Current Liabilities Overview

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Questions and Answers

Which type of payable is represented by a written promise to pay a specific amount?

  • Taxes payable
  • Notes payable (correct)
  • Wages payable
  • Interest payable

Current liabilities are typically paid within which of the following time frames?

  • Two years
  • One month
  • One year or the operating cycle out of current assets (correct)
  • Five years

When a company issues an interest-bearing note, the credited amount in the Notes Payable account corresponds to which value?

  • Market value
  • Cash realizable value
  • Face value (correct)
  • Maturity value

Upon issuing an interest-bearing note, the amount of cash received is usually what in relation to the note's face value?

<p>Equal to the face value (B)</p> Signup and view all the answers

What is the correct journal entry to record the proceeds from issuing an interest-bearing note?

<p>Cash debited, Notes Payable credited (D)</p> Signup and view all the answers

A note payable is defined as which of the following?

<p>A written promissory note (D)</p> Signup and view all the answers

Which financial entry represents the issuance of a €600,000 note with an 8% interest rate?

<p>Cash and Notes Payable (D)</p> Signup and view all the answers

In the context of current liabilities, which would not typically be included?

<p>Long-term bonds (A)</p> Signup and view all the answers

What is the total cash payment required by Hoffman Granite Company to pay off the note and interest at maturity?

<p>€636,000 (C)</p> Signup and view all the answers

How is the interest expense calculated for the note signed by Hoffman Granite Company?

<p>Principal x Interest rate x rac{9}{12} (A)</p> Signup and view all the answers

Which journal entry correctly reflects Hoffman Granite Company's payment at maturity when interest has been accrued?

<p>Interest Payable €36,000; Notes Payable €600,000; Cash €636,000 (B)</p> Signup and view all the answers

What is the correct adjusting journal entry Bud's Painting Service must make on December 31 for interest accrued?

<p>Interest Expense €3,000; Interest Payable €3,000 (B)</p> Signup and view all the answers

When interest is recorded on an interest-bearing note, which accounts are affected?

<p>Interest Expense increases; Interest Payable increases (D)</p> Signup and view all the answers

How much total cash will Bud's Painting Service pay on January 1 to settle the note and the accrued interest?

<p>€153,000 (D)</p> Signup and view all the answers

What amount is recorded as Interest Payable when the note matures?

<p>€36,000 (C)</p> Signup and view all the answers

What effect does making the payment at maturity have on the Notes Payable account?

<p>The balance decreases to zero (C)</p> Signup and view all the answers

What is the formula used to calculate interest charged on a note payable?

<p>Principal x Interest rate x Time (C)</p> Signup and view all the answers

What is the total interest expense incurred from the €150,000 note over 4 months at a 6% interest rate?

<p>€3,000 (C)</p> Signup and view all the answers

Which account is affected by the entry to record the payment of the note and accrued interest?

<p>Cash (A)</p> Signup and view all the answers

What will happen if Hoffman Granite Company does not accrue interest for the note?

<p>Interest Expense will be understated (B)</p> Signup and view all the answers

How much interest would be charged on a HK$400,000 note payable at 8% over 90 days?

<p>HK$8,000 (D)</p> Signup and view all the answers

After paying off the note and interest, what is the effect on the Cash account?

<p>Cash decreases by the total payment amount (C)</p> Signup and view all the answers

What amount is recorded for 'Interest Payable' in the adjusting entry on December 31?

<p>€3,000 (C)</p> Signup and view all the answers

Calculate the interest charged on a $50,000 note payable at a 6% rate for 60 days.

<p>$500 (C)</p> Signup and view all the answers

What is the entry to record payment of both the note and interest on January 1?

<p>Notes Payable €150,000; Interest Payable €3,000; Cash €153,000 (D)</p> Signup and view all the answers

What would be the interest charged on a HK$225,000 note at 8% for a period of 3 months?

<p>HK$4,500 (C)</p> Signup and view all the answers

What does the term 'accrued interest' refer to in this context?

<p>Interest that has not been paid but is owed (C)</p> Signup and view all the answers

How much interest would a £100,000 note payable at 6% accumulate over 2 months?

<p>£1,000 (B)</p> Signup and view all the answers

Which option correctly reflects the total liabilities of Bud's Painting Service after recording the interest expense and before payment?

<p>€150,000 plus interest payable of €3,000 (A)</p> Signup and view all the answers

What is the total cash received from a €150,000 note after calculating interest for four months at a 6% rate?

<p>€153,000 (D)</p> Signup and view all the answers

If Dakota Company issued an €800,000 note at 10% for nine months, what is the adjusting entry for accrued interest at December 31, 2020?

<p>Credit to Interest Payable of €40,000 (B)</p> Signup and view all the answers

What factor is used in the interest calculation for a 90-day note payable?

<p>360 days (A)</p> Signup and view all the answers

What amount will be reported on Lulzbot.com's statement of financial position as Warranty Liability on December 31, 2020?

<p>€3,000 (C)</p> Signup and view all the answers

Which of the following is included in current liabilities?

<p>Unearned revenues (A)</p> Signup and view all the answers

How are current liabilities generally presented on the statement of financial position?

<p>After non-current liabilities (B)</p> Signup and view all the answers

What is the definition of a current liability?

<p>A debt expected to pay within one year or the operating cycle, whichever is longer (B)</p> Signup and view all the answers

Which of the following statements regarding current liabilities is correct?

<p>Current liabilities can lead to liquidity issues (D)</p> Signup and view all the answers

What are typical costs associated with warranty claims expected to be?

<p>The average cost per unit multiplied by total defects (B)</p> Signup and view all the answers

What factor is not considered when determining warranty liability?

<p>Current liabilities (D)</p> Signup and view all the answers

If a company’s warranty expenses exceed the estimated liability, how should this be treated?

<p>As an operating expense (B)</p> Signup and view all the answers

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Study Notes

Current Liabilities

  • Current liabilities are obligations that a company expects to pay within one year or the operating cycle, whichever is longer.
  • Current liabilities are typically paid out of current assets.
  • Current liabilities include:
    • Accounts payable
    • Salaries payable
    • Taxes payable
    • Interest payable
    • Notes payable
    • Unearned revenues
  • Notes payable are written promissory notes.
  • Issuing an interest-bearing note involves crediting Notes Payable for the face value of the note.
  • When interest is accrued on an interest-bearing note, Interest Expense is increased and Interest Payable is increased.
  • The balance in the Notes Payable account is decreased by the amount of the principal at maturity.
  • Warranty liabilities arise when a company provides a warranty on its products.
  • The estimated warranty cost is calculated by multiplying the number of units sold by the estimated percentage of defective units and then multiplying that result by the average cost per unit.
  • Warranty liabilities are typically reported on the statement of financial position as a current liability.
  • Current liabilities are typically listed after non-current liabilities on the statement of financial position.
  • Current liabilities are typically presented in order of maturity.

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