ch9

ch9
Student: ___________________________________________________________________________
1.
When a liability is initially recorded, it is recorded at the future amount of all payments.
True
2.
A current liability is always a short-term obligation expected to be paid within one year of the balance sheet
date.
True
3.
False
Purchasing inventory on account decreases the quick ratio.

True
9.
False
Selling inventory on account increases the quick ratio.

True
8.
False
Quick assets include cash, accounts receivable, and inventory.

True
7.
False
Many strong companies intentionally create low quick ratios.

True
6.
False
The quick ratio can be manipulated by management through paying off current liabilities before the end of
the accounting period.
True
5.
False
A quick ratio that is high according to an industry average might mean the company may have excessive
inventory levels or slow moving inventory items.
True
4.
False
False
A current liability is created when a customer pays cash for services to be provided in the future.
True
False
10. Purchasing inventory on account increases the accounts payable turnover ratio.
True
False
11. The choice of inventory method has an impact on the accounts payable turnover ratio.
True
False
12. The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to
suppliers.
True
False
13. Income taxes payable is an example of an accrued liability.

True
False
14. The accounts payable turnover ratio is difficult to manipulate.

True
False
15. The accrual of interest on a short-term note payable decreases both the quick ratio and current assets.
True
False
16. The FICA (social security) tax is a matching tax with a portion paid by both the employer and the
employee.
True
False
17. A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entries have
been made during the year, the entry to record interest accrued on December 31, 2009 would include a
debit to interest expense and a credit to interest payable for $2,000.
True
False
18. An estimated liability can't be reported on the balance sheet.

True
False
19. A contingent liability is reported on the balance sheet if it is probable and can be estimated.
True
False
20. A contingent liability is disclosed in a note to the financial statements when the liability is reasonably
possible and can be estimated.
True
False
21. The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss
on the income statement.
True
False
22. A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated.
True
False
23. Working capital is a measure of short-run liquidity and is measured by dividing current assets by current
liabilities.
True
False
24. Working capital decreases when accrued wages expense is recorded at year-end.
True
False
25. Working capital decreases when a company pays taxes payable.

True
False
26. Working capital increases when a company accrues revenues at year-end.

True
False
27. Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.
True
False
28. Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash
flows.
True
False
29. For the present value of a single amount, the compounding period may only be once a year.
True
False
30. An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the
payment amount of the prior year.
True
False
31. Which of the following statements is correct?

A.
B.
C.
D.
Current liabilities are initially recorded at the amount of their principal plus interest.
Current liabilities are those liabilities due within one year.
Liquidity refers to the ability to pay all debts within one year.
Current liabilities affect both the quick ratio and working capital.
32. Which of the following is not a current liability?

A.
B.
C.
D.
A liability due within one-year for a business with a fifteen-month operating cycle.
A liability due within three months for a business with a two-month operating cycle.
A liability due within one-year for a business with a nine-month operating cycle.
A liability due within fifteen months for a business with a one-year operating cycle.
33. Which of the following is incorrect?

A. Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is
longer.
B. Liquidity is the ability of the company to meet its total obligations.
C. Current liabilities impact a company's liquidity.
D. Working capital is equal to current assets minus current liabilities.
34. How is the quick ratio calculated?

A.
B.
C.
D.
It is current assets minus current liabilities.

It is current assets divided by current liabilities.
It is quick assets divided by current liabilities.
It is current liabilities divided by current assets.
35. Which of the following accounts would not be considered when calculating the quick ratio?
A.
B.
C.
D.
Marketable securities.
Inventory.
Accounts receivable.
Accounts payable.
36. Which of the following accounts would not be considered when calculating the quick ratio?
A.
B.
C.
D.
Taxes payable
Accounts receivable
Cash
Prepaid rent
37. A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result, what
happens to the quick ratio?
A.
B.
C.
D.
It is greater than 1.9.

It is less than 1.9.
It remains equal to 1.9.
It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved.
38. A company has a quick ratio of 0.9 before paying off a large current liability with cash. As a result, what
happens to the quick ratio?
A.
B.
C.
D.

39. The following is a partial list of account balances from the books of Probst Enterprise at the end of 2010:
Based solely upon these balances, what is the quick ratio?

A.
B.
C.
D.
0.76
1.15
0.26
0.79
40. At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Which of
the following is a potential cause of the decrease in this ratio?
A.
B.
C.
D.
An increase in accounts payable and a decrease in inventories.

A decrease in inventories and an increase in long-term notes payable.
A decrease in short-term borrowings and an increase in cash.
An increase in accounts payable and a decrease in cash.
41. If the quick ratio has been increasing over the past several years, which of the following would cause the
ratio to continue to increase?
A.
B.
C.
D.
An increase in accounts payable.

An increase in inventories.
An increase in short-term borrowings.
A decrease in taxes payable.
42. Chavez Chocolates had a quick ratio of 1.74 at year-end 2009. Which of the following would cause the
ratio to decrease during 2010?
A. A decrease in both cash and marketable securities.
B. An increase in both cash and marketable securities.
C. An increase in current assets that exceeded the increase in current liabilities.
D Current assets as a percentage of total assets increased while current liabilities as a percentage of total
. liabilities and stockholders' equity decreased.
43. Which of the following statements is correct?
A. Social Security tax is employer paid only.
B. The pay period always ends in conjunction with the company's fiscal year end.
C Many fringe benefits such as sick and vacation leave benefits should be recognized when the employee
. earns the benefit not when they take the leave.
D. Unemployment taxes are paid by the employee only.
44. Which of the following describes an accrued liability?
A.
B.
C.
D.
It is an expense that has been both incurred and paid.

It is an expense that has been incurred but not yet paid.
It is an expense that has been prepaid but not yet consumed.
It is a liability where the cash flow has taken place but the revenue has yet to be earned.
45. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. Assuming no adjusting entries have been made during the year, the required adjusting
entry at the end of the accounting period, December 31, 2010, would be which of the following?
A.
B.
C.
D.
Option A
Option B
Option C
Option D
46. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. The interest and principal are both due on August 31, 2011. Assume that the
appropriate adjusting entry was made on December 31, 2010 and that no adjusting entries have been
made during 2011. The required journal entry to pay the note on August 31, 2011 would be which of the
following?
A.
B.
C.
D.
Option A
Option B
Option C
Option D
47. Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83 million
for 2011. In 2010, cost of goods sold was $258 million and accounts payable was $72 million. What was
Landseeker's accounts payable turnover ratio in 2011?
A.
B.
C.
D.
4.23
4.15
4.04
3.91
48. Which of the following transactions will decrease the accounts payable turnover ratio?
A.
B.
C.
D.
Using cash to pay an accounts payable balance.

Selling inventory on account.
Selling inventory for cash.
A customer returning inventory purchased on account.
49. Which of the following statements incorrectly describes the accounts payable turnover ratio?
A.
B.
C.
D.
A high ratio indicates that suppliers are being paid in a timely manner.
It increases when inventory is sold on account regardless of the sales price.
It can be manipulated by aggressively paying off accounts payable at year-end.
It is not affected by the choice of inventory accounting methods.
50. On September 1, 2010, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000.
Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense
that should be reported in the 2011 income statement?
A.
B.
C.
D.
$2,667
$4,000
$1,333
$3,000
51. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest-bearing
note payable with interest payable at maturity. Assuming that no adjusting entries have been made during
the year, the amount of accrued interest payable to be reported on the December 31, 2010 balance sheet is
which of the following?
A.
B.
C.
D.
$250
$300
$500
$750
52. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest-bearing
note payable with interest payable at maturity. The amount of interest expense to be reported during 2011 is
which of the following?
A.
B.
C.
D.
$1,000
$300
$500
$750
53. Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of
the following?
A. An understatement of both liabilities and stockholders' equity.
B. Net income to be overstated and assets to be understated.
C. Net income to be understated and liabilities to be understated.
D. An overstatement of net income, an understatement of liabilities, and an overstatement of stockholders'
equity.
54. The adjusting entry to record accrued interest on a note payable would not result in which of the following?
A.
B.
C.
D.
A decrease in net income.

A decrease in stockholders' equity.
An increase in liabilities.
A decrease in current assets.
55. Which of the following statements is incorrect?

A. The currently maturing portion of long-term debt must be classified as a current liability.
B. The non-current portion of long-term debt will remain reported as a long-term liability.
C When a company plans to refinance the currently maturing debt on a long-term basis, it must still report
. the currently maturing debt as a current liability.
D The currently maturing portion of long-term debt is a current liability if it is due within the longer of one. year or the operating cycle.
56. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and repayments of the
principal are payable annually in $2 million installments. Purdum Farms makes the first payment December
31, 2010 and then prepares its balance sheet. What amount will be reported as current and long-term
liabilities respectively in connection with the note at December 31, 2010?
A.
B.
C.
D.
$2 million in current liabilities and $8 million in long-term liabilities.

Zero in current liabilities and $8 million in long-term liabilities.
57. How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be
reported within the financial statements?
A.
B.
C.
D.
It must be recorded and reported as a liability.

It does not need to be recorded or reported as a liability.
It must only be disclosed as a note to the financial statements.
It must be reported as a liability, but not disclosed in a note.
58. Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance
sheet?
A.
B.
C.
D.
When the loss probability is remote and the amount can be reasonably estimated.
When the loss is probable and the amount can be reasonably estimated.
When the loss probability is reasonably possible and the amount can be reasonably estimated.
When the loss is probable regardless of whether the loss can be reasonably estimated.
59. Houston Company is involved in a lawsuit. In which of the following situations is only footnote disclosure
of the contingent liability reported within the financial statements?
A.
B.
C.
D.
When the loss is remote and the amount cannot be reasonably estimated.
When the loss is reasonably possible and the amount can be reasonably estimated.
When the loss is remote and the amount can be reasonably estimated.
60. Which of the following statements about contingent liabilities is incorrect?

A. A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably
estimated.
B. A disclosure note is required when the loss is probable and the amount can be reasonably estimated.
C. A disclosure note is required when the loss is reasonably possible and the amount can be reasonably
estimated.
D. A disclosure note is required when the loss is remote and the amount can be reasonably estimated.
61. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
Lawsuit A: The loss is probable, but the loss can't be reasonably estimated.
Lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.
Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?
A.
B.
C.
D.
A disclosure note is required for each of the three lawsuits.

A disclosure note is required only for lawsuits A & C.
A disclosure note is required only for lawsuit A.
A disclosure note is required only for lawsuits B & C.
62. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
lawsuit A: The loss is probable, but the loss can't be reasonably estimated.
lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.
lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is incorrect?
A.
B.
C.
D.
A disclosure note is required for Lawsuit A.

A disclosure note is required for lawsuit B.
A disclosure note is required for lawsuit C.
Lawsuit A is reported on the balance sheet as a liability.
63. Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin:
lawsuit A: The loss is probable and the loss can be reasonably estimated.
lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated.
lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
A.
B.
C.
D.
A disclosure note is required for lawsuit A.

A disclosure note is not required for lawsuit B.
64. Smith Corporation entered into the following transactions:

Purchased inventory on account.
Collected an account receivable.
Purchased equipment using cash.
A.
B.
C.
D.
The inventory purchase on account increased working capital.

Collecting an account receivable increases working capital.
The equipment purchase decreases working capital.
The inventory purchase on account increased the quick ratio.
65. Smith Corporation entered into the following transactions:

Which of the above transactions resulted in an increase in working capital?
A.
B.
C.
D.
The inventory purchase on account.

Collecting an account receivable.
The purchase of equipment using cash.
None of the transactions resulted in an increase in working capital.
66. SRJ Corporation entered into the following transactions:

The accrual of interest expense on a six-month note payable.
Collected cash for services to be provided within the next six months.
The accrual of revenue.
Which of the above transactions resulted in a decrease in working capital?
A.
B.
C.
D.
The accrual of interest expense.

Collecting cash for services to be provided in the future.
Both the accrual of interest expense and the accrual of revenue.

A.
B.
C.
D.

Both the accrual of revenue and the collection of cash for future services.

Which of the following statements is correct with respect to determining the net cash flow from operating
activities on a statement of cash flows?
A.
B.
C.
D.
The accrual of interest expense is added to net income.

Collecting cash for services to be provided in the future is deducted from net income.
The accrual of revenue is added to net income.
Collecting cash for services to be provided in the future doesn't require an adjustment to net income.
69. Rocket Corporation entered into the following transactions:

The accrual of wages and salaries expense.
The cash payment of a six-month note payable.
The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume
that Rocket's operating cycle is four months.
A.
B.
C.
D.
The accrual of wages and salaries expense decreases working capital.

The cash payment of the note payable decreases working capital.
The purchase of the insurance policy increases working capital.
The cash payments for the note and insurance both decrease working capital.
70. Rocket Corporation entered into the following transactions:

The cash sale of equipment for a loss.
Which of the following statements is correct with respect to determining Rocket's cash flows from
operating activities on the statement of cash flows?
A.
B.
C.
D.
The accrual of wages and salaries expense is deducted from net income.
The loss on the equipment sale is deducted from net income.
The cash payment to purchase the insurance policy is deducted from net income.
The accrual of wages and the equipment loss are both deducted from net income.
71. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000
for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing
rate is 10%. What amount of liability would be reported on the balance sheet as of the purchase date, after
the initial $10,000 payment was made?
A.
B.
C.
D.
$100,000
$38,550
$61,446
$71,446
72. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000
for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing
rate is 10%. At what amount would the land be reported at on the balance sheet?
A.
B.
C.
D.
$100,000
$38,550
$110,000
$71,446
73. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay
$5,000 every six months during the next four years; the first payment is due six months after the purchase
date. Libby's incremental borrowing rate is 8%. At what amount would the equipment be reported at on the
balance sheet as of the purchase date?
A.
B.
C.
D.
$45,000
$38,664
$33,664
$40,000
74. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay
$5,000 every six months during the next four years; the first payment is due six months after the purchase
date. Libby's incremental borrowing rate is 8%. At what amount would the liability be reported on the
balance sheet as of the purchase date, after the initial $5,000 payment was made?
A.
B.
C.
D.
$45,000
$33,664
$38,664
$40,000
75. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to
pay $3,000 every three months during the next five years; the first payment is due three months after the
purchase date. Rae's incremental borrowing rate is 12%. At what amount would the liability be reported at
on the balance sheet as of the purchase date, after the initial $10,000 payment was made?
A.
B.
C.
D.
$44,633
$50,000
$54,633
$60,000
76. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to
purchase date. Rae's incremental borrowing rate is 12%. At what amount would the vehicle be reported at
on the balance sheet as of the purchase date?
A.
B.
C.
D.
$44,633
$50,000
$54,633
$60,000
77. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date
and agreeing to pay $10,000 every three months during the next two years; the first payment is due three
months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount would the
machine be reported at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$123,255
$130,000
$80,000
$73,255
78. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date
and agreeing to pay $10,000 every three months during the next two years; the first payment is due three
months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount would the
liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 payment was
made?
A.
B.
C.
D.
$123,255
$130,000
$80,000
$73,255
79. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay
$50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment
is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would
the building be reported at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$326,500
$460,000
$287,950
$416,500
80. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay
$50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment
is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what amount would
the liability be reported at on the balance sheet as of the purchase date, after the initial $90,000 payment
was made?
A.
B.
C.
D.
$326,500
$460,000
$287,950
$416,500
81. Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the
purchase date, and agreeing to make annual payments for the next ten years; the first payment is due one
year after the purchase date. Rudy's incremental borrowing rate is 10%. How much will each of the annual
payments be?
A.
B.
C.
D.
$65,098
$86,821
$55,098
$44,000
82. Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on the
purchase date, and agreeing to make payments every three months for the next five years; the first payment
is due three months after the purchase date. Grant's incremental borrowing rate is 8%. How much will each
of the payments be?
A.
B.
C.
D.
$55,041
$61,112
$36,694
$32,400
83. Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every
three months for the next five years; the first payment is due three months after the purchase date. Husky's
incremental borrowing rate is 12%. How much will each of the payments be?
A.
B.
C.
D.
$28,000
$66,940
$37,981
$33,608
84. Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every
three months for the next two years; the first payment is due three months after the purchase date. Huck's
incremental borrowing rate is 8%. How much will each of the payments be?
A.
B.
C.
D.
$6,248
$6,689
$8,527
$5,709
85. You have been asked to compute the cash equivalent price of a machine assuming the cost (including
principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the
following table values would be used to find the cost of the machine?
A.
B.
C.
D.
Present value of a single amount.

