Ch9 Liabilities – Test Bank | Canadian Edition – 2nd

View Product website:

https://selldocx.com/docx/ch9-liabilities-test-bank-canadian-edition-2nd-1132

Financial Accounting, 2nd Cdn. Ed. (Waybright)

Chapter 9 Current Liabilities and Long-Term Debt

9.1 Distinguish among known, estimated, and contingent liabilities and provisions

1) The majority of a company's liabilities are estimated liabilities.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

2) Notes payable would be an example of a known liability.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Critical Thinking

Blooms: Comprehension

3) A contingent liability arises because of a past event, but is dependent upon a future event.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

4) Which of the following would be considered an estimated liability?

A) Notes payable

B) Warranties payable

C) Pending litigation

D) Sales tax payable

E) Federal tax payable

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

5) Which of the following would be considered a known liability?

A) Federal income tax payable

B) Warranties payable

C) Pending litigation

D) Notes payable

E) Both federal income tax payable and notes payable

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

6) Which of the following would be considered a contingent liability?

A) Federal income tax payable

B) Warranties payable

C) Pending litigation

D) Contingency payable

E) Sales tax payable

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

7) An obligation resulting from an event that has not yet occurred is an example of a(n) ________.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

8) A liability, such as warranties payable, would be an example of a(n) ________.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Critical Thinking

Blooms: Comprehension

9) Accounts payable would be an example of a(n) ________.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

10) Accrued liabilities, such as interest payable, would be considered a(n) ________.

Diff: 1

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Comprehension

11) Does the amount of an obligation need to be known in order for a liability to exist? Explain.

Diff: 2

LO: 9-1 Distinguish among known, estimated, and contingent liabilities and provisions

Skill: Concept

Blooms: Comprehension

9.2 Account for current liabilities of a known amount

1) The largest portion of accounts payable for most merchandising companies is related to the purchase of inventory on account.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

2) Unearned revenues are typically classified as current liabilities.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

3) When a business borrows money, usually from a financial institution, the signing of a promissory note is generally not required.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

4) Payroll liabilities include employee deductions withheld by employers, such as Canada Pension Plan (CPP), employment insurance (EI), and employee income tax.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

5) Payroll deductions are considered to be liabilities for an employer.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

6) A company receives a note payable for $5,000 at 10% for 50 days. How much interest (to the nearest cent) will the customer owe?

A) $10.00

B) $500.00

C) $68.49

D) $1.36

E) $86.49

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

7) If a liability is not properly classified, it will have an effect on the:

A) quick ratio.

B) current ratio.

C) both the quick and current ratio.

D) total dollars of liabilities.

E) total dollars of current assets.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Analytic Skills

Blooms: Analysis

8) Which one of these is not an accrued liability?

A) Interest

B) Salaries and wages

C) Unearned revenue

D) Payroll

E) Income taxes

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Analytic Skills

Blooms: Analysis

9) Identify the general ledger accounts that would be debited and credited when making a payment on account, such as a telephone bill.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Analytic Skills

Blooms: Comprehension

10) What is a major difference between an account payable and a note payable?

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

11) A company receives a note payable for $3,500 at 9% for 45 days. How much interest (to the nearest cent) will the customer owe using a 365-day year?

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

12) A past transaction or event must have occurred for a ________ to exist.

Diff: 1

LO: 9-2 Account for current liabilities of a known amount

Skill: Concept

Blooms: Knowledge

13) Journalize the following transactions for Alpha Company:

May 13 Purchased inventory on account from ABC for $4,000.

May 22 Purchased inventory on account from Sara for $2,500.

May 27 Paid off the account from ABC.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

14) Journalize the following transactions:

A magazine sells a 12-month magazine subscription for $60 per year. The company has collected cash for 1,200 subscriptions. Record the journal entries for:

Receipt of cash for the subscriptions (Feb 13).

Amount of revenue earned after mailing out 7 months of magazines (Sept 13).

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

15) Record the following sales transactions for Meranda Company:

Oct 3 Had sales of $3,500 in cash and $6,000 in credit. The harmonized

sales tax (HST) is 13%.

Oct 8 Had cash sales of $12,000 plus 13% HST.

Nov 15 Paid HST for Oct. 3 and Oct. 8 sales.

Nov 30 Received customer payment for Oct. 3 outstanding accounts receivable.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

16) On May 1, 2015, Omega Bank agreed to lend Acme Enterprises $100,000. To that effect, Acme signed a $100,000, 10-month, 12% note. Acme Enterprises has a year-end of December 31. Record journal entries:

a) on the date the note was signed.

b) at year end

c) on March 1, 2016, when the note was repaid in full.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

17) On June 15, 2015, Ima Debtor agreed to lend Kai Fong Enterprises $250,000. To that effect, Kai Fong signed a $250,000, 8-month, 10% note. Kai Fong Enterprises has a year-end of November 30. Record journal entries:

a) on the date the note was signed.

b) at year end.

c) on February 16, 2016, when the note was repaid in full.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

18) Cafe 26 Restaurant's gross payroll for April is $46,600. The company deducted $2,162 for CPP, $853 for EI, and $9,011 for income taxes from the employees' cheques. Employees are paid monthly at the end of each month.

Required:

a) Prepare a journal entry for Cafe 26 on April 30 to record the payment of the April payroll to employees.

b) Prepare a journal entry on April 30 to accrue Cafe 26's employer payroll costs. Assume that Cafe 26

assessed workers' compensation premiums at a rate of 1% per month and accrues for vacation pay at

a rate of 4% per month.

Diff: 2

LO: 9-2 Account for current liabilities of a known amount

Skill: Application

Blooms: Application

9.3 Account for liabilities of an uncertain amount

1) Even liabilities of unknown amounts are required to be placed on the balance sheet.

Diff: 1

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Concept

Blooms: Knowledge

2) A warranty is an example of a(n):

A) contingent liability.

B) known liability.

C) estimated liability.

D) settled liability.

E) unknown obligation.

Diff: 2

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Critical Thinking

Blooms: Comprehension

3) Are estimated liabilities generally classified as current or long-term liabilities?

Diff: 1

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Critical Thinking

Blooms: Comprehension

4) Casey Company purchases inventory for $100,000, paying $40,000 in cash and signing a 3-year, 5% note payable for the remainder. The company has $90,000 in sales in the month of March and estimates that 5% of product sales will require warranty repairs. Journalize the transactions below and identify which accounts are known liabilities and which are estimated liabilities.

Inventory purchase.

Sales for March (25% on account, 75% in cash).

Estimated dollars for warranties.

*Known Liability: Note Payable; Estimated Liability: Warranty Payable

Diff: 3

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Application

Blooms: Application

9.4 Account for contingent liabilities and provisions

1) Contingent liabilities represent actual and not potential obligations.

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

2) There are times when contingent liabilities are never recorded.

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

3) Disclosure is required under IFRS when the likelihood of the outcome (measurement) is:

A) virtually certain: > 95%.

B) possible: 5% - 70%.

C) remote: < 5%.

D) probable: 50% - 95%.

E) likely: 70% - 95%.

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

4) Which of the following would be considered a contingent liability?

A) Sales tax obligation

B) Mortgage obligation

C) Accounts payable obligation

D) Pending legal action

E) Notes obligation

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Comprehension

5) When the likelihood of an obligation occurring is possible, what is the accounting treatment under ASPE?

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

6) Under IFRS, a ________ is a liability that has an uncertain timing or an uncertain amount.

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

7) When the likelihood of an obligation occurring is virtually certain, what is the accounting treatment under IFRS and ASPE?

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Concept

Blooms: Knowledge

8) Tim Hortons is a public company and prepares its financial statements in accordance to IFRS. The company has a contingent liability estimated at $232,000. The likelihood of the obligation occurring is remote or < 5%. What is the appropriate accounting treatment for the company?

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Critical Thinking

Blooms: Evaluation

9) Amanda Industries, a private company, has a contingent liability estimated at $125,000 with a 70%-95% likelihood of the obligation occurring. What is the appropriate accounting treatment for the company?

Diff: 1

LO: 9-4 Account for contingent liabilities and provisions

Skill: Critical Thinking

Blooms: Evaluation

9.5 Account for long-term debt

1) Bonds payable are supported by a promissory note.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

2) A mortgage is a special type of long-term note payable.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

3) A mortgage is a secured note because the building serves as collateral.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

4) Bonds are interest-bearing notes that are issued to a single lender.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

5) Zero coupon bonds are bonds issued at a price higher than the face value that do not pay interest during the bond's duration.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

6) If a $6,000, 10%, 10-year bond, was issued on October 1, 2015 and the market rate was 8% at the time, then how much will the bond sell for at the time of issue if interest is compounded annually?

A) $5,600

B) $5,454

C) $6,000

D) $$6,600

E) $6,805

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

7) A $10,000 bond issue with a stated rate of interest of 7%, when the market rate of interest is 8%, means that the bond will be sold for:

A) $10,000.

B) $10,800.

C) less than $10,000.

D) the maturity value.

E) $10,700.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Critical Thinking

Blooms: Comprehension

8) A $25,000 bond issue with a stated interest rate of 5%, when the market rate of interest is 4%, means that the bond will sell for:

A) $25,000.

B) more than $25,000.

C) $24,000

D) $24,750.

E) $23,750.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Critical Thinking

Blooms: Comprehension

9) If a $6,000, 10% , 10-year bond, was issued on October 1, 2015 and the market rate was 8% at the time, then how much interest will be accrued on December 31, 2015 if interest is compounded annually?

A) $125

B) $136

C) $150

D) $600

E) $750

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

10) Bonds that are backed by collateral are ________ bonds.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

11) Debenture bonds are the same as ________ bonds.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

12) Bonds that can be exchanged for stock are called ________ bonds.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

13) The amount that a borrower must pay back to the bondholders on the maturity date is the ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

14) The rate of interest that is printed on the bond is called the ________ rate of interest.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

15) The rate of interest at which investors are willing to pay for similar bonds of equal risk at the current time is the ________ rate of interest.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

16) If a bond's stated rate of interest is equal to the market rate of interest, the bond will be issued at ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

17) If the market rate of interest is greater than the bond's stated rate of interest, the bond will be issued at ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

18) If the bond's stated rate of interest is greater than the market rate of interest, the bond will be issued at ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Concept

Blooms: Knowledge

19) A $300,000 issue of bonds that sold at 105 will cost ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

20) A $150,000 issue of bonds that sold at 93.8 will cost ________.

Diff: 1

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

21) Using the information below, write the journal entry to record the payment of the bond on the maturity date.

A $250,000 issue of bonds that sold for $275,000 matures on June 25, 2020.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

22) Using the information below, write the journal entry to record the payment of the bond on the maturity date.

A $400,000 issue of bonds that sold for $363,000 matures on August 1, 2015.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

23) Journalize the following bond issues:

June 12 Issued $500,000 at 98.

June 18 Issued $250,000 at 106.

June 22 Issued $350,000 at 100.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

24) Mathura Company issued a 10-year, 5%, $158,870 mortgage payable to finance the purchase of a building for a factory at January 31, 2014. The terms provide for semi-annual instalment payments on July 31 and January 31.

a) Record the issue of the mortgage payable on January 31, 2014.

b) Record the first two instalment payments on July 31, 2015, and January 31, 2015, assuming the payment is a blended principal and interest payment of $10,191.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

25) Casey Industries issues a $250,000, 6%, 20-year mortgage note to finance the purchase of a new building on Jan. 1, 2014. Payments of $9,375 are made on June 30 and December 31 of each year. Prepare the amortization schedule for the first 5 payments of this mortgage note. (Round amounts to nearest dollar when necessary.)

Diff: 3

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

26) Journalize the following bond issues:

Dec. 17 $175,000 at 100.

Dec. 28 $425,000 at 96.7.

Dec. 30 $710,000 at 103.4.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

27) Journalize the following annual bond interest payments on June 30:

June 30 a. 10-year 8% $250,000 bond that sold for $300,000.

June 30 b. 5-year 5% $300,000 bond that sold for $280,000.

June 30 c. 5-year 10% $500,000 bond that sold for $500,000.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

28) Journalize the following annual bond interest payments on Apr 30:

April 30 a. 10-year 7% $250,000 bond that sold for $250,000.

April 30 b. 8-year 9% $450,000 bond that sold for $426,000.

April 30 c. 15-year 10% $500,000 bond that sold for $410,000.

