Chapter 13- Current Liabilities & Contingencies

Liabilities are

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

Which of the following is a current liability

A. A long term debt maturing currently, which is to be paid with cash in a sinking fund B. A long term debt maturing currently, which is to be retired with proceeds from a new debt issue C. A long term debt maturing currently, which is to be converted into common stock D. None of these Ans: D none of these

Which of the following is true about accounts payable

Accounts payable should not be reported at their present value.

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

Current liabilities

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

The discount of 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 revenues are all current liabilities

Which of the following items is a current liability?

A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in 3 months B. Bonds due in 3 years C. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months D. Bonds to be refunded when due in 8 months, there being no doubt about the marketability of the refunding issue. Ans: C

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

All of these are included: 1. Trade notes payable 2. Short term zero-interest-bearing notes payable 3. The discount on short term notes payable

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 stockholder’s 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: 1. Dividends payable in the company’s stock 2. Accounts payable: Debit balances 3. Losses expected to be incurred within the next 12 months in excess of the company’s insurance coverage

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 operation 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

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short term debt?

Management indicated that they are going to refinance the obligation

A company has not declared a dividend on its cumulative preferred stock for the past 3 years. What is the required accounting treatment or disclosure in this situation?

Disclose the amount of the dividends in arrears

Which of the following situations may give rise to unearned revenue?

Selling magazine subscriptions

Which of the following statements is correct?

None of these: 1. A company may exclude a short term obligation from current liabilities if the firm intends to refinance the obligation on a long term basis 2. A company may exclude a short term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. 3. A company may exclude a short term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long term debt before the balance sheet is issued.

The ability to consummate the refinancing of a short term obligation may be demonstrated by

All of these: 1. Actually refinancing the obligation by issuing a long term obligation after the date of the balance sheet but efore it is issued. 2. Entering into a financing agreement that permits the enterprise to refinance the debt on a long term basis 3. Actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.

Which of the following statements is false?

FICA taxes withheld from employees’ payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority

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

Sales taxes are an expense of the seller

If a short term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following info except

The number of financing institutions that refused to refinance the debt, if any

In accounting for compensated absences, the difference between vested rights and accumulated rights is

Vested rights are not contingent upon an employee’s future service

An employee’s net pay is determined by gross earnings minus amounts for income tax withholdings and the employee’s

Portion of FICA taxes and any voluntary deductions

Which of these is not included in an employer’s payroll tax expense?

Federal income taxes

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

All of these conditions for the accrual: 1. The obligation relates to the rights that vest or accumulate 2. Payment of the compensation is probable 3. the obligation is attributable to employee services already performed

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

be accrued during the period when earned.

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

1. The current rates of pay in effect when employees earn the right to compensated absences 2. The future rates of pay expected to be paid when employees use compensated time

What are compensated absences?

Paid time off

Which gives rise to the requirement to accrue a liability for the cost of compensated absences?

All of these: 1. Payment is probable 2. Employee rights vest or accumulate 3. Amount can be reasonably estimated

Under what conditions is an employer required to accrue a liability for sick pay?

Sick pay benefits vest

Which of the following taxes does not represents payroll deduction a company may incur?

State unemployment taxes

What is a contingency?

An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated