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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 10: Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 32

Short Problems 35

Short Essay Questions 51

Data Analytic Questions 57

Video Questions 59

Multiple Choice Questions

1) The recognition of a deferred tax liability that results from the use of straight-line depreciation on financial statements and double-declining balance on tax returns will:

A) increase the current ratio.

B) increase the debt/equity ratio.

C) increase the quick ratio.

D) decrease the debt/asset ratio.

Diff: Medium

Learning Objective: 10.10B

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) Net worth is:

A) assets plus liabilities.

B) total income since the company began operations.

C) total shareholders' equity.

D) another name for net income.

Diff: Easy

Learning Objective: 10.1; 10.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) Which one of the following events increases working capital?

A) Purchase of inventory on credit

B) Payment of an installment on a notes payable

C) Payment of sales taxes for the state

D) Selling merchandise on credit at a profit

Diff: Medium

Learning Objective: 10.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) An employee of Susann Inc. failed two drug tests. The employee has sued and Susann Inc.'s. lawyers appropriately believe that, at best, it is only reasonably possible that Susann Inc. will lose the court case. The proper accounting treatment of the lawsuit will:

A) increase earnings per share.

B) increase the debt/asset ratio.

C) decrease the current ratio.

D) not affect the debt/equity ratio.

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) Which one of the following events does not have any impact on total working capital?

A) An expense is paid with cash.

B) Warranty expense is accrued.

C) Salaries previously accrued are paid.

D) Debt that was previously long-term matures next year.

Diff: Medium

Learning Objective: 10.2; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) If the current ratio is currently greater than 1.0, which one of the following events would increase the current ratio?

A) Purchase of inventory on account

B) Receipt of money from a customer prior to the performance of service

C) Accrual of warranty expense

D) Sale of plant asset for cash at a gain

Diff: Medium

Learning Objective: 10.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) If the quick ratio is currently greater than 1.0, which one of the following events would increase the quick ratio?

A) Warranty expense is accrued.

B) A previously accrued warranty cost is paid.

C) Long-term debt is paid off.

D) Inventory is purchased on account.

Diff: Medium

Learning Objective: 10.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) Which one of the following events decreases the capital structure leverage ratio (Total assets / Shareholders' equity)?

A) Bonds are retired with a gain.

B) Warranty expense is accrued.

C) Some of the long-term debt matures next year.

D) The board of directors declares a cash dividend to be paid next month.

Diff: Medium

Learning Objective: 10.1; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) Which one of the following transactions decreases a company's quick assets?

A) The board of directors declares a cash dividend to be paid next month.

B) Salary expense is accrued.

C) Depreciation expense is recorded.

D) A payment is made for next year's insurance.

Diff: Medium

Learning Objective: 10.1; 10.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) Which one of the following is the result of the amortization of a discount on a short-term note payable?

A) Increases assets and decreases liabilities

B) Decreases assets and increases liabilities

C) Increases liabilities and decreases shareholders' equity

D) Decreases liabilities and owners' equity

Diff: Medium

Learning Objective: 10.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) One of Tonic Corp's employees invented a revolutionary coffee lid that cools coffee as you drink it in order to prevent burns. Two children ordered coffee and burned their mouths after failing to properly secure the lids. The children's parents sued. Tonic Corp's. lawyers believe that it is highly probable that judgment will be rendered against Tonic Corp and it is likely a payment in excess of $2 million will be incurred. The proper accounting treatment of the lawsuit will:

A) decrease total liabilities.

B) increase total liabilities.

C) increase the current ratio.

D) require accountants to wait until the suit is settled to account for the event.

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) Accounts payable typically arise because:

A) cash is received from a customer that will be paid back in the future.

B) cash is received from customers prior to the rendering of services or delivery of products.

C) the firm temporarily borrows cash for operations.

D) amounts are owed to others for goods, supplies, and services purchased on open account.

Diff: Easy

Learning Objective: 10.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) Collecting sales taxes from customers always:

A) decreases net income.

B) increases the debt/equity ratio.

C) increases the current ratio.

D) decreases net worth.