Diff: 2

LO: 9-5 Account for long-term debt

Skill: Application

Blooms: Application

29) Farrell Corporation is issuing $300,000 worth of 5-year bonds on January 1, 2015, bearing an interest rate of 4%, payable annually. Assume that the current, market rate of interest is 5%.

a) Will the bond be issued at a discount or at a premium?

b) Calculate the value of the resulting discount or premium.

c) Record the journal entry to reflect the sale of bonds and the appropriate discount premium.

d) Assuming interest is paid annually on December 31, write the journal entry to record payment of interest.

b) $12,852

c) and d)

Diff: 3

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Application

Blooms: Application

30) Farrell Corporation is issuing $400,000 worth of 6-year bonds on January 1, 2015, bearing an interest rate of 8%, payable annually. Assume that the current, market rate of interest is 6%.

a) Will the bond be issued at a discount or at a premium?

b) Calculate the value of the resulting discount or premium.

c) Record the journal entry to reflect the sale of bonds and the appropriate discount premium.

d) Assuming interest is paid annually on December 31, write the journal entry to record payment of interest.

b) $39,664

c) and d)

Diff: 3

LO: 9-3 Account for liabilities of an uncertain amount.

Skill: Application

Blooms: Application

9.6 Report liabilities on the statement of financial position

1) Having liabilities classified incorrectly will have a big impact on the company's current and quick ratios.

Diff: 1

LO: 9-6 Report liabilities on the statement of financial position

Skill: Analytic Skills

Blooms: Analysis

2) Mackey Company has a 5-year mortgage for $100,000. In the first year of the mortgage, Mackey will report this liability as a:

A) current liability of $100,000.

B) long-term liability of $100,000.

C) current liability of $80,000 and a long-term liability of $20,000.

D) current liability of $20,000 and a long-term liability of $80,000.

E) current liability of $80,000 and a long-term debt of $20,000.

Diff: 2

LO: 9-6 Report liabilities on the statement of financial position

Skill: Analytic Skills

Blooms: Comprehension

3) According to the text, which current liability is generally listed first?

Diff: 1

LO: 9-6 Report liabilities on the statement of financial position

Skill: Concept

Blooms: Knowledge

4) What effect will there be on reported liabilities and net income if a company does NOT accrue warranty expense?

Diff: 1

LO: 9-6 Report liabilities on the statement of financial position

Skill: Critical Thinking

Blooms: Comprehension

9.7 Compute the debt ratio

1) The percentage of total assets of a company that it would take to pay off all of the company's liabilities is called the debt ratio.

Diff: 1

LO: 9-7 Compute the debt ratio

Skill: Concept

Blooms: Knowledge

2) Both the formulas for current ratio and debt ratio use current liabilities in the computation.

Diff: 1

LO: 9-7 Compute the debt ratio

Skill: Concept

Blooms: Knowledge

3) Bill Company had total assets of $560,000; total liabilities of $250,000; and total shareholders' equity of $310,000. Bill Company's debt ratio is:

A) 55.4%.

B) 80.6%.

C) 44.6%.

D) 28.7%.

E) 66.4%.

Diff: 1

LO: 9-7 Compute the debt ratio

Skill: Application

Blooms: Application

4) Jewell Company has current assets of $56,000; long-term assets of $135,000; current liabilities of $44,000; and long-term liabilities of $90,000. Jewell Company's debt ratio is:

A) 127.3%.

B) 78.6%.

C) 239.3%.

D) 70.2%.

E) 20.7%.

Diff: 2

LO: 9-7 Compute the debt ratio

Skill: Application

Blooms: Application

5) Amanda Industries had total assets of $600,000; total liabilities of $175,000; and total shareholders' equity of $425,000. Calculate Amanda Industries' debt ratio.

Diff: 1

LO: 9-7 Compute the debt ratio

Skill: Analytic Skills

Blooms: Application

6) Is a high debt ratio a bad thing? Explain.

Diff: 2

LO: 9-7 Compute the debt ratio

Skill: Critical Thinking

Blooms: Evaluation

7) John Company has current assets of $59,000; long term assets of $129,000; current liabilities of $31,000, and long-term liabilities of $83,000. Calculate John Company's current ratio and debt ratio.

Diff: 2

LO: 9-7 Compute the debt ratio

Skill: Application

Blooms: Application

8) Based on the information below for December 31st, calculate the current ratio and debit ratio for each year. Indicate whether or not the company's ability to meet its current obligations and pay its overall debt has improved or deteriorated.

Diff: 2

LO: 9-7 Compute the debt ratio

Skill: Analytic Skills

Blooms: Application

9.8 Cumulative Questions

1) Atrium Co. sells appliances and offers a one-year warranty to repair or replace any products that are defective. While the company is certain that some products will be defective, they are not certain of the number or expected cost. Identify the category of the liability and explain how it should be classified on the balance sheet.

Diff: 2

LO: 9-3, 9-6

Skill: Critical Thinking

Blooms: Comprehension

2) ABC Co. has a $100,000 pending lawsuit which is expected to be settled in the next 18 months. The company's lawyers are virtually certain that ABC Co. will lose the case. Identify the category of the liability and explain how it should be classified.

Diff: 2

LO: 9.4, 9.6

Skill: Critical Thinking

Blooms: Comprehension

3) Journalize the following transactions for Southport Company:

April 1, 2014 Bought an $11,000 machine on a 12-month, 9% note. The machine has

a useful life of five years and is depreciated on a straight-line basis.

Dec 31, 2014 Recorded accrued interest on the note and depreciation on the machine.

April 1, 2015 Paid note from April 1, 2013.

Diff: 2

LO: 8-11 (Appendix 8A) Account for leases

Skill: Application

Blooms: Application

4) On June 1, Taylor Merchandising purchases inventory for $150,000. The company has sales of $300,000 during the month of June and estimates that 7% of its product sales will require warranty repairs. All purchases and sales are subject to 13% HST. Journalize the following:

Inventory purchase (100% on account).

Sales for June (60% on account, 40% in cash).

Estimated dollars for warranties.

Paid cash claims of $11,300 out of cash on July 31.

Diff: 3

LO: 9-2, 9-3

Skill: Application

Blooms: Application

5) Identify whether each of the below items would be a known, estimated, or contingent liability:

a) A manufacturing company offers a one-year warranty on their product.

b) A lawsuit has been filed against Voltage Energy, a private company, for polluting a creek in a local community. The amount is estimated at $125,000 and there is a 70%-95% likelihood of the obligation occurring.

c) ABC Co. purchased machinery for $125,000 paying $75,000 in cash and borrowing the remainder by signing a one-year 5% note payable.

b) Contingent

c) Known

Diff: 2

LO: 9-1, 9-2, 9-3, 9-4

Skill: Concept

Blooms: Comprehension

6) Identify whether the following December 31, 2014 information from Jessica Industries would be a known, estimated, or contingent liability:

a) Salary expense for the last payroll for the year was$52,000. It is expected to be paid out January 2, 2015.

b) The company's December taxable sales were $253,000. Jessica Industries is required to collect HST (13%) on its sales, which is to be remitted January 5, 2015.

c) Jessica Industries extends its customers a one-year warranty on its product sold. The rate of warranty repairs is 2% of sales.

d) The company had waste which polluted a nearby lake. The clean-up is likely to cost $325,000-$350,000.

e) Issued $100,000, 8%, five-year bond when the market rate of interest was 10%.

a) Known

b) Known

c) Estimated

d) Contingent

e) Known

Diff: 2

LO: 9-1, 9-2, 9-3, 9-4

Skill: Concept

Blooms: Comprehension

7) On June 30, Hanson Company purchased a building for $600,000. The company made a cash payment of $200,000 and signed a twenty-year, 8% mortgage note payable for the remainder. Payments of $40,000 are made every June 30 and December 31. The building has a useful life of twenty years and a residual value of $100,000. Hanson uses the straight-line depreciation method and prepares its adjusting entries on an annual basis. Journalize the June 30 transactions, any annual adjusting entries for December 31, and the mortgage payment on December 31.

Calculation:

$600,000 - $100,000)/20 × 6/12 = $12,500

Diff: 3

LO: 8-10 Calculate the assets turnover ratio and return on assets

Skill: Application

Blooms: Application

8) Identify the classification error in the following partial Balance Sheet for Aztec Industries and determine the impact on the current ratio.

Aztec Industries

Balance Sheet-Partial

Diff: 3

LO: 5-7, 9-7

Skill: Analytic Skills

Blooms: Analysis

9) Classify the following accounts, which were included in Aztec Company's December 31st trial balance, and calculate the company's current ratio and debt ratio. The note is payable in equal installments of principal over each of the four years.

Current Ratio: 2.7:1; Total Assets: $68,700;

Total Liabilities: $40,100; Debt Ratio: 58.4%

Diff: 2

LO: 5-7, 9-7

Skill: Application

Blooms: Application