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Exam 7: Accounting for Liabilities

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Question 71

Multiple Choice

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Regardless of the specific type of long-term debt,which of the following are normally required with debt transactions?

A) to repay the debt
B) to pay dividends
C) to pay interest
D) A and C are both correct

E) All of the above
F) B) and C)

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Question 72

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Classified balance sheets are useful for assessing a company's liquidity and solvency.

A) True
B) False

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Question 73

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Orzoff Electronics offers a six-month warranty on the products it sells.It estimates the warranty expense will be 3 percent of sales.One of the company managers wondered how the warranty affects the company's profit.The income statement for the most recent year was: The manager estimates that if the company did not offer the warranty,sales and cost of goods sold would both decrease by 30 percent and selling and administrative expenses would decrease by 20 percent.Based on this information,would you recommend that the company discontinue the warranty? Prepare an income statement to support your answer.

A line of credit typically has an interest rate that is fixed (constant)for the length of the agreement.

Vacation pay and sick leave are examples of contingent liabilities that a company generally should recognize on its financial statements.

Pella Company issued bonds with a face value of $3,000,000 on January 1,2012.The bonds were issued at face value and carried a 4-year term to maturity.Interest at 9% was payable in cash on December 31 of each year.Based on this information alone,the amount of interest expense shown on the 2012 income statement and the cash flow from operating activities shown on the 2012 statement of cash flows would be:

On December 27,2012,Terrell Corp.signed an agreement for a line of credit with the Barnett Bank.Under the agreement,Terrell can borrow up to $50,000 at any time during the following year.Terrell will make any borrowings or paybacks on the first day of a month and make interest payments on the last day of any month when a balance exists.The annual interest rate will be the bank's prime rate plus 1% and will be applied to the outstanding monthly balance.The following table gives the appropriate information for the first three months of 2013. Determine the amount of interest to be paid at the end of each of the three months.

What are examples of events that give rise to contingent liabilities?

In accounting for a contingent liability,if the likelihood of the obligation is probable but the amount cannot be estimated,a company must

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

If a company's operating cycle is 90 days long,the company would use a period of one year to identify current assets and current liabilities.

In 2012,the balance sheet of Worth Company incorrectly reported as long term some liabilities that should have been treated as current liabilities.How would this error affect financial statement users' analysis and assessment of the company?

On January 1,2011,Hays borrowed an additional $1,000 from Barnett Bank,bringing the total amount borrowed to $2,000.On January 1,2012,Hays paid $500 on the principal of the loan.On December 31,2012,Hays records the 2012 interest payment.The prime rate for 2012 was 5 percent.Which of the following answers shows the effect of the 2012 interest payment on the financial statements?

Using the effective interest rate method to amortize bond discount will

Nevada Company remitted to the state $1,800 in sales taxes that it had previously collected from customers.The effects on the financial statements were:

Quimby Co.sells goods to customers with a three-year warranty.During 2012,Quimby sold $600,000 of goods.On December 31,2012,Quimby made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year.Show the effects of the December 31,2012 adjustment.

On November 1,2012,Fain Corporation paid principal and interest on a 6-month,8% note payable with a face amount of $5,000.How did this transaction affect Fain's financial statements?

Which of the following shows the effect of the December 31,2012 payment? (Figures rounded to nearest dollar)

Discount on bond payable is a/an