Diff: Medium

Learning Objective: 10.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) If a contingent loss which is expected to be paid next year is accrued, this would:

A) increase return on assets.

B) decrease capital structure leverage.

C) decrease the current ratio.

D) speed up asset turnover.

Diff: Medium

Learning Objective: 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) Short-term notes payable typically arise because:

A) the firm temporarily requires cash for operations.

B) cash is received from customers prior to the rendering of services or delivery of products.

C) the board of directors have declared a dividend that will be paid at a later date.

D) cash is received from a customer.

Diff: Easy

Learning Objective: 10.3; 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) Dividends payable typically arise because:

A) creditors want a return on funds loaned to a company.

B) cash is paid for dividends previously declared in another accounting period.

C) the board of directors declare a dividend that will be paid at a later date.

D) bond investors demand a return.

Diff: Easy

Learning Objective: 10.3; 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) If a loss contingency related to a lawsuit against a firm is deemed to have a reasonable probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will:

A) require note disclosure.

B) decrease return on equity.

C) increase the accounts payable/sales ratio.

D) slow down asset turnover.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) Unearned revenue typically arises because:

A) cash is received as a security deposit.

B) cash is received from customers prior to the rendering of services or delivery of products.

C) a company temporarily requires cash for operations.

D) merchandise is sold to customers prior to payment.

Diff: Easy

Learning Objective: 10.3; 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) A liability for a deposit may arise because:

A) cash payment in advance for insurance coverage.

B) cash is paid as a security deposit that will be refunded in the future.

C) the company deposits sales receipts too early.

D) merchandise is delivered to customers prior to payment.

Diff: Easy

Learning Objective: 10.3; 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Accruing warranty expense will:

A) increase the capital structure leverage ratio.

B) increase the current ratio.

C) increase return on assets.

D) speed up inventory turnover.

Diff: Medium

Learning Objective: 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) If a loss contingency related to a lawsuit against a firm is deemed to have a remote probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will:

A) increase return on assets.

B) increase the debt/asset ratio.

C) have no effect on earnings per share.

D) speed up asset turnover.

Diff: Medium

Learning Objective: 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) An increase in a deferred tax liability is recognized when:

A) the tax accountant omits taxable revenue from the tax returns.

B) net income measured under GAAP is greater than taxable income on tax returns because of temporary timing differences.

C) the amount of tax paid to the government is more than that calculated by the accountant on the company's tax return.

D) a tax audit by the IRS causes an increase in taxes due from a previous year's tax return.

Diff: Medium

Learning Objective: 10.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) Contingent liabilities whose ultimate payment is highly probable and can be reasonably estimated must be:

A) ignored until actual payment is made.

B) disclosed only in the footnotes to the financial statements.

C) recorded in the body of the balance sheet.

D) disclosed in the auditor's report.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) Contingent liabilities whose ultimate payment is remote should be:

A) recorded in the body of the balance sheet.

B) disclosed in the footnotes to the financial statements.

C) disclosed in the auditor's report.

D) ignored.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) Contingent liabilities whose ultimate payment is reasonably probable should be:

A) recorded in the body of the balance sheet.

B) disclosed in the footnotes to the financial statements.

C) ignored.

D) disclosed in the auditor's report.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) If a loss contingency related to a lawsuit against a firm is deemed to have a high probability of requiring ultimate payment and can be reasonably estimated, then the proper accounting treatment of the loss contingency will:

A) increase profit margin.

B) decrease the debt/asset ratio.

C) decrease earnings per share.

D) increase net income.

Diff: Medium

Learning Objective: 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) Sweeney, Inc. borrowed $30,000 from the bank by signing a 9-month note payable. The proper accounting treatment of recording the note will:

A) increase assets and liabilities.

B) decrease assets and increase liabilities.

C) increase liabilities and owners' equity.

D) increase assets and decrease owners' equity.

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) An income tax accrual at year end will most likely:

A) decrease earnings per share.

B) speed up inventory turnover.

C) decrease the debt/equity ratio.

D) be a contingency.

