. These should be classified on the balance sheet of Lance Company as:

Long-term liabilities

Deferred charges

Current liabilities (correct)

Intermediate debt

Which of the following items is a current liability?

Bonds to be refunded when due in eight months, with no doubt about the marketability of the refunding issue Signup and view all the answers

Which of the following should not be included in the current liabilities section of the balance sheet?

All of these are included Signup and view all the answers

Which of the following is a current liability?

A cash dividend payable to preferred stockholders Signup and view all the answers

Of the following items, the only one which should not be classified as a current liability is:

Short-term obligations expected to be refinanced Signup and view all the answers

An account which would be classified as a current liability is:

None of these Signup and view all the answers

What is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less). Signup and view all the answers

What is the relationship between present value and the concept of a liability?

Present values are used to measure certain liabilities. Signup and view all the answers

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing. Signup and view all the answers

Where is debt callable by the creditor reported on the debtor's financial statements?

Current liability. Signup and view all the answers

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Subsequently refinance the obligation on a long-term basis. Signup and view all the answers

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

All of these are conditions for the accrual. Signup and view all the answers

Which of the following is not a correct statement about sales taxes?

Sales taxes are an expense of the seller. Signup and view all the answers

The amount of the liability for compensated absences should be based on:

Either 1 or 2 is acceptable. Signup and view all the answers

Which of the following taxes does not represent a common payroll deduction?

State unemployment taxes. Signup and view all the answers

A contingent liability:

Is the result of a loss contingency. Signup and view all the answers

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years. Any liability for the warranty should be reported as:

Part current and part long-term. Signup and view all the answers

Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. What should the amount of loss accrual be?

The minimum of the range. Signup and view all the answers

Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be estimated, an unfavorable outcome is highly probable, and:

The cause for action occurred during the accounting period covered by the financial statements. Signup and view all the answers

Use of the accrual method in accounting for product warranty costs:

Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale. Signup and view all the answers

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

Estimated liability under warranties. Signup and view all the answers

An electronics store provides coupons for video game purchases with a discount. How would the store account for a purchase using the discount coupon?

The difference between the cost of the video game and the cash received is recognized as premium expense. Signup and view all the answers

Study Notes

Current Liabilities

Long-term debts maturing currently are not classified as current liabilities if they are to be converted into common stock.
Exclude short-term obligations from current liabilities if there is intent to refinance on a long-term basis, demonstrating the ability to complete the refinancing.
Current liabilities include accounts payable measured at their gross amount or the net amount with a Purchase Discounts account.
90-day notes payable are classified as current liabilities and renewable for another 90 days should be recognized accordingly.

Sales Taxes

Sales taxes are the seller's expense and should not be included in the sales account unless calculated accordingly.
To determine sales taxes included in sales, divide total sales by one plus the sales tax rate.

Compensation and Absences

Accrual conditions for liabilities regarding compensated absences include employee rights accumulation, probable payment, and existing obligation due to prior services.
Compensated absences liabilities should be based either on current or future rates of pay when employees utilize their rights.

Contingent Liabilities

A contingent liability arises from a loss contingency and may not always be disclosed unless certain conditions are met.
If liabilities can only be reasonably estimated within a range, record the minimum amount of loss accrual.

Product Warranty Costs

Use of accrual accounting for warranty costs should be adopted when warranties form an integral part of the sale, representing accepted practice.
The expense warranty approach focuses on estimated liabilities under warranties, contrasting with the sales warranty approach.

Financial Statement Reporting

Debt callable by a creditor is reported as a current liability if it is probable that the creditor will call the debt within a year.
Losses from a lawsuit after financial statements must be recorded if estimations are reasonable and the outcome is highly probable, occurring during the accounting period.

Premium Expenses

In promotional sales offering discounts, the difference between the cost of goods sold and the cash received is recognized as premium expense, reflecting the store's gross profit margin.

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Test your understanding of current liabilities, sales tax calculations, and compensation absences in this comprehensive quiz. Explore the classification and treatment of these financial elements to enhance your accounting knowledge.

Accounting Quiz: Current Liabilities and Sales Taxes

Questions and Answers

Which of the following is a current liability?

Which of the following is true about accounts payable?

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000. These should be classified on the balance sheet of Lance Company as:

Which of the following items is a current liability?

Which of the following should not be included in the current liabilities section of the balance sheet?

Which of the following is a current liability?

Of the following items, the only one which should not be classified as a current liability is:

An account which would be classified as a current liability is:

What is the relationship between current liabilities and a company's operating cycle?

What is the relationship between present value and the concept of a liability?

What is a discount as it relates to zero-interest-bearing notes payable?

Where is debt callable by the creditor reported on the debtor's financial statements?

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

Which of the following is not a correct statement about sales taxes?

The amount of the liability for compensated absences should be based on:

Which of the following taxes does not represent a common payroll deduction?

A contingent liability:

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years. Any liability for the warranty should be reported as:

Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. What should the amount of loss accrual be?

Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be estimated, an unfavorable outcome is highly probable, and:

Use of the accrual method in accounting for product warranty costs:

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

An electronics store provides coupons for video game purchases with a discount. How would the store account for a purchase using the discount coupon?

Study Notes

Current Liabilities

Sales Taxes

Compensation and Absences

Contingent Liabilities

Product Warranty Costs

Financial Statement Reporting

Premium Expenses

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Description

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