Chapter 10: Current Liabilities PDF

Chapter 10: Current Liabilities ACCT 112 MULTIPLE CHOICE QUESTIONS 31. All of the following are reported as current liabilities except a. accounts payable. b. bonds p...

Chapter 10: Current Liabilities ACCT 112 MULTIPLE CHOICE QUESTIONS 31. All of the following are reported as current liabilities except a. accounts payable. b. bonds payable. c. notes payable. d. unearned revenues. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 32. The relationship between current liabilities and current assets is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's Non-current debt. Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA 33. Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating noncurrent liabilities. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 34. A current liability is a debt that can reasonably be expected to be paid a. within one year or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 35. Liabilities are classified on the statement of financial position as current or a. deferred. b. unearned. c. noncurrent. d. accrued. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting Page 1 of 15 Chapter 10: Current Liabilities ACCT 112 36. From a liquidity standpoint, it is more desirable for a company to have current a. assets equal current liabilities. b. liabilities exceed current assets. c. assets exceed current liabilities. d. liabilities exceed Non-current liabilities. Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA 37. The relationship of current assets to current liabilities is used in evaluating a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency. Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA 38. Which of the following is usually not an accrued liability? a. Interest payable b. Wages payable c. Taxes payable d. Notes payable Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 39. In most companies, current liabilities are paid within a. one year through the creation of other current liabilities. b. the operating cycle through the creation of other current liabilities. c. one year or the operating cycle out of current assets. d. the operating cycle out of current assets. Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 40. The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's a. maturity value. b. market value. c. face value. d. cash realizable value. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 41. With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 42. A note payable is in the form of a. a contingency that is reasonably likely to occur. b. a written promissory note. c. an oral agreement. d. a standing agreement. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting Page 2 of 15 Chapter 10: Current Liabilities ACCT 112 43. The entry to record the proceeds upon issuing an interest-bearing note is a. Interest Expense Cash Notes Payable b. Cash Notes Payable c. Notes Payable Cash d. Cash Notes Payable Interest Payable Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None AICPA FC: Measurement, IMA: Reporting 44. Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. The entry made by Hoffman Granite on January 1 to record the proceeds and issuance of the note is a. Interest Expense................................................................. 36,000 Cash................................................................................... 564,000 Notes Payable........................................................... 600,000 b. Cash................................................................................... 600,000 Notes Payable........................................................... 600,000 c. Cash................................................................................... 600,000 Interest Expense................................................................. 36,000 Notes Payable........................................................... 636,000 d. Cash................................................................................... 600,000 Interest Expense................................................................. 36,000 Notes Payable........................................................... 600,000 Interest Payable......................................................... 36,000 Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting 45. Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. What is the adjusting entry required if Hoffman Granite Company prepares financial statements on June 30? a. Interest Expense................................................................. 24,000 Interest Payable......................................................... 24,000 b. Interest Expense................................................................. 24,000 Cash.......................................................................... 24,000 c. Interest Payable.................................................................. 24,000 Cash.......................................................................... 24,000 d. Interest Payable.................................................................. 24,000 Interest Expense........................................................ 24,000 Ans: A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €600,000 .08  612 = €24,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.) Page 3 of 15 Chapter 10: Current Liabilities ACCT 112 46. Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. What entry will Hoffman Granite make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable.................................................................... 636,000 Cash.......................................................................... 636,000 b. Notes Payable.................................................................... 600,000 Interest Payable.................................................................. 36,000 Cash.......................................................................... 636,000 c. Interest Expense................................................................. 36,000 Notes Payable.................................................................... 600,000 Cash.......................................................................... 636,000 d. Interest Payable.................................................................. 24,000 Notes Payable.................................................................... 