Diff: Medium

Learning Objective: 10.3; 10.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) Ranch Company estimates warranty expense as 5% of sales. On January 1, warranties payable was $13,000. During the year Ranch paid $5,000 to meet its warranty obligations and recorded sales of $120,000. The December 31 liability for the warranty is:

A) $10,000.

B) $12,000.

C) $6,000.

D) $14,000.

Explanation: $13,000 + ($120,000 × 5%) - $5,000 = $14,000

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) Which one of the following would increase the bonus for a CEO who is paid a bonus equal to a percentage of current GAAP net income?

A) Recording a decrease in the company's self-insured worker's compensation expense

B) Decreasing the estimated life of plant and equipment by an average of 8 years

C) Increasing wages for the warehouse employees

D) Collecting payments in advance from customers

Diff: Medium

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) A suit for breach of contract seeking damages of $3,000,000 was filed against Clark Corporation on March 1, 2020. Clark's legal counsel believes that a negative outcome is highly probable. A reasonable estimate of the court's award to the plaintiff is $600,000. Settlement is expected to occur during the latter part of 2020. What accounting is necessary for the year ending June 30, 2020?

A) Note disclosure only

B) Accrue a contingent liability of $3,000,000 and provide note disclosure explaining the contingency

C) Accrue a contingent liability of $600,000 and provide note disclosure explaining the contingency

D) No disclosure or accrual necessary

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) Abbott Co. has 5 employees who worked the entire year. Each employee earns 6 paid vacation days annually. Vacation days may be taken during December of 2020 and all of 2021. All unused vacation days are paid when the employee leaves the company. The daily wage in 2020 per employee is $100. This is an example of:

A) a definite liability.

B) a third party liability.

C) a gain contingency.

D) unearned revenue.

Diff: Medium

Learning Objective: 10.3; 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) Which one of the following is a current liability?

A) Portions of notes payable due beyond the next accounting period

B) Sales taxes paid on new equipment acquired

C) Estimated costs of hurricanes which might develop in the Caribbean during next hurricane season

D) Football tickets sold to customers for games in the coming season

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) Current liabilities include:

A) amounts due from suppliers for credits on accounts due to returns.

B) taxes withheld from employees' payroll checks which must be remitted to the IRS.

C) amounts paid for warranty repairs during the current year.

D) cash dividends to be declared by the board of directors during the next six months.

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 34 / None

Use the information from Cen, Inc. to answer the questions that follow.

Cen, Inc. reported the following on its December 31, 2020, balance sheet:

35) How much is the maturity value of the one-year note payable that is outstanding at the end of 2020?

A) $9,500

B) $9,800

C) $10,100

D) $10,400

Explanation: $9,800 + $300 = $10,100

Diff: Hard

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) Which statement is true concerning Cen's interest?

A) Cen paid a total of $60 interest during 2020.

B) Interest was incurred during the year on more than one note.

C) Interest of $3,200 was accrued and paid during 2020.

D) The 'accrued interest on notes payable' amount relates only to the one-year short-term notes payable.

Diff: Hard

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) Which one of the following would most likely be reported as a current liability?

A) A portion of the frequent flyer program miles accumulated by airline travelers

B) Self-insurance risks on anticipated losses

C) Customers' merchandise returns exchanged for different merchandise

D) The CEO's stock option package for the current year

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) Liabilities are:

A) sometimes credit and other times debit balances.

B) deferred amounts which will be recognized on the balance sheet when the actual due date arrives.

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

D) obligations to transfer ownership of one company to other entities.

Diff: Easy

Learning Objective: 10.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: Critical Thinking; FC: Measurement; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) What business transaction must occur in order to reduce Estimated Warranty Payable?

A) Goods under warranty are repaired in the period after the sale

B) Warranty costs are accrued at the end of the accounting period

C) Sale of goods on account

D) Customers take advantage of cash discounts for early payment

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) A contingent liability:

A) is definite in existence, but its amount and due date are not yet known.

B) has the same requirements as a contingent gain.

C) must be accrued even when it is not reasonably estimable.

D) is disclosed only in the financial statement notes if highly probable and the amount can be estimated.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) Gain contingencies:

A) should be accrued when probable and the amount can be reasonably estimated.

B) are reported as revenues on the income statement.

C) should be accrued for anticipated lottery winnings.

D) are almost never accrued and are rarely disclosed.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) A company has a decreasing current ratio. Creditors would likely be most concerned:

A) with the long-term asset turnover.

B) about the company's ability to pay current debts as they come due.

C) about the company's profitability.

D) about whether earnings per share is increasing or decreasing.

Diff: Medium

Learning Objective: 10.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) A pension is:

A) a cost such as health insurance paid on behalf of a retired or disabled employee.

B) a contingent inflow of cash anticipated from assets earning interest.

C) required of all employers.

D) usually determined by the employees' years of service.

Diff: Easy

Learning Objective: 10.10A

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Alpine, Inc. sells baseball tickets for professional baseball games. Cash receipts for baseball tickets are credited to Unearned Ticket Revenue. During 2020, Alpine collected $30,000 for a September, 2020 baseball game and $42,000 for a March, 2021 baseball game. The September game was played as scheduled. How much should be reported as Unearned Ticket Revenue at December 31, 2020?

A) $0

B) $42,000

C) $72,000

D) $40,000

Diff: Medium

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) A measure of the extent to which reported income is conservative is called:

A) ERISA.

B) a gain contingency.

C) the conservatism ratio.

D) a line of credit.

Diff: Easy

Learning Objective: 10.10B

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) Warranties should be accrued if it is:

A) probable that an expense has been incurred and the amount is reasonably estimable.

B) possible that an expense has been incurred regardless of whether the amount is estimable or not.

C) possible that an expense will be incurred and the amount is reasonably estimable.

D) remote that any expense has been incurred.

Diff: Easy

Learning Objective: 10.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) In addition to recognizing income tax expense, the accounting necessary to record income taxes requires:

A) a credit to income tax payable based on net income times the tax rate.

B) a debit to the income tax expense account for the amount of cash that must be paid for taxes.

C) computations of the amounts to record in the deferred income tax account.

D) all companies to report taxable income on the income statement.

Diff: Medium

Learning Objective: 10.10B

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) Two types of differences exist between computing income for tax purposes and computing income for financial accounting purposes. The differences are:

A) defined benefit taxes and defined contribution taxes.

B) deferred tax assets and deferred tax liabilities.

C) revenues and expenses.

D) temporary and permanent.

Diff: Medium

Learning Objective: 10.10B

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) The economic essence of which one of the following should not be reported in the balance sheet as a current liability?

A) Free sandwich offers printed on hockey ticket stubs

B) Amounts sued for damages associated with injuries from an allegedly defective weed eater

C) Mail-in rebates from software by software companies

D) Amounts payable to an employee to reimburse them for expenses

Diff: Hard

Learning Objective: 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) A defined benefit plan differs from a defined contribution plan in that a defined benefit plan:

A) has a liability that must be actuarially computed.

B) is required by ERISA.

C) requires a corporation to make a series of payments of a specified amount to a pension fund.

D) requires journal entries, and the defined contribution plan does not.

Diff: Medium

Learning Objective: 10.10A

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) Pension expense is:

A) accrued each period as employees require payments.

B) recognized as a long-term deferred asset.

C) accrued as employees earn their rights to future benefits.

D) calculated by dividing an employee's annual salary into the number of years the employee is expected to require pension payments.

Diff: Medium

Learning Objective: 10.10A

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) Simpson Incorporated sells fishing lures and monofilament leader material. During June, Simpson distributed 6,000 coupons to receive a free lure to each customer who purchased a dozen spools of monofilament leader material. Through December 31, 2020, Simpson honored 1,200 coupons redeemed. Simpson expects a total of 5,200 total coupons to be redeemed. Simpson sells lures for $1.00 each. The cost of each lure to Simpson is 45 cents. How much should Simpson report as a liability at December 31, 2020?

