Chapter 13 Concepts Acct 342

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

False

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

False

Magazine subscriptions and airline ticket sales both result in unearned revenues.

True

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

True

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

True

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis and demonstrates the ability to consummate the refinancing.

True

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

True

A company must accrue a liability for sick pay that accumulates but does not vest.

False

Companies report the amount of social security taxes withheld from employees as well as the companies’ matching portion as current liabilities until they are remitted.

True

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

False

Liabilities are

obligations arising from past transactions and payable in assets or services in the future.

Which of the following is a current liability?

None of these answers are correct

Which of the following is true about accounts payable?

1. Accounts payable are also called trade accounts payable.

Among the short-term obligations of Larsen Company as of December 31, the
balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as

current liabilities.

Which of the following is not true about the discount on short-term notes payable?

The Discount on Notes Payable account should be reported as an asset on the balance sheet.

Which of the following may be a current liability?

Withheld Income Taxes. Deposits Received from Customers. Deferred Revenue. (All of these answers are correct.)

Which of the following items is a current liability?

Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

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

Trade notes payable. Short-term zero-interest-bearing notes payable. The discount on short-term notes payable. ( All of these answers are correct.)

Which of the following is a current liability?

A cash dividend payable to preferred stockholders

Stock dividends distributable should be classified on the

balance sheet as an item of stockholders’ equity.

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

short-term obligations expected to be refinanced.

An account which would be classified as a current liability is

none of these answers are correct.

Which of the following is a characteristic of a current liability but not a long-term
liability?

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Which of the following is not considered a part of the definition of a liability?

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Why is the liability section of the balance sheet of primary importance to bankers?

To assist in understanding the entity’s liquidity.

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

Liquidation of current liabilities is reasonably expected within the company’s operating cycle (or one year if less).

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

Present values are used to measure certain liabilities.

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

The discount represents the cost of borrowing.

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

Current liability.

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

Subsequently refinance the obligation on a long-term basis.

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1,
2014 for the purchase of $250,000 of inventory. The face value of the note was $253,900. Assuming Greeson used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2014 will include a

debit to Interest Expense for $2,600.

The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,
discounted at the bank at 7% is

7.53%.

On September 1, Horton purchased $13,300 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was made on September 18. Assuming Horton uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase?

$13,167

Slack Inc. borrowed $320,000 on April 1. The note requires interest at 12% and
principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?

$28,800.

Craig borrowed $350,000 on October 1, 2014 and is required to pay $360,000 on
March 1, 2015. What amount is the note payable recorded at on October 1, 2014 and how much interest is recognized from October 1 to December 31, 2014?

$350,000 and $6,000.

Parton owes $2 million that is due on February 28. The company borrows
$1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long-term in the December 31 financial statements.

$1,600,000.

Venible newspapers sold 6,000 of annual subscriptions at $125 each on June 1.
How much unearned revenue will exist as of December 31?

$312,500

Bargain Surplus made cash sales during the month of October of $225,000. The
sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?

Credit Sales Taxes Payable for $13,500.

On February 10, 2014, after issuance of its financial statements for 2013, Higgins
Company entered into a financing agreement with Cleveland Bank, allowing Higgins Company to borrow up to $6,000,000 at any time through 2016. Amounts borrowed under the agreement bear interest at 2% above the bank’s prime interest rate and mature two years from the date of loan. Higgins Company presently has $2,250,000 of notes payable with Star National Bank maturing March 15, 2014. The company intends to borrow $3,750,000 under the agreement with Cleveland and liquidate the notes payable to Star National Bank. The agreement with Cleveland also requires Higgins to maintain a working capital level of $9,000,000 and prohibits the payment of dividends on common stock without prior approval by Cleveland Bank. From the above information only, the total short-term debt of Higgins Company as of the December 31, 2013 balance sheet date is

$2,250,000.

On December 31, 2014, Isle Co. has $4,000,000 of short-term notes payable due on
February 14, 2015. On January 10, 2013, Isle arranged a line of credit with Beach Bank which allows Isle to borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2, 2015, Isle borrowed $2,400,000 from Beach Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2014 balance sheet which is issued on March 5, 2015 is

$1,600,000.