600,000 Interest Expense................................................................. 12,000 Cash.......................................................................... 636,000 Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €600,000 .08  912 = €36,000 (Prin. x Int. rate x Fraction of a yr. = Int. pay.) 47. As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased. Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 48. When an interest-bearing note matures, the balance in the Notes Payable account is a. less than the total amount repaid by the borrower. b. the difference between the maturity value of the note and the face value of the note. c. equal to the total amount repaid by the borrower. d. greater than the total amount repaid by the borrower. Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 49. On October 1, Eli's Carpet Service borrows £125,000 from First Bank on a 3-month, £125,000, 8% note. What entry must Eli's Carpet Service make on December 31 before financial statements are prepared? a. Interest Payable.................................................................. 2,500 Interest Expense........................................................ 2,500 b. Interest Expense................................................................. 10,000 Interest Payable......................................................... 10,000 c. Interest Expense................................................................. 2,500 Interest Payable......................................................... 2,500 d. Interest Expense................................................................. 2,500 Notes Payable........................................................... 2,500 Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £125,000 .08  312 = £2,500 (Prin. x Int. rate x Fraction of a yr. = Int. exp.) Page 4 of 15 Chapter 10: Current Liabilities ACCT 112 50. On October 1, Eli's Carpet Service borrows £125,000 from First Bank on a 3-month, £125,000, 8% note. The entry by Eli's Carpet Service to record payment of the note and accrued interest on January 1 is a. Notes Payable.................................................................... 127,500 Cash.......................................................................... 127,500 b. Notes Payable.................................................................... 125,000 Interest Payable.................................................................. 2,500 Cash.......................................................................... 127,500 c. Notes Payable.................................................................... 125,000 Interest Payable.................................................................. 10,000 Cash.......................................................................... 135,000 d. Notes Payable.................................................................... 125,000 Interest Expense................................................................. 2,500 Cash.......................................................................... 127,500 Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £125,000 + (£125,000 .08  312) = £127,500 [Prin. + (Prin. x Int. rate x Fraction of a yr.) = Mat. value] 51. Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid. Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 52. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is a. Notes Payable Interest Payable Cash b. Notes Payable Interest Expense Cash c. Notes Payable Cash d. Notes Payable Cash Interest Payable Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 53. Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable. Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting Page 5 of 15 Chapter 10: Current Liabilities ACCT 112 54. Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 55. Sales taxes collected by the retailer are recorded as a(n) a. revenue. b. liability. c. expense. d. asset. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 56. On September 1, Bud's Painting Service borrows €150,000 from Highlands Bank on a 4-month, €150,000, 6% note. What entry must Bud's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable.................................................................. 3,000 Interest Expense........................................................ 3,000 b. Interest Expense................................................................. 9,000 Interest Payable......................................................... 9,000 c. Interest Expense................................................................. 3,000 Interest Payable......................................................... 3,000 d. Interest Expense................................................................. 3,000 Notes Payable........................................................... 3,000 Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €150,000 .06  412 = €3,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.) 57. On September 1, Bud's Painting Service borrows €150,000 from Highlands Bank on a 4-month, €150,000, 6% note. The entry by Bud Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable.................................................................... 153,000 Cash.......................................................................... 153,000 b. Notes Payable.................................................................... 150,000 Interest Payable.................................................................. 3,000 Cash.......................................................................... 153,000 c. Notes Payable.................................................................... 150,000 Interest Payable.................................................................. 9,000 Cash.......................................................................... 159,000 d. Notes Payable.................................................................... 150,000 Interest Expense................................................................. 3,000 Cash.......................................................................... 153,000 Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (€150,000 .06  412) + €150,000 = €153,000 [(Prin. x Int. rate x Fraction of a yr.) + Prin. = Cash rec’d.] Page 6 of 15 Chapter 10: Current Liabilities ACCT 112 58. The interest charged on a HK$400,000 note payable, at the rate of 8%, on a 90-day note would be a. HK$32,000. b. HK$17,776. c. HK$8,000. d. HK$2,666. Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$400,000 .08  90360 = HK$8,000 (Prin. x Int. rate x Fraction of a yr. = Int.) 59. The interest charged on a $50,000 note payable, at the rate of 6%, on a 60-day note would be a. $3,000. b. $1,667. c. $750. d. $500. Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $50,000 .06  60360 = $500 (Prin. x Int. rate x Fraction of a yr. = Int.) 60. The interest charged on a HK$225,000 note payable, at the rate of 8%, on a 3-month note would be a. HK$18,000. b. HK$9,000. c. HK$4,500. d. HK$3,000. Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$225,000 .08  312 = HK$4,500 (Prin. x Int. rate x Fraction of a yr. = Int.) 61. The interest charged on a £100,000 note payable, at the rate of 6%, on a 2-month note would be a. £6,000. b. £3,000. c. £1,500. d. £1,000. Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £100,000 .06  212 = £1,000 (Prin. x Int. rate x Fraction of a yr. = Int.) 62. On October 1, 2020, Dakota Company issued an €800,000, 10%, nine-month interest- bearing note. If the Dakota Company is preparing financial statements at December 31, 2020, the adjusting entry for accrued interest will include a: a. credit to Notes Payable of €20,000. b. debit to Interest Expense of €20,000 c. credit to Interest Payable of €40,000. d. debit to Interest Expense of €30,000. Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €800,000 .10  312 = €20,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.) Page 7 of 15 Chapter 10: Current Liabilities ACCT 112 63. On October 1, 2019, Pennington Company issued an €800,000, 10%, nine-month interest- bearing note. Assuming interest was accrued at June 30, 2020, the entry to record the payment of the note on July 1, 2020, will include a: a. debit to Interest Expense of €20,000. b. credit to Cash of €800,000 c. debit to Interest Payable of €60,000. d. debit to Notes Payable of €860,000. Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €800,000 .10  912 = €60,000 (Prin. x Int. rate x Fraction of a yr. = Int. pay.) 64. Koppernaes Company has total proceeds (before segregation of sales taxes) from sales of $9,540. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is: a. $9,540. b. $8,968. c. $10,112. d. $9,000. Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $9,540  (1 +.06) = $9,000 [Tot. sales ÷ (1 + sales tax %) = Sales rev.] 65. Mackenzie Insurance Company collected a premium of €15,000 for a 1-year insurance policy on May 1. What amount should Mackenzie report as a current liability for Unearned Insurance Revenue at December 31? a. €0. b. €5,000. c. €10,000. d. €15,000. Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (€15,00012)  4 = €5,000 [(Prem. ÷ No. mos. in a yr.) x No. of unexpired mos. = Unearn. ins. rev.] 66. A company receives HK$396, of which HK$36 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Tax Expense for HK$36. b. credit to Sales Taxes Payable for HK$36. c. debit to Sales Revenue for HK$396. d. debit to Cash for HK$360. Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting 67. A company receives HK$696, of which HK$56 is for sales tax. The journal entry to record the sale would include a a debit to Sales Tax Expense for HK$56. b. debit to Sales Taxes Payable for HK$56. c. debit to Sales Revenue for HK$696. d. debit to Cash for HK$696. Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Page 8 of 15 Chapter 10: Current Liabilities ACCT 112 68. A retail store does not segregate sales and the amount of sales tax on sales. If the sales tax rate is 5% and the register total amounted to $262,500, what is the amount of the sales taxes owed to the taxing agency? a. $250,000 b. $262,500 c. $13,125 d. $12,500 Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $262,500 − ($262,500  (1 +.05) = $12,500 [Sales tot. – (Sales tot. ÷ (1 + Sales tax %)) = Sales tax.] 69. On January 1, 2020, Mazzeo Company, a calendar-year company, issued €1,600,000 of notes payable, of which €400,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2020, is a. Current Liabilities, €1,600,000. b. Long-term Debt, €1,600,000. c. Current Liabilities, €800,000; Non-current Debt, €800,000. d. Current Liabilities, €400,000; Non-current Debt, €1,200,000. Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €1,600,000 − €400,000 = €1,200,000 (Tot. notes pay. – Portion coming due next yr. = L-T debt portion) 70. On January 1, 2020, Key Company, a calendar-year company, issued £250,000 of notes payable, of which £62,500 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2020, is a. Current Liabilities, £250,000. b. Long-term Debt , £250,000. c. Current Liabilities, £62,500; Non-current Debt, £187,500. d. Current Liabilities, £187,500; Non-current Debt, £62,500. Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $250,000 − $62,500 = $187,500 (Tot. notes pay. – Portion coming due next yr. = L-T debt portion) 71. A cash register tape shows cash sales of HK$3,000 and sales taxes of HK$240. The journal entry to record this information is a. Cash................................................................................... 3,240 Sales Revenue.......................................................... 3,240 b. Cash................................................................................... 3,240 Sales Taxes Payable................................................. 240 Sales Revenue.......................................................... 3,000 c. Cash................................................................................... 3,000 Sales Tax Expense............................................................. 240 Sales Revenue.......................................................... 3,240 d. Cash................................................................................... 3,240 Sales Revenue.......................................................... 3,000 Sales Tax Revenue.................................................... 240 Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Page 9 of 15 Chapter 10: Current Liabilities ACCT 112 72. Maple Street Bookstore has collected $1,500 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Maple Street Bookstore make to show the April remittance? a. Sales Taxes Payable.......................................................... 1,500 Cash.......................................................................... 1,500 b. Sales Tax Expense............................................................. 1,500 Cash.......................................................................... 1,500 c. Sales Tax Expense............................................................. 1,500 Sales Taxes Payable................................................. 1,500 d. No entry required. Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting 73. Rhode Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to €81,900. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. €3,900 b. €4,095 c. €195 d. It cannot be determined. Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €81,900 − (€81,9001.05) = €3,900 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %)) = Sales taxes] 74. Sly's Salon has total receipts for the month of €9,275 including sales taxes. If the sales tax rate is 6%, what are Sly's sales for the month? a. €8,719 b. €9,832 c. €8,750 d. It cannot be determined. Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €9,275  1.06 = €8,750 [Tot. sales ÷ (1 + Sales tax %) = Sales] 75. The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 76. A retail store does not segregate sales and the amount of sales tax on sales. If the sales tax rate is 5% and the register total amounted to HK$136,500, what is the amount of the sales taxes owed to the taxing agency? a. HK$130,000 b. HK$136,500 c. HK$6,825 d. HK$6,500 Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$136,500 − (HK$136,5001.05) = HK$6,500 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %) = Sales taxes] Page 10 of 15 Chapter 10: Current Liabilities ACCT 112 77. Advances from customers are classified as a(n) a. revenue. b. expense. c. current asset. d. current liability. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 78. The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a noncurrent liability. d. not be separated from the long-term portion of debt. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 79. Sales taxes collected by a retailer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 80. Sales taxes collected by a retailer are reported as a. provisions. b. revenues. c. expenses. d. current liabilities. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 81. Mast General Store has total receipts for the month of €45,990 including sales taxes. If the sales tax rate is 5%, what are Mast's sales for the month? a. €43,691 b. €43,800 c. €48,290 d. It cannot be determined. Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic AICPA FC: Measurement, IMA: Reporting Solution: €45,990  (1 +.05) = €43,800 [Tot. sales ÷ (1 + Sales tax %) = Sales] 82. A cash register tape shows cash sales of HK$5,000 and sales taxes of HK$300. The journal entry to record this information is a. Cash................................................................................... 5,300 Sales Revenue.......................................................... 5,300 b. Cash................................................................................... 5,300 Sales Tax Revenue.................................................... 300 Sales Revenue.......................................................... 5,000 c. Cash................................................................................... 5,000 Sales Tax Expense............................................................. 300 Sales Revenue.......................................................... 5,300 d. Cash................................................................................... 5,300 Sales Revenue.......................................................... 5,000 Sales Taxes Payable................................................. 300 Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Page 11 of 15 Chapter 10: Current Liabilities ACCT 112 83. Carver's Pharmacy has collected $900 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Carver's Pharmacy make to show the March remittance? a. Sales Tax Expense............................................................. 900 Cash.......................................................................... 900 b. Sales Taxes Payable.......................................................... 900 Cash.......................................................................... 900 c. Sales Tax Expense............................................................. 900 Sales Taxes Payable................................................. 900 d. No entry required. Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting 84. Dailey Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to €48,150. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes? a. €3,371 b. €3,150 c. €4,815 d. It cannot be determined. Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €48,150 − (€48,1501.07) = €3,150 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %) = Sales taxes] 85. Any balance in an unearned revenue account is reported as a(n) a. current liability. b. long-term debt. c. revenue. d. unearned liability. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 86. Southern Foodie Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $30 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable................................................... 2,400,000 Subscription Revenue................................................ 2,400,000 b. Cash.................................................................................. 2,400,000 Unearned Subscription Revenue............................... 2,400,000 c. Subscriptions Receivable................................................... 400,000 Unearned Subscription Revenue............................... 400,000 d. Prepaid Subscriptions......................................................... 2,400,000 Cash.......................................................................... 2,400,000 Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting 87. Lulu Luxuries Company issued a four-year interest-bearing note payable for €200,000 on January 1, 2019. Each January the company is required to pay €50,000 on the note. How will this note be reported on the December 31, 2020 statement of financial position? a. Non-current debt, €200,000. b. Non-current debt, €150,000. c. Non-current debt, €100,000; Non-current debt due within one year, €50,000. d. Non-current debt, €150,000; Non-current debt due within one year, €50,000. Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €200,000 − €50,000 − €50,000 = €100,000 [(Jan. 1, 2019 note pay bal. – Jan. 1, 2020 pmt = Bal. at Dec. 31, 2020); (Dec. 31, 2020 allocation: $50,000 as current liabl., $100,000 as N-C liabl.)] Page 12 of 15 Chapter 10: Current Liabilities ACCT 112 88. Vick Vickers has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Vickers account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Prepaid Service Fees Service Revenue d. No entry is required when the engagement is concluded. Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 89. Which one of the following is shown first under current liabilities by many companies as a matter of custom? a. Accrued expenses b. Current maturities of long-term debt c. Sales taxes payable d. Notes payable Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 90. Working capital is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities. Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA 91. The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities. Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA 92. Monkee's Company has current assets of €45,000, current liabilities of €50,000, long-term assets of €90,000 and non-current liabilities of €40,000. Monkee's Company's working capital and its current ratio are: a. €45,000 and.90:1. b. €5,000 and 1.50:1. c. €5,000 and.90:1. d. (€5,000) and.90:1. Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €45,000 − €50,000 = (€5,000); €45,000  €50,000 =.90 : 1 [Curent assets – Current liabl. = Working cap.); (Current assets ÷ Current liabl. = Current ratio)] Page 13 of 15 Chapter 10: Current Liabilities ACCT 112 93. Landfall Navigation began operations in 2020 and provides a one year warranty on the products it sells. They estimate that 20,000 of the 400,000 units sold in 2020 will be returned for repairs and that these repairs will cost $8 per unit. The cost of repairing 16,000 units presented for service in 2020 was $128,000. Landfall should report a. warranty expense of $32,000 for 2020. b. warranty expense of $160,000 for 2020. c. warranty liability of $160,000 on December 31, 2020. d. no warranty obligation on December 31, 2020, since this is only a provision. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (20,000 − 16,000)  $8 = $32,000 + $128,000 = $160,000 [(Est. units – Actual units) x Cost per unit = Warranty expense + Exp. incurred] 94. Wang Company sells 1,200 units of a product that has a one-year warranty on parts. The average cost of honoring one warranty contract is HK$60. During the year 60 contracts are honored at a cost of HK$3,600. It is estimated that 120 contracts will be honored in the following year. The adjusting entry at the end of the current year will include a a. credit to Warranty Liability for HK$7,200. b. credit to Warranty Liability for HK$10,800. c. debit to Warranty Expense for HK$3,600. d. debit to Warranty Expense for HK$10,800. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: 120  HK$60 = HK$7,200 (Est. contracts x Ave. cost per contract = Warranty liabl.) 95. The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period. d. only if the repairs are expected to be made within one year. Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 97. Current maturities of long-term debt a. require an adjusting entry. b. are optionally reported on the statement of financial position. c. can be properly classified during statement of financial position preparation, with no adjusting entry required. d. are not considered to be current liabilities. Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 99. The accounting for warranty costs is based on the a. going concern principle. b. expense recognition principle. c. conservatism concept. d. historical cost principle. Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 100. Warranty expenses are reported on the income statement as a. administrative expenses. b. part of cost of goods sold. c. contra-revenues. d. selling expenses. Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA Page 14 of 15 Chapter 10: Current Liabilities ACCT 112 101. Lulzbot.com sells 6,000 units of its product for €500 each. The selling price includes a one- year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average €50 per unit. In the year of sale, warranty contracts are honored on 120 units for a total cost of €6,000. What amount should Lulzbot.com accrue on December 31 for estimated warranty costs? a. €9,000 b. €6,000 c. €3,000 d. €45,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: [(6,000 .03) − 120]  €50 = €3,000 [((Units sold x Est. defective %) – Actual defective units) x Ave. cost per unit = Warranty costs] 102. Lulzbot.com sells 6,000 units of its product for €500 each during the year ending December 31, 2020. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average €50 per unit. In the year of sale, warranty contracts are honored on 120 units for a total cost of €6,000. What amount will be reported on Lulzbot.com's statement of financial position as Warranty Liability on December 31, 2020? a. €6,000 b. €9,000 c. €3,000 d. It cannot be determined. Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: [(6,000 .03) − 120]  €50 = €3,000 [((Units sold x Est. defective %) – Actual defective units) x Ave. cost per unit = Warranty liabl.] 103. Current liabilities generally appear a. after non-current liabilities on the statement of financial position. b. in decreasing order of magnitude on the statement of financial position. c. in order of maturity on the statement of financial position. d. in increasing order of magnitude on the statement of financial position. Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: reporting, IMA: Reporting 107. A current liability is a debt that a company expects to pay within a. one year. b. the operating cycle. c. one year or the operating cycle, whichever is longer. d. one year or the operating cycle, whichever is shorter. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting 108. Which of the following statements concerning current liabilities is incorrect? a. Current liabilities include unearned revenues. b. A company that has more current liabilities than current assets may have liquidity issues. c. Current liabilities include prepaid expenses. d. A current liability is a debt that a company expects to pay within one year or the operating cycle whichever is longer. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting Page 15 of 15