Present value of an annuity.
Future value of a single amount.
Future value of an annuity.
86. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010. Straight
Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31,
2012. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8%
for three years was $317,520. On January 1, 2010, Straight Industries recorded the purchase with a debit
to equipment for $317,520 and a credit to notes payable for $317,520. On December 31, 2010, Straight
recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting
entries have been made during the year, how much interest expense would have accrued at December 31,
2010?
A.
B.
C.
D.
$25,402
$32,000
$29,693
$27,493
for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment
for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year
ended December 31, 2010, the book value of the liability for notes payable, including accrued interest
would be which of the following?
A.
B.
C.
D.
$342,922
$349,520
$345,013
$347,213
for three years is $317,520. On January 1, 2010, Straight recorded the purchase with a debit to equipment
for $317,520 and a credit to notes payable for $317,520. How much is the 2011 interest expense, assuming
that the December 31, 2010 adjusting entry was made?
A.
B.
C.
D.
$27,434
$27,962
$32,000
$29,693
89. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note
agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement will
require $10 million in annual payments starting on December 31, 2010 and continuing for a total of five
years (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the market
interest rate of 10% compounded annually. What is the note and interest payable liability on December 31,
2010 after the first payment was made?
A.
B.
C.
D.
$32,908,000
$31,698,800
$40,000,000
$27,908,000
90. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note
interest rate of 10% compounded annually. How much is the 2011 interest expense?
A.
B.
C.
D.
$3,169,880
$3,290,800
$4,000,000
$2,790,800
91. A company's income statement reported net income of $40,000 during 2010. The income tax return
excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the
$3,000 would not be reported for tax purposes until 2011. Which of the following statements is correct
assuming a 35% tax rate?
A.
B.
C.
D.
A $3,000 deferred tax liability is reported as of December 31, 2010.

A $3,000 deferred tax asset is reported as of December 31, 2010.
92. A company's income statement reported net income of $80,000 during 2010. The income tax return
$6,000 would not be reported for tax purposes until 2011. Which of the following statements is incorrect
A.
B.
C.
D.
Income tax expense on the income statement exceeds the tax liability to the IRS.
The $6,000 of revenue creates a deferred tax liability.
Income tax expense on the income statement is $25,900.
93. A company's 2010 income tax return reported a $75,000 tax liability. During 2010, the deferred income tax
liability account increased $9,000. Which of the following statements is correct?
A.
B.
C.
D.
Income tax expense on the 2010 income statement was $75,000.

94. If income tax expense reported on the income statement is $45,000 for 2010, and the tax return for 2010
(the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the
end of 2010 will be which of the following? Assume a 40% tax rate.
A.
B.
C.
D.
A $3,000 liability.
A $3,000 asset.
A $7,500 liability.
A $7,500 asset.
95. How much needs to be invested today if your goal is to have $100,000 five years from today? The return on
the investment is expected to be 10% and will be compounded semi-annually.
A.
B.
C.
D.
$61,390
$62,090
$66,667
$50,000
96. Which of the following correctly describes the accounting for leases?
A.
B.
C.
D.
A capital lease is not reported on the balance sheet as a liability.

A capital lease reports an asset on the balance sheet.
An operating lease reports an operating asset on the balance sheet.
An operating lease reports a liability on the balance sheet.
97. Which of the following questions is asked with respect to determining the accounting for leases?
A. Is the lease term greater than 90% of the asset's estimated life?
B. Is the present value of the payments greater than 75% of the asset's fair market value?
C. Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term
at fair market value?
D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?
98. Which of the following questions is incorrect with respect to determining the accounting for leases?
A. Is the lease term greater than 75% of the asset's expected economic life?
C. Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less than
fair market value?
D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?
99. How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the next ten
years beginning one year from today? The return on the investment is expected to be 12%.
A.
B.
C.
D.
$44,645
$36,291
$28,251
$50,000
100.How much needs to be invested today if your goal is to be able to withdraw $10,000 for each of the next
nine years beginning one year from today and $50,000 ten years from today? The return on the investment
is expected to be 6%.
A.
B.
C.
D.
$68,017
$95,937
$78,176
$132,075
101.Halbur Company reported total assets of $150,000, current assets of $60,000, and total stockholders' equity
of $60,000 and noncurrent liabilities of $65,000.
Requirements (show computations):
Compute working capital.
Compute the current ratio.
102.Moore Company has the following partial list of account balances at year-end:
103.Sharp Company borrowed $500,000 on a 6% one-year, interest bearing note dated November 1, 2010 with
interest payable at maturity. The annual accounting period ends on December 31. Assuming that adjusting
entries are only made at December 31, the company's fiscal year-end, prepare journal entries for each of the
following dates:
A. November 1, 2010.
B. December 31, 2010.
C. October 31, 2011.
104.Wolf Company borrowed $5,000 on an 8% note payable on March 1, 2010. The maturity date of the note
(and payment of all interest) is September 1, 2011. The accounting period ends December 31. Assuming no
adjusting entries are made during the year, prepare the journal entry for each of the following dates:
A. March 1, 2010.
C. September 1, 2011.
105.The following data were provided by the detailed payroll records of Mountain Corporation for the month of
March 2011:
106.The following is a partial list of account balances for Coen, Inc. as of December 31, 2010:
Required:
Prepare the liability section of Coen Inc.'s classified balance sheet for December 31, 2010.
107.The following data is available for Tommy's Toys for the years 2008 through 2011:
108.Answer the following four questions.

A. What is a contingent liability?
B. When must a contingent liability be recorded through a journal entry?
C. When should a contingent liability be disclosed in the footnotes to the financial statements?
D. When is disclosure of a contingent liability not required?
109.In a recent year, The Walt Disney Company reported the following increases or decreases in current assets
and current liabilities. Identify whether each of these increases or decreases caused cash to increase or
decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of the amount in
the column labeled cash effect.
110.Border Company purchased a truck that cost $17,000. The company signed a $17,000 note payable that
specified four equal annual payments (at each year-end), each of which includes a payment on the principal
and interest on the unpaid balance at 10% per annum.
Requirements:
A. Calculate the amount of each equal payment (round to the nearest dollar).
B. Prepare the journal entry to record the purchase of the truck.
C. Prepare the journal entry to record the first annual payment on the note (assume no interest has been
accrued during the year).
D. Will the interest paid with the first annual payment be more or less than the interest paid with the second
annual payment? Explain your answer.
111.Fold and Hold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on
January 1, 2010. Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the balance,
payable in six equal annual installments on each December 31 beginning with December 31, 2010. The
note specified a 10% interest rate on the unpaid balance.
Requirements:
A. Prepare the journal entry to record the purchase on January 1, 2010 (round to the nearest dollar).
B. Prepare the entry to record the first installment payment on December 31, 2010 (round to the nearest
dollar). Assume that no adjusting entries have been made during the year.
112.Information Company purchased an asset that cost $70,000 on January 1, 2010. Arrangements were made
with the supplier to pay $10,000 cash on January 1, 2010, and the balance was to be paid over a threeyear period, with equal annual payments of $24,553 to be made at the end of 2010, 2011, and 2012. Each
payment will include principal plus interest on the unpaid balance at 11% per year.
Requirements:
113.On January 1, 2010, Mission Company agreed to buy some equipment from Anna Company. Mission
Company signed a note, agreeing to pay Anna Company $500,000 for the equipment on December 31,
2012. The market rate of interest for this note was 10%.
Requirements:
A. Prepare the journal entry Mission Company would record on January 1, 2010 related to this purchase.
B. Prepare the December 31, 2010, adjusting entry to record interest expense related to the note for the first
year. Assume that no adjusting entries have been made during the year.
C. Prepare the December 31, 2011, adjusting entry to record interest expense related to the note for the
second year. Assume that no adjusting entries have been made during the year.
D. Prepare the entry Mission Company would record on December 31, 2012, the due date of the note to
record interest expense for the third year and payment of the note. Assume that no adjusting entries have
been made during the year.
114.Why are present value concepts and applications so important when companies purchase equipment
financed by the seller?
115.Answer each of the independent problems (show computations):
116.A company's income statement reported net income of $80,000 during 2010. The income tax return
$10,000 would not be reported for tax purposes until 2011.
Prepare the journal entry to record the 2010 income tax expense assuming a 40% tax rate.
117.A company's income statement reported income tax expense of $200,000 during 2010. The deferred tax
liability on the balance sheet increased $20,000 during 2010. How much was the company's tax liability
during 2010?
ch9 Key
1.
When a liability is initially recorded, it is recorded at the future amount of all payments.
FALSE
Liabilities are initially recorded in terms of their current cash equivalent.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #1
Topic Area: Liabilities Defined And Classified
2.
A current liability is always a short-term obligation expected to be paid within one year of the balance
sheet date.
FALSE
A current liability is due within one year or the operating cycle, whichever is longer.
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
3.
A quick ratio that is high according to an industry average might mean the company may have
excessive inventory levels or slow moving inventory items.
FALSE
Inventory is not a quick asset.
AICPA FN: Measurement
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
4.
The quick ratio can be manipulated by management through paying off current liabilities before the end
of the accounting period.
TRUE
The quick ratio can be manipulated through transactions involving quick assets and current liabilities.
Blooms: Remember
Difficulty: Easy
5.
Many strong companies intentionally create low quick ratios.

TRUE
Many strong companies use sophisticated management techniques to minimize their current asset
investment, and as a result, have low quick ratios.
Blooms: Remember
Difficulty: Easy
6.
Quick assets include cash, accounts receivable, and inventory.

FALSE
Quick assets include cash, marketable securities, and accounts receivable.
Blooms: Remember
Difficulty: Easy
7.
Selling inventory on account increases the quick ratio.

TRUE
Quick assets include cash, marketable securities, and accounts receivable. Selling inventory on account
increases accounts receivable and therefore increases the numerator of the quick ratio.
Blooms: Understand
Difficulty: Easy
8.
Purchasing inventory on account decreases the quick ratio.

FALSE
Purchasing inventory on account increases current liabilities (the denominator) and therefore decreases
the quick ratio.
Blooms: Understand
Difficulty: Easy
9.
A current liability is created when a customer pays cash for services to be provided in the future.
TRUE
Current liabilities include unearned (deferred) revenues.
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
10.
Purchasing inventory on account increases the accounts payable turnover ratio.

FALSE
Purchasing inventory on account increases accounts payable, the accounts payable turnover ratio
denominator, which therefore decreases the ratio.
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-03 Analyze the accounts payable turnover ratio.
11.
The choice of inventory method has an impact on the accounts payable turnover ratio.
FALSE
The accounts payable turnover numerator ratio is cost of goods sold, which is impacted by the choice of
inventory method.
Blooms: Understand
Difficulty: Easy
12.
The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to
suppliers.
FALSE
The accounts payable turnover ratio is cost of goods sold divided by average accounts payable.
Blooms: Understand
Difficulty: Easy
13.
Income taxes payable is an example of an accrued liability.

TRUE
An accrued liability is created by an expense that has been incurred, but has yet to be paid.
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
14.
The accounts payable turnover ratio is difficult to manipulate.

FALSE
The accounts payable turnover ratio can be manipulated by paying accounts payable at year-end and can
also be manipulated by the choice of inventory method.
Blooms: Understand
Difficulty: Easy
15.
The accrual of interest on a short-term note payable decreases both the quick ratio and current assets.
FALSE
The interest accrual increases current liabilities and therefore decreases the quick ratio. The interest
accrual does not affect current assets.
AICPA FN: Reporting, Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-04 Report notes payable and explain the time value of money.
16.
The FICA (social security) tax is a matching tax with a portion paid by both the employer and the
employee.
TRUE
The social security tax is equally shared by the employer and employee.
Blooms: Understand
Difficulty: Easy
17.
A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entries

have been made during the year, the entry to record interest accrued on December 31, 2009 would
include a debit to interest expense and a credit to interest payable for $2,000.
TRUE
Interest expense ($2,000) = Amount borrowed ($100,000) Interest rate (6%) Number of months
borrowed relative to a year (4 12)
Blooms: Apply
Difficulty: Easy
18.
An estimated liability can't be reported on the balance sheet.

FALSE
Estimated liabilities, such as warranty liabilities, are reported on the balance sheet.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
19.
A contingent liability is reported on the balance sheet if it is probable and can be estimated.
TRUE
Contingent liabilities are reported on the balance sheet when they are both probable and can be
estimated.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-05 Report contingent liabilities
20.
A contingent liability is disclosed in a note to the financial statements when the liability is reasonably
possible and can be estimated.
TRUE
Contingent liabilities are disclosed via a note when they are reasonably possible.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
21.
The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a
loss on the income statement.
TRUE
The recording of a contingent liability debits a loss account and credits accrued contingency liability.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
22.
A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated.
FALSE
Contingent liabilities are disclosed via a note when they are reasonably possible, regardless of whether
they can be estimated.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
23.
Working capital is a measure of short-run liquidity and is measured by dividing current assets by current
liabilities.
FALSE
Working capital is current assets minus current liabilities.
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.
Topic Area: Focus On Cash Flows
24.
Working capital decreases when accrued wages expense is recorded at year-end.

TRUE
Working capital is current assets minus current liabilities. Accruing wages expense at year-end
increases current liabilities and therefore decreases working capital.
Blooms: Understand
Difficulty: Easy
25.
Working capital decreases when a company pays taxes payable.

FALSE
Working capital is current assets minus current liabilities. Paying taxes payable decreases both current
assets and current liabilities, therefore working capital remains the same.
Blooms: Understand
Difficulty: Easy
26.
Working capital increases when a company accrues revenues at year-end.

TRUE
Working capital is current assets minus current liabilities. Accruing revenues increases current assets,
therefore working capital increases.
Blooms: Understand
Difficulty: Easy
27.
Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.
FALSE
Long-term liabilities are reported on the balance sheet at the present value of the future cash flows.
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-07 Report long-term liabilities.
Topic Area: Long-Term Liabilities
28.
Operating leases are reported on the balance sheet at an amount equal to the present value of the future
cash flows.
FALSE
Operating leases do not meet the criteria to be included on the balance sheet.
Blooms: Understand
Difficulty: Easy
29.
For the present value of a single amount, the compounding period may only be once a year.
FALSE
Compounding can be many times during a year when finding the present value of a single sum.
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-08 Compute present values.
Topic Area: Present Value
30.
An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the
payment amount of the prior year.
FALSE
An annuity has equal payments over equal time intervals.
Blooms: Understand
Difficulty: Easy
31.

A.
B.
C.
D.
Current liabilities are initially recorded at the amount of their principal plus interest.
Current liabilities are those liabilities due within one year.
Liquidity refers to the ability to pay all debts within one year.
Current liabilities affect both the quick ratio and working capital.
Current liabilities are the denominator in the quick ratio and are deducted from current assets when
calculating working capital.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
32.
Which of the following is not a current liability?

A.
B.
C.
D.
A liability due within one-year for a business with a fifteen-month operating cycle.
A liability due within three months for a business with a two-month operating cycle.
A liability due within one-year for a business with a nine-month operating cycle.
A liability due within fifteen months for a business with a one-year operating cycle.
A current liability is due within one-year or the operating cycle whichever is longer.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
33.
Which of the following is incorrect?

A. Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is
longer.
B. Liquidity is the ability of the company to meet its total obligations.
C. Current liabilities impact a company's liquidity.
D. Working capital is equal to current assets minus current liabilities.
Liquidity is the ability to pay current liabilities.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
34.
How is the quick ratio calculated?

A.
B.
C.
D.
It is current assets minus current liabilities.

It is current assets divided by current liabilities.
It is quick assets divided by current liabilities.
It is current liabilities divided by current assets.
The quick ratio is quick assets divided by current liabilities.

Blooms: Understand
Difficulty: Medium
35.
Which of the following accounts would not be considered when calculating the quick ratio?
A.
B.
C.
D.
Marketable securities.
Inventory.
Accounts receivable.
Accounts payable.

Blooms: Understand
Difficulty: Medium
36.
Which of the following accounts would not be considered when calculating the quick ratio?
A.
B.
C.
D.
Taxes payable
Accounts receivable
Cash
Prepaid rent

Blooms: Understand
Difficulty: Medium
37.
A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result,
what happens to the quick ratio?
A.
B.
C.
D.

The decrease in the numerator (quick assets) is less percentage wise relative to the decrease in the
denominator, therefore the ratio increases.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
38.
A company has a quick ratio of 0.9 before paying off a large current liability with cash. As a result,
what happens to the quick ratio?
A.
B.
C.
D.

The decrease in the numerator (quick assets) is greater percentage wise relative to the decrease in the
denominator, therefore the ratio decreases.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
39.
The following is a partial list of account balances from the books of Probst Enterprise at the end of
2010:
Based solely upon these balances, what is the quick ratio?

A.
B.
C.
D.
0.76
1.15
0.26
0.79
The quick ratio (0.76) equals quick assets ($6,500 + $12,300) divided by current liabilities ($20,500 +
$1,200 + $1,300 + $1,900).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
40.
At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Which
of the following is a potential cause of the decrease in this ratio?
A.
B.
C.
D.
An increase in accounts payable and a decrease in inventories.

A decrease in inventories and an increase in long-term notes payable.
A decrease in short-term borrowings and an increase in cash.
An increase in accounts payable and a decrease in cash.
The decrease in the numerator (cash) and the increase in the denominator (accounts payable), each
would cause the quick ratio to decrease.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
41.
If the quick ratio has been increasing over the past several years, which of the following would cause
the ratio to continue to increase?
A.
B.
C.
D.
An increase in accounts payable.

An increase in inventories.
An increase in short-term borrowings.
A decrease in taxes payable.
The decrease in the denominator (taxes payable), would cause the quick ratio to increase.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
42.
Chavez Chocolates had a quick ratio of 1.74 at year-end 2009. Which of the following would cause the
ratio to decrease during 2010?
A. A decrease in both cash and marketable securities.
B. An increase in both cash and marketable securities.
C. An increase in current assets that exceeded the increase in current liabilities.
D Current assets as a percentage of total assets increased while current liabilities as a percentage of total
. liabilities and stockholders' equity decreased.
The increase in the numerator (cash and marketable securities) would cause the quick ratio to increase.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard
43.

A. Social Security tax is employer paid only.
B. The pay period always ends in conjunction with the company's fiscal year end.
C Many fringe benefits such as sick and vacation leave benefits should be recognized when the
. employee earns the benefit not when they take the leave.
D. Unemployment taxes are paid by the employee only.
Expenses should be recognized when they are incurred.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
44.
Which of the following describes an accrued liability?

A.
B.
C.
D.
It is an expense that has been both incurred and paid.

It is an expense that has been incurred but not yet paid.
It is an expense that has been prepaid but not yet consumed.
It is a liability where the cash flow has taken place but the revenue has yet to be earned.
An accrued liability is recorded when an expense is incurred but not yet paid.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
45.
Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. Assuming no adjusting entries have been made during the year, the required
adjusting entry at the end of the accounting period, December 31, 2010, would be which of the
following?
A.
B.
C.
D.
Option A
Option B
Option C
Option D
Interest expense ($2,000) = Amount borrowed ($100,000) Interest rate (6%) Number of months
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
46.
Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearing note payable. The interest and principal are both due on August 31, 2011. Assume that the
appropriate adjusting entry was made on December 31, 2010 and that no adjusting entries have been
made during 2011. The required journal entry to pay the note on August 31, 2011 would be which of the
following?
A.
B.
C.
D.
Option A
Option B
Option C
Option D
December 31, 2010: Interest expense ($2,000) = Amount borrowed ($100,000) Interest rate (6%)
Number of months borrowed relative to a year (4 12).
August 31, 2011: Interest expense ($4,000) = Amount borrowed ($100,000) Interest rate (6%)
Number of months borrowed relative to a year (8 12).
The credit to cash ($106,000) equals the amount borrowed ($100,000) plus the interest for one-year
($6,000).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
47.
Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83
million for 2011. In 2010, cost of goods sold was $258 million and accounts payable was $72 million.
What was Landseeker's accounts payable turnover ratio in 2011?
A.
B.
C.
D.
4.23
4.15
4.04
3.91
Accounts payable turnover (4.15) = Cost of goods sold ($322 million) Average accounts payable ($83
million + $72 million) 2
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
48.
Which of the following transactions will decrease the accounts payable turnover ratio?
A.
B.
C.
D.
Using cash to pay an accounts payable balance.

Selling inventory on account.
Selling inventory for cash.
A customer returning inventory purchased on account.
Accounts payable turnover = Cost of goods sold Average accounts payable; a return of inventory
purchased by a customer decreases cost of goods sold.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
49.
Which of the following statements incorrectly describes the accounts payable turnover ratio?
A.
B.
C.
D.
A high ratio indicates that suppliers are being paid in a timely manner.
It increases when inventory is sold on account regardless of the sales price.
It can be manipulated by aggressively paying off accounts payable at year-end.
It is not affected by the choice of inventory accounting methods.
Accounts payable turnover = Cost of goods sold Average accounts payable; the choice of inventory
method affects cost of goods sold and therefore affects the ratio as well.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
50.
On September 1, 2010, Donna Equipment signed a one-year, 8% interest-bearing note payable for
$50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how much
interest expense that should be reported in the 2011 income statement?
A.
B.
C.
D.
$2,667
$4,000
$1,333
$3,000
2011 interest expense ($2,667) = Amount borrowed ($50,000) Interest rate (8%) Number of months
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
51.
Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearing note payable with interest payable at maturity. Assuming that no adjusting entries have been
made during the year, the amount of accrued interest payable to be reported on the December 31, 2010
balance sheet is which of the following?
A.
B.
C.
D.
$250
$300
$500
$750
December 31, 2010 interest payable ($500) = Amount borrowed ($25,000) Interest rate (8%)
Number of months borrowed during 2010 relative to a year (3 12)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
52.
Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearing note payable with interest payable at maturity. The amount of interest expense to be reported
during 2011 is which of the following?
A.
B.
C.
D.
$1,000
$300
$500
$750
2011 interest expense ($500) = Amount borrowed ($25,000) Interest rate (8%) Number of months
borrowed during 2011 relative to a year (3 12)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
53.
Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which
of the following?
A. An understatement of both liabilities and stockholders' equity.
B. Net income to be overstated and assets to be understated.
C. Net income to be understated and liabilities to be understated.
D. An overstatement of net income, an understatement of liabilities, and an overstatement of
stockholders' equity.
The adjusting entry increases interest payable and interest expense, which decreases both net income
and stockholders' equity. Failure to make the entry causes both net income and stockholders' equity to
be overstated, and liabilities to be understated.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
54.
The adjusting entry to record accrued interest on a note payable would not result in which of the
following?
A.
B.
C.
D.
A decrease in net income.

A decrease in stockholders' equity.
An increase in liabilities.
A decrease in current assets.
The adjusting entry increases interest payable and interest expense, which decreases both net income
and stockholders' equity. An accrual doesn't involve a cash flow and doesn't affect current assets.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
55.

A. The currently maturing portion of long-term debt must be classified as a current liability.
B. The non-current portion of long-term debt will remain reported as a long-term liability.
C When a company plans to refinance the currently maturing debt on a long-term basis, it must still
. report the currently maturing debt as a current liability.
D.The currently maturing portion of long-term debt is a current liability if it is due within the longer of
one-year or the operating cycle.
If the currently maturing debt is to be refinanced on a long-term basis, it is excluded from current
liabilities.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
56.
Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and repayments of
the principal are payable annually in $2 million installments. Purdum Farms makes the first payment
December 31, 2010 and then prepares its balance sheet. What amount will be reported as current and
long-term liabilities respectively in connection with the note at December 31, 2010?
A.
B.
C.
D.

The $2,000,000 payment due on December 31, 2011 is a current liability and the three later (2012,
2013, and 2014) payments ($2,000,000 3) are reported as long-term liabilities.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
57.
How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be
reported within the financial statements?
A.
B.
C.
D.
It must be recorded and reported as a liability.

It does not need to be recorded or reported as a liability.
It must only be disclosed as a note to the financial statements.
It must be reported as a liability, but not disclosed in a note.
A contingent liability that is reasonably possible but cannot reasonably be estimated is disclosed in the
notes to the financial statements.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
58.
Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the
balance sheet?
A.
B.
C.
D.
When the loss probability is remote and the amount can be reasonably estimated.
When the loss probability is reasonably possible and the amount can be reasonably estimated.
When the loss is probable regardless of whether the loss can be reasonably estimated.
A contingent liability that is probable and can be reasonably estimated is reported as a liability on the
balance sheet.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
59.
Houston Company is involved in a lawsuit. In which of the following situations is only footnote
disclosure of the contingent liability reported within the financial statements?
A.
B.
C.
D.
When the loss is remote and the amount cannot be reasonably estimated.
When the loss is reasonably possible and the amount can be reasonably estimated.
When the loss is remote and the amount can be reasonably estimated.
A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the
notes to the financial statements.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
60.
Which of the following statements about contingent liabilities is incorrect?

A. A disclosure note is required when the loss is reasonably possible and the amount cannot be
reasonably estimated.
B. A disclosure note is required when the loss is probable and the amount can be reasonably estimated.
C. A disclosure note is required when the loss is reasonably possible and the amount can be reasonably
estimated.
D. A disclosure note is required when the loss is remote and the amount can be reasonably estimated.
A disclosure note is not required when the loss probability is remote.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
61.
Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
Lawsuit A: The loss is probable, but the loss can't be reasonably estimated.
Lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.
Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
A.
B.
C.
D.
A disclosure note is required for each of the three lawsuits.

A disclosure note is required only for lawsuits A & C.
A disclosure note is required only for lawsuit A.
A disclosure note is required only for lawsuits B & C.
Contingent losses which are either probable or reasonably possible must be disclosed.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
62.
Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:
lawsuit A: The loss is probable, but the loss can't be reasonably estimated.
lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.
lawsuit C: The loss is reasonably possible and can be reasonably estimated.
A.
B.
C.
D.
A disclosure note is required for Lawsuit A.

A disclosure note is required for lawsuit B.
To be reported as a liability on the balance sheet, contingent losses must be both probable and
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
63.
Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin:
lawsuit A: The loss is probable and the loss can be reasonably estimated.
lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated.
lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
A.
B.
C.
D.
A disclosure note is required for lawsuit A.

A disclosure note is not required for lawsuit B.
A contingent liability that is reasonably possible is disclosed in the notes to the financial statements
regardless of whether it can be reasonably estimated.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
64.
Smith Corporation entered into the following transactions:

A.
B.
C.
D.
The inventory purchase on account increased working capital.

Collecting an account receivable increases working capital.
The equipment purchase decreases working capital.
The inventory purchase on account increased the quick ratio.
The cash payment decreases current assets and therefore working capital. The equipment is a long-term
asset.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
65.
Smith Corporation entered into the following transactions:

A.
B.
C.
D.
The inventory purchase on account.

Collecting an account receivable.
The purchase of equipment using cash.
None of the transactions resulted in an increase in working capital.
The inventory purchase and the collection of the receivable didn't affect working capital. The cash
payment decreases current assets and therefore working capital.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
66.
SRJ Corporation entered into the following transactions:

Which of the above transactions resulted in a decrease in working capital?
A.
B.
C.
D.

Both the accrual of interest expense and the accrual of revenue.
The interest accrual increases interest payable, which increases current liabilities and decreases working
capital.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
67.

A.
B.
C.
D.

Both the accrual of revenue and the collection of cash for future services.
The accrual of revenue increases accounts receivable which increases current assets and increases
working capital.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
68.

Which of the following statements is correct with respect to determining the net cash flow from
operating activities on a statement of cash flows?
A.
B.
C.
D.
The accrual of interest expense is added to net income.

Collecting cash for services to be provided in the future is deducted from net income.
The accrual of revenue is added to net income.
Collecting cash for services to be provided in the future doesn't require an adjustment to net income.
Accruing interest expense reduces income but doesn't involve a cash flow; therefore it is added to net
income.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
69.
Rocket Corporation entered into the following transactions:

The cash payment of a six-month note payable.
Which of the following statements is correct with respect to determining Rocket's working capital?
Assume that Rocket's operating cycle is four months.
A.
B.
C.
D.
The accrual of wages and salaries expense decreases working capital.

The cash payment of the note payable decreases working capital.
The purchase of the insurance policy increases working capital.
The cash payments for the note and insurance both decrease working capital.
Accruing wages and salaries expense increases current liabilities which decreases working capital.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
70.
Rocket Corporation entered into the following transactions:

The cash sale of equipment for a loss.
Which of the following statements is correct with respect to determining Rocket's cash flows from
operating activities on the statement of cash flows?
A.
B.
C.
D.
The accrual of wages and salaries expense is deducted from net income.
The loss on the equipment sale is deducted from net income.
The cash payment to purchase the insurance policy is deducted from net income.
The accrual of wages and the equipment loss are both deducted from net income.
The purchase of the insurance policy creates a deferral which is not reported in net income. Therefore
the cash payment is deducted from net income.
AICPA FN: Reporting
Blooms: Apply
Difficulty: Medium
71.
Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay
$10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental
borrowing rate is 10%. What amount of liability would be reported on the balance sheet as of the
purchase date, after the initial $10,000 payment was made?
A.
B.
C.
D.
$100,000
$38,550
$61,446
$71,446
The liability ($61,446) is equal to the present value of the ten remaining payments [$10,000 6.1446
(present value of a 10% ordinary annuity)]
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
Topic Area: Present Value Concepts
72.
Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay
$10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental
borrowing rate is 10%. At what amount would the land be reported at on the balance sheet?
A.
B.
C.
D.
$100,000
$38,550
$110,000
$71,446
The land cost ($71,446) is equal to the present value of the ten remaining payments [$10,000 6.1446
(present value of a 10%, 10-period ordinary annuity)] plus the initial payment ($10,000).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
73.
Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to
pay $5,000 every six months during the next four years; the first payment is due six months after the
purchase date. Libby's incremental borrowing rate is 8%. At what amount would the equipment be
reported at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$45,000
$38,664
$33,664
$40,000
The equipment cost ($38,664) is equal to the present value of the eight remaining payments [$5,000
6.7327 (present value of a 4%, 8-period ordinary annuity)] plus the initial payment ($5,000).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
Learning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.
74.
Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to
pay $5,000 every six months during the next four years; the first payment is due six months after
the purchase date. Libby's incremental borrowing rate is 8%. At what amount would the liability be
reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made?
A.
B.
C.
D.
$45,000
$33,664
$38,664
$40,000
The liability ($33,664) is equal to the present value of the eight remaining payments [$5,000 6.7327
(present value of a 4%, 8-period ordinary annuity)].
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
75.
Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to
purchase date. Rae's incremental borrowing rate is 12%. At what amount would the liability be reported
at on the balance sheet as of the purchase date, after the initial $10,000 payment was made?
A.
B.
C.
D.
$44,633
$50,000
$54,633
$60,000
The liability ($44,633) is equal to the present value of the twenty remaining payments [$3,000
14.8775 (present value of a 3%, 20-period ordinary annuity)].
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
76.
Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to
purchase date. Rae's incremental borrowing rate is 12%. At what amount would the vehicle be reported
at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$44,633
$50,000
$54,633
$60,000
The vehicle ($54,633) is equal to the present value of the twenty remaining payments [$3,000 14.8775
(present value of a 3%, 20-period ordinary annuity)] plus the initial $10,000 payment.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
77.
Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date
and agreeing to pay $10,000 every three months during the next two years; the first payment is due
three months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount would
the machine be reported at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$123,255
$130,000
$80,000
$73,255
The machine ($123,255) is equal to the present value of the eight remaining payments [$10,000
7.3255 (present value of a 2%, 8-period ordinary annuity)] plus the initial $50,000 payment.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
78.
Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date
and agreeing to pay $10,000 every three months during the next two years; the first payment is due
three months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount would
the liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 payment
was made?
A.
B.
C.
D.
$123,255
$130,000
$80,000
$73,255
The liability ($73,255) is equal to the present value of the eight remaining payments [$10,000 7.3255
(present value of a 2%, 8-period ordinary annuity)].
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
79.
Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to
pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first
payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what
amount would the building be reported at on the balance sheet as of the purchase date?
A.
B.
C.
D.
$326,500
$460,000
$287,950
$416,500
The building ($416,500) is equal to the present value of the nine annual payments [$50,000 5.7590
(present value of a 10%, 9-period ordinary annuity)], plus the present value of the payment due ten
years from today [$100,000 .3855 (present value of a 10-period, 10% single sum)], plus the initial
$90,000 cash payment.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
80.
Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to
pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first
payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At what
amount would the liability be reported at on the balance sheet as of the purchase date, after the initial
$90,000 payment was made?
A.
B.
C.
D.
$326,500
$460,000
$287,950
$416,500
The liability ($326,500) is equal to the present value of the nine annual payments [$50,000 5.7590
(present value of a 10%, 9-period ordinary annuity)] plus the present value of the payment due ten years
from today [$100,000 .3855 (present value of a 10-period, 10% single sum)].
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
81.
Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the
purchase date, and agreeing to make annual payments for the next ten years; the first payment is due
one year after the purchase date. Rudy's incremental borrowing rate is 10%. How much will each of the
annual payments be?
A.
B.
C.
D.
$65,098
$86,821
$55,098
$44,000
The annual payment ($69,457) is equal to the amount financed ($400,000) divided by the present value
of a 10%, 10-period ordinary annuity factor (6.1446).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
82.
Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on
the purchase date, and agreeing to make payments every three months for the next five years; the first
payment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. How
much will each of the payments be?
A.
B.
C.
D.
$55,041
$61,112
$36,694
$32,400
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
83.
Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments
every three months for the next five years; the first payment is due three months after the purchase date.
Husky's incremental borrowing rate is 12%. How much will each of the payments be?
A.
B.
C.
D.
$28,000
$66,940
$37,981
$33,608
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
84.
Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every
three months for the next two years; the first payment is due three months after the purchase date.
Huck's incremental borrowing rate is 8%. How much will each of the payments be?
A.
B.
C.
D.
$6,248
$6,689
$8,527
$5,709
The annual payment ($6,689) is equal to the amount financed ($49,000) divided by the present value of
a 2%, 8-period ordinary annuity factor (7.3255).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
85.
You have been asked to compute the cash equivalent price of a machine assuming the cost (including
principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the
following table values would be used to find the cost of the machine?
A.
B.
C.
D.
Present value of a single amount.

Present value of an annuity.
Future value of a single amount.
Future value of an annuity.
The two unequal payments must be discounted using the present value of a single amount table values.
The payments are unequal, so therefore the annuity table values can't be used.
Blooms: Understand
Difficulty: Medium
86.
Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010.
Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on
December 31, 2012. The market rate of interest for similar notes was 8%. The present value of
$400,000 discounted at 8% for three years was $317,520. On January 1, 2010, Straight Industries
recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for
$317,520. On December 31, 2010, Straight recorded an adjusting entry to account for interest that had
accrued on the note. Assuming no adjusting entries have been made during the year, how much interest
expense would have accrued at December 31, 2010?
A.
B.
C.
D.
$25,402
$32,000
$29,693
$27,493
2010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) Interest
rate (8%)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
87.
$400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the
purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight
Industries' balance sheet for the year ended December 31, 2010, the book value of the liability for notes
payable, including accrued interest would be which of the following?
A.
B.
C.
D.
$342,922
$349,520
$345,013
$347,213
rate (8%)
December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010
accrued interest expense ($25,402)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
88.
$400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded the
purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much
is the 2011 interest expense, assuming that the December 31, 2010 adjusting entry was made?
A.
B.
C.
D.
$27,434
$27,962
$32,000
$29,693
rate (8%).
December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010
accrued interest expense ($25,402).
rate (8%).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
89.
Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note
interest rate of 10% compounded annually. What is the note and interest payable liability on December
31, 2010 after the first payment was made?
A.
B.
C.
D.
$32,908,000
$31,698,800
$40,000,000
$27,908,000
December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + Interest expense
($37,908,000 10%) - First annual payment ($10,000,000).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
90.
Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note
interest rate of 10% compounded annually. How much is the 2011 interest expense?
A.
B.
C.
D.
$3,169,880
$3,290,800
$4,000,000
$2,790,800
December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + 2010 interest
expense ($37,908,000 10%) - First annual payment ($10,000,000).
2011 interest expense ($3,169,880) = January 1, 2011 book value ($31,698,800) 10%
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
91.
A company's income statement reported net income of $40,000 during 2010. The income tax return
$3,000 would not be reported for tax purposes until 2011. Which of the following statements is correct
A.
B.
C.
D.

The $3,000 future taxable amount creates a $1,050 deferred tax liability ($3,000 .35).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
Learning Objective: 09-07 Report long-term liabilities. (S)
92.
excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws
the $6,000 would not be reported for tax purposes until 2011. Which of the following statements is
incorrect assuming a 35% tax rate?
A.
B.
C.
D.
Income tax expense on the income statement exceeds the tax liability to the IRS.
The $6,000 of revenue creates a deferred tax liability.
Income tax expense on the income statement is $25,900.
The income tax expense ($80,000 .35) on the income statement is $28,000.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
93.
A company's 2010 income tax return reported a $75,000 tax liability. During 2010, the deferred income
tax liability account increased $9,000. Which of the following statements is correct?
A.
B.
C.
D.

The income tax expense ($84,000) on the 2010 income statement equals the IRS tax liability ($75,000)
plus the increase in the deferred income tax liability ($9,000).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
94.
If income tax expense reported on the income statement is $45,000 for 2010, and the tax return for 2010
(the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at
the end of 2010 will be which of the following? Assume a 40% tax rate.
A.
B.
C.
D.
A $3,000 liability.
A $3,000 asset.
A $7,500 liability.
A $7,500 asset.
The income tax expense ($45,000) on the 2010 income statement equals the IRS tax liability ($42,000)
plus the deferred income tax liability ($3,000) that was created during 2010.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
95.
How much needs to be invested today if your goal is to have $100,000 five years from today? The return
on the investment is expected to be 10% and will be compounded semi-annually.
A.
B.
C.
D.
$61,390
$62,090
$66,667
$50,000
The investment ($61,391) is equal to the future amount ($100,000) multiplied by the present value of
$1, 10-period, 5% table value (.6139).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
Topic Area: Compute Present Value
96.
Which of the following correctly describes the accounting for leases?

A.
B.
C.
D.
A capital lease is not reported on the balance sheet as a liability.

A capital lease reports an asset on the balance sheet.
An operating lease reports an operating asset on the balance sheet.
An operating lease reports a liability on the balance sheet.
A capital lease reports both an asset and a liability on the balance sheet.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
97.
Which of the following questions is asked with respect to determining the accounting for leases?
A. Is the lease term greater than 90% of the asset's estimated life?
C. Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease
term at fair market value?
D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the
lessee?
One of the four questions is with respect to the transfer of title.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
98.
Which of the following questions is incorrect with respect to determining the accounting for leases?
A. Is the lease term greater than 75% of the asset's expected economic life?
C. Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price less
than fair market value?
D. Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the
lessee?
The present value test uses 90% rather than 75%.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
99.
How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the next
ten years beginning one year from today? The return on the investment is expected to be 12%.
A.
B.
C.
D.
$44,645
$36,291
$28,251
$50,000
The investment ($28,251) is equal to the payments ($5,000) multiplied by the present value of a $1
annuity, 10-period, 12% table value (5.6502).
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
Topic Area: Computing Present Value
100.
How much needs to be invested today if your goal is to be able to withdraw $10,000 for each of the
next nine years beginning one year from today and $50,000 ten years from today? The return on the
investment is expected to be 6%.
A.
B.
C.
D.
$68,017
$95,937
$78,176
$132,075
The investment ($95,937) = [$10,000 multiplied by the present value of a $1 annuity, 9-period, 6% table
value (6.8017)] plus [$50,000 multiplied by the present value of a $1, 10-period, 6% table value (.5584)
]
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
101.
Halbur Company reported total assets of $150,000, current assets of $60,000, and total stockholders'
equity of $60,000 and noncurrent liabilities of $65,000.
Requirements (show computations):
Compute working capital.
Compute the current ratio.
Answers will vary
Feedback: 1. Total assets ($150,000) = Current liabilities ($X) + Noncurrent liabilities ($65,000) +
Stockholders' equity ($60,000)
Current liabilities = $25,000
Working Capital ($35,000) = Current assets ($60,000) - Current liabilities ($25,000)
2. Current Ratio (2.4) = Current assets ($60,000) Current liabilities ($25,000)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
102.
Moore Company has the following partial list of account balances at year-end:
Answers will vary
Feedback
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
103.
Sharp Company borrowed $500,000 on a 6% one-year, interest bearing note dated November 1, 2010
with interest payable at maturity. The annual accounting period ends on December 31. Assuming that
adjusting entries are only made at December 31, the company's fiscal year-end, prepare journal entries
for each of the following dates:
A. November 1, 2010.
C. October 31, 2011.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
104.
Wolf Company borrowed $5,000 on an 8% note payable on March 1, 2010. The maturity date of the
note (and payment of all interest) is September 1, 2011. The accounting period ends December 31.
Assuming no adjusting entries are made during the year, prepare the journal entry for each of the
following dates:
A. March 1, 2010.
C. September 1, 2011.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
105.
The following data were provided by the detailed payroll records of Mountain Corporation for the
month of March 2011:
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
106.
The following is a partial list of account balances for Coen, Inc. as of December 31, 2010:
Required:
Prepare the liability section of Coen Inc.'s classified balance sheet for December 31, 2010.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
107.
The following data is available for Tommy's Toys for the years 2008 through 2011:
Answers will vary

Feedback: A1. 2011 accounts payable turnover (7.34) = Cost of goods sold ($7,506) Average
inventory [$1,023 + $1,022] 2)
A2. 2010 accounts payable turnover (8.05) = Cost of goods sold ($7,646) Average inventory [$1,022 +
$878] 2)
A3. 2009 accounts payable turnover (8.79) = Cost of goods sold ($7,799/ [$878 + $896] 2).
B1. 49.7 days = 365 days accounts payable turnover (7.34)
C. Over the three year period, Tommy's Toys accounts payable turnover ratio has decreased and the
number of days it takes them to pay vendors has increased from 42 in 2009 to 50 days in 2011. If their
suppliers offer them credit terms of 30 days, then Tommy's Toys is taking almost twice that time to pay
them. It would be a good idea to compare the accounts payable turnover ratio of competitors with that
of Tommy's Toys to see if they are in line with other similar companies.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
108.
Answer the following four questions.

A. What is a contingent liability?
B. When must a contingent liability be recorded through a journal entry?
C. When should a contingent liability be disclosed in the footnotes to the financial statements?
D. When is disclosure of a contingent liability not required?
Answers will vary
Feedback: A. Contingent liabilities are potential liabilities that arise due to past events.
B. Whether or not the potential liability becomes a recorded liability depends upon the outcome of
future events. For example, a company is currently involved in a product liability lawsuit. The company
may have to pay the plaintiff if the settlement is unfavorable. A contingent liability must be recorded if
it is probable that the future events will occur and the amount can be reasonably estimated.
C. Contingent liabilities should be disclosed in the footnotes to the financial statements if it is probable
that future events will occur but the amount cannot be reasonably estimated. Footnote disclosure
should also occur if it is reasonably possible that the future events will occur whether or not it can be
D. Disclosure is not required if the probability of future events occurring is remote.
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
109.
In a recent year, The Walt Disney Company reported the following increases or decreases in current
assets and current liabilities. Identify whether each of these increases or decreases caused cash to
increase or decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of
the amount in the column labeled cash effect.
Answers will vary

Feedback: (1) +$366, (2) +$103, (3) -$848, (4) -$179, (5) +$292, (6) +$69.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
110.
Border Company purchased a truck that cost $17,000. The company signed a $17,000 note payable
that specified four equal annual payments (at each year-end), each of which includes a payment on the
principal and interest on the unpaid balance at 10% per annum.
Requirements:
A. Calculate the amount of each equal payment (round to the nearest dollar).
B. Prepare the journal entry to record the purchase of the truck.
C. Prepare the journal entry to record the first annual payment on the note (assume no interest has been
accrued during the year).
D. Will the interest paid with the first annual payment be more or less than the interest paid with the
second annual payment? Explain your answer.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Hard
111.
Fold and Hold Corporation purchased a machine which had a current cash equivalent cost of $38,971
on January 1, 2010. Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the
balance, payable in six equal annual installments on each December 31 beginning with December 31,
2010. The note specified a 10% interest rate on the unpaid balance.
Requirements:
A. Prepare the journal entry to record the purchase on January 1, 2010 (round to the nearest dollar).
B. Prepare the entry to record the first installment payment on December 31, 2010 (round to the nearest
dollar). Assume that no adjusting entries have been made during the year.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
112.
Information Company purchased an asset that cost $70,000 on January 1, 2010. Arrangements were
made with the supplier to pay $10,000 cash on January 1, 2010, and the balance was to be paid over
a three-year period, with equal annual payments of $24,553 to be made at the end of 2010, 2011, and
2012. Each payment will include principal plus interest on the unpaid balance at 11% per year.
Requirements:
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
113.
On January 1, 2010, Mission Company agreed to buy some equipment from Anna Company. Mission
Company signed a note, agreeing to pay Anna Company $500,000 for the equipment on December 31,
2012. The market rate of interest for this note was 10%.
Requirements:
A. Prepare the journal entry Mission Company would record on January 1, 2010 related to this
purchase.
B. Prepare the December 31, 2010, adjusting entry to record interest expense related to the note for the
first year. Assume that no adjusting entries have been made during the year.
C. Prepare the December 31, 2011, adjusting entry to record interest expense related to the note for the
second year. Assume that no adjusting entries have been made during the year.
D. Prepare the entry Mission Company would record on December 31, 2012, the due date of the note to
record interest expense for the third year and payment of the note. Assume that no adjusting entries have
been made during the year.
Answers will vary
Feedback:
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
114.
Why are present value concepts and applications so important when companies purchase equipment
financed by the seller?
Answers will vary
Feedback: Present value concepts are very important in seller-financed purchases because the debt
payments will include principal and interest payments. The equipment should be capitalized at an
amount equal to the present value of the purchase. That is, the asset account should reflect what the
equipment could have been acquired for in terms of "today's dollars". The additional amounts for
interest are charges for borrowing. These interest amounts should be reported as interest expense as
incurred.
Blooms: Understand
Difficulty: Medium
115.
Answer each of the independent problems (show computations):
Answers will vary
Feedback:
Blooms: Understand
Difficulty: Hard
116.
$10,000 would not be reported for tax purposes until 2011.
Prepare the journal entry to record the 2010 income tax expense assuming a 40% tax rate.
Answers will vary
Feedback: Income tax expense 32,000 ($28,000 + $4,000)
Income taxes payable 28,000 ($80,000 - $10,000) .40
Deferred tax liability 4,000 ($10,000 .40)
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
117.
A company's income statement reported income tax expense of $200,000 during 2010. The deferred tax
liability on the balance sheet increased $20,000 during 2010. How much was the company's tax liability
during 2010?
Answers will vary
Feedback: Income tax expense 200,000
Income taxes payable 180,000
Deferred tax liability 20,000
AACSB: Analytic
Blooms: Apply
Difficulty: Medium
ch9 Summary
Category
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Blooms: Remember
Blooms: Understand
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Libby - Chapter 09
Topic Area: Compute Present Value
# of Questions
57
60
117
48
33
36
68
8
41
30
3
84
14
18
9
12
12
15
14
6
16
7
117
1
2
13
62
22
2
15

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Purchasing inventory on account decreases the quick ratio.

Selling inventory on account increases the quick ratio.

Quick assets include cash, accounts receivable, and inventory.

Many strong companies intentionally create low quick ratios.

13. Income taxes payable is an example of an accrued liability.

14. The accounts payable turnover ratio is difficult to manipulate.

18. An estimated liability can't be reported on the balance sheet.

25. Working capital decreases when a company pays taxes payable.

26. Working capital increases when a company accrues revenues at year-end.

31. Which of the following statements is correct?

32. Which of the following is not a current liability?

33. Which of the following is incorrect?

34. How is the quick ratio calculated?

It is current assets minus current liabilities.

It is greater than 1.9.

It is greater than 0.9.

Based solely upon these balances, what is the quick ratio?

An increase in accounts payable and a decrease in inventories.

An increase in accounts payable.

It is an expense that has been both incurred and paid.

Using cash to pay an accounts payable balance.

A decrease in net income.

55. Which of the following statements is incorrect?

$2 million in current liabilities and $8 million in long-term liabilities.

It must be recorded and reported as a liability.

60. Which of the following statements about contingent liabilities is incorrect?

A disclosure note is required for each of the three lawsuits.

A disclosure note is required for Lawsuit A.

A disclosure note is required for lawsuit A.

64. Smith Corporation entered into the following transactions:

The inventory purchase on account increased working capital.

65. Smith Corporation entered into the following transactions:

The inventory purchase on account.

66. SRJ Corporation entered into the following transactions:

The accrual of interest expense.

67. SRJ Corporation entered into the following transactions:

The accrual of interest expense.

68. SRJ Corporation entered into the following transactions:

The accrual of interest expense is added to net income.

69. Rocket Corporation entered into the following transactions:

The accrual of wages and salaries expense decreases working capital.

70. Rocket Corporation entered into the following transactions:

Present value of a single amount.

A $3,000 deferred tax liability is reported as of December 31, 2010.

Income tax expense on the 2010 income statement was $75,000.

A capital lease is not reported on the balance sheet as a liability.

108.Answer the following four questions.

115.Answer each of the independent problems (show computations):

Many strong companies intentionally create low quick ratios.

Quick assets include cash, accounts receivable, and inventory.

Selling inventory on account increases the quick ratio.

Purchasing inventory on account decreases the quick ratio.

Purchasing inventory on account increases the accounts payable turnover ratio.

Income taxes payable is an example of an accrued liability.

The accounts payable turnover ratio is difficult to manipulate.

A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entries

An estimated liability can't be reported on the balance sheet.

Working capital decreases when accrued wages expense is recorded at year-end.

Working capital decreases when a company pays taxes payable.

Working capital increases when a company accrues revenues at year-end.

Which of the following statements is correct?