A) $6,000

B) $1,800

C) $3,600

D) $2,340

Explanation: (5,200 − 1,200) × $0.45 = $1,800

Diff: Hard

Learning Objective: 10.3; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

A) 1.76

B) 2.50

C) 1.44

D) 3.24

Explanation: Current Ratio = Current Assets ÷ Current Liabilities

= ($120,000 + $50,000) ÷ $68,000 = 2.50

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A) $45,333

B) $146,667

C) $125,333

D) $113,333

Explanation: Current assets cannot fall below 1.5 times current liabilities. Therefore, dividing current assets by 1.5 indicates the maximum level that Jake can allow current liabilities to grow to without violating the debt covenant. So current liabilities can grow to $113,333 ($170,000 ÷ 1.5).

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 54 / None

55) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

A) 2.94

B) 3.24

C) 2.06

D) 0.83

Explanation: Current Ratio = ($120,000 + $20,000) ÷ $68,000 = 2.06

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 55 / None

56) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A) $93,333

B) $133,333

C) $146,667

D) $102,000

Explanation: Current assets cannot fall below 1.5 times current liabilities. Therefore, dividing current assets by 1.5 indicates the maximum level that Jake can allow current liabilities to grow to without violating the debt covenant. So current liabilities can grow to $93,333 ($140,000 ÷ 1.5).

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 56 / None

57) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests the entire $100,000 of the borrowed funds in equipment, what would be its current ratio?

A) 3.24

B) 1.76

C) 1.31

D) 1.50

Explanation: Current Ratio = ($120,000 + $0) ÷ $68,000 = 1.76

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 57 / None

58) Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.

If Jake invests the entire $100,000 of the borrowed funds in equipment, what is the maximum amount of current liabilities it could have without violating the debt contract?

A) $146,667

B) $102,000

C) $80,000

D) $125,333

Explanation: The current liabilities can grow to $80,000 ($120,000 ÷ 1.5).

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 58 / None

59) Meadville Industries sells gift certificates that are redeemable in merchandise. During 2020, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2020. The journal entry recording the sale of the gift certificates will include:

A) a debit to Certificate Liability for $88,000.

B) a debit to Unearned Revenue for $88,000.

C) a credit to Sales for $88,000.

D) a credit to Unearned Revenue for $88,000.

Explanation:

Cash (+A) 88,000

Unearned Revenue (+L) 88,000

Diff: Medium

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 59 / None

60) Meadville Industries sells gift certificates that are redeemable in merchandise. During 2020, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2020. Assuming that Meadville uses the perpetual inventory method, the journal entry recording the redemption of the gift certificates during 2020 will include:

A) a credit to Cost of Goods Sold for $32,000.

B) a debit to Unearned Revenue for $88,000.

C) a credit to Sales for $52,000.

D) a credit to Unearned Revenue for $52,000.

Explanation:

Unearned Revenue (-L) 52,000

Sales (R, +SE) 52,000

Cost of Goods Sold (E, -SE) 32,000

Inventory (-A) 32,000

Diff: Medium

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 60 / None

61) The following information was taken from the annual report of Jones Inc.

2020 2019

BALANCE SHEET

Deferred income tax liability $29,700 $28,300

INCOME STATEMENT

Income before taxes $ 88,000

Income tax expense (30,400)

Net income $ 57,600

Effective income tax rate 40%

What is Jones's conservatism ratio?

A) 1.02

B) 1.52

C) 2.89

D) 1.21

Explanation:

Conservatism Ratio = Reported Income Before Taxes ÷ Taxable Income

= $88,000 ÷ $72,500* = 1.21

Income Tax Expense 30,400

Deferred Income Tax ($29,700 - $28,300) 1,400

Income Tax Payable (Plug) 29,000

* $29,000 ÷ 40% = $72,500

Diff: Hard

Learning Objective: 10.10B

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 61 / None

62) The following information was taken from the annual report of Jones Inc.

2020 2019

BALANCE SHEET

Deferred income tax liability $29,700 $28,300

INCOME STATEMENT

Income before taxes $ 88,000

Income tax expense (30,400)

Net income $ 57,600

Effective income tax rate 40%

Based on this information, what journal entry should Jones make in 2020 to record its income taxes?

A)

Income Tax Expense 30,400

Deferred Income Tax 29,700

Deferred Income Tax 28,300

Income Tax Payable 31,800

B)

Income Tax Expense 30,400

Deferred Income Tax 29,700

Income Tax Payable 700

C)

Income Tax Expense 31,800

Deferred Income Tax 1,400

Income Tax Payable 30,400

D)

Income Tax Expense 30,400

Deferred Income Tax 1,400

Income Tax Payable 29,000

Explanation:

Income Tax Expense 30,400

Deferred Income Tax ($29,700 - $28,300) 1,400

Income Tax Payable 29,000

Diff: Hard

Learning Objective: 10.10B

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 62 / None

63) The following information was taken from the annual report of Leno Inc.

2020 2019

BALANCE SHEET

Deferred income tax liability $58,300 $59,400

INCOME STATEMENT

Income before taxes $108,000

Income tax expense (40,400)

Net income $ 67,600

Effective income tax rate 35%

What is Leno's conservatism ratio?

A) 0.63

B) 0.91

C) 0.69

D) 0.86

Explanation: Conservatism Ratio = Reported Income Before Taxes ÷ Taxable Income

= $108,000 ÷ $118,571* = 0.91

Income Tax Expense 40,400

Deferred Income Tax ($59,400 - $58,300) 1,100

Income Tax Liability (Plug) 41,500

*$41,500 ÷ 35% = $118,571

Diff: Hard

Learning Objective: 10.10B

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 63 / None

64) The following information was taken from the annual report of Leno Inc.

2020 2019

BALANCE SHEET

Deferred income tax liability $58,300 $59,400

INCOME STATEMENT

Income before taxes $108,000

Income tax expense (40,400)

Net income $ 67,600

Effective income tax rate 35%

Based on this information, what journal entry should Leno make in 2020 to record its income taxes?

A)

Income Tax Expense 40,400

Deferred Income Tax 58,300

Deferred Income Tax 59,400

Income Tax Payable 39,300

B)

Income Tax Expense 40,400

Deferred Income Tax 19,000

Income Tax Payable 59,400

C)

Income Tax Expense 40,400

Deferred Income Tax 1,100

Income Tax Payable 41,500

D)

Income Tax Expense 40,400

Deferred Income Tax 17,900

Income Tax Payable 58,300

Explanation:

Income Tax Expense 40,400

Deferred Income Tax ($59,400 - $58,300) 1,100

Income Tax Liability 41,500

Diff: Hard

Learning Objective: 10.10B

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 64 / None

65) Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2020.

If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:

A) a debit to Warranty Liability for $28,700.

B) a debit to Warranty Expense for $28,700.

C) a credit to Parts for $17,220.

D) a credit to Cash for $28,700.

Explanation:

Warranty Expense (E, -SE) 28,700*

Warranty Liability (+L) 28,700

* $28,700 = 35 cars sold × $820 estimated warranty cost per car

Diff: Hard

Learning Objective: 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 65 / None

66) Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The following activities occurred during 2020.

If the January 1, 2020 beginning balance in the warranty liability account was $2,500, what would be the year-end warranty liability balance?

A) $31,200

B) $16,200

C) $11,200

D) $13,700

Explanation: Ending Balance = Beginning Balance + Warranty Expense for the Year - Cost of Repairs under Warranty = $2,500 + $28,700* - ($6,000 + $5,000 + $4,000) = $16,200

*$28,700 = (5 + 10 + 8 + 12) × $820

Diff: Hard

Learning Objective: 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 66 / None

67) Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2020.

Assume that the breakdown of warranty costs is 40% parts and 60% wages (paid in cash). Based on this information, which of the following journal entries would be made on September 1?

A)

Warranty Expense 5,000

Warranty Liability 5,000

B)

Warranty Expense 5,000

Cash 3,000

Parts inventory 2,000

C)

Cash 3,000

Parts inventory 2,000

Warranty Liability 5,000

D)

Warranty Liability 5,000

Cash 3,000

Parts inventory 2,000

Explanation: $5,000 × 40% = $2,000; $5,000 × 60% = $3,000

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 67 / None

Matching Questions

68) Select the letter of the effect on the debt/equity ratio (a through c) as a result of each transaction listed in items 1 through 9.

Effects

a. Increase debt/equity and capital structure leverage ratios

b. Decrease debt/equity and capital structure leverage ratios

c. Does not change debt/equity and capital structure leverage ratios

_______ 1. Amortized the discount of the long-term note payable

_______ 2. A portion of long-term debt is paid

_______ 3. Accrued salaries at yearend

_______ 4. Paid payroll taxes which were accrued last month

_______ 5. Paid a bonus amounting to 5% on reported income to the CEO that was previously accrued

_______ 6. Paid costs associated with warranties that were previously accrued

_______ 7. Paid taxes which were accrued

_______ 8. Accrued income taxes at yearend

_______ 9. Accrued estimated coupon redemptions

1. a

2. b

3. a

4. b

5. b

6. b

7. b

8. a

9. a

Diff: Hard

Learning Objective: 10.1; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 5 min.

Title/Media Ref.: Matching Question 1 / None

69) For each item numbered 1 through 16 below, select the appropriate effect on liabilities listed in a through e that each transaction describes. You may use each letter more than once or not at all. In some cases, two effects are correct.

Effects on Liabilities

a. Decrease current liabilities

b. Increase current liabilities

c. No effect on recorded current liabilities

________ 1. Purchased supplies on account.

________ 2. Paid accounts payable.

________ 3. Issued a $1,000 short-term note payable for $970.

________ 4. Amortized the discount of the short-term note payable.

________ 5. A portion of long-term debt is due next year.

________ 6. Declared cash dividends to stockholders.

________ 7. Paid the cash dividend previously declared.

________ 8. Received money from customers prior to delivery of the product to the customer.

________ 9. Delivered products to a customer who previously paid for that product.

________ 10. Collected sales tax on behalf of the state government.

________ 11. Accrued payroll taxes that the firm has to pay to the federal government within three months.

________ 12. Accrued a bonus amounting to 5% on reported income to the CEO.

________ 13. In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is remote.

________ 14. In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is reasonably possible.

________ 15. In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is highly probable.

________ 16. Accrued warranty expense.

1. b 9. a

2. a 10. b

3. b 11. b

4. b 12. b

5. b 13. c

6. b 14. c

7. a 15. b

8. b 16. b

Diff: Medium

Learning Objective: 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 8 min.

Title/Media Ref.: Matching Question 2 / None

70) Select the letter of the effect on the ratios (a through c) as a result of each transaction listed in items 1 through 16.

Effects

a. Increase in debt/equity and capital structure leverage ratios

b. Decrease debt/equity and capital structure leverage ratios

c. Does not change debt/equity and capital structure leverage ratios

________ 1. Purchased supplies on account to be used next month.

________ 2. Paid accounts payable.

________ 3. Issued a $1,000 short-term note payable for $970.

________ 4. Amortized the discount of the short-term note payable.

________ 5. A portion of long-term debt is due next year.

________ 6. Declared cash dividends to holders of stock.

________ 7. Paid the cash dividend previously declared.

________ 8. Received money from customer prior to delivery of the product to the customer.

________ 9. Delivered product to a customer who previously paid for that product.

________ 10. Collected sales tax on behalf of the state government.

________ 11. Accrued payroll taxes the firm has to pay to the federal government within three months.

________ 12. Paid a bonus (not previously accrued) amounting to 5% on reported income to the CEO for the current year.

________ 13. A large payment is remotely probable resulting from a lawsuit filed against the firm.

________ 14. A large payment is reasonably probable resulting from a lawsuit filed against the firm.

________ 15. A $10,000 payment is highly probable resulting from a lawsuit filed against the firm.

________ 16. Bondholder converted bond into stock through conversion feature.

1. a 9. b

2. b 10. a

3. a 11. a

4. a 12. a

5. c 13. c

6. a 14. c

7. b 15. a

8. a 16. b

Diff: Hard

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 8 min.

Title/Media Ref.: Matching Question 3 / None

Short Problems

71) On July 1, Falcon Company borrowed $2,000 in return for a one-year note payable with a maturity value of $2,200. Calculate the balance sheet value of the note on December 31.

$2,200 - $100 = $2,100

Diff: Medium

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 1 / None

72) On October 1, Accurate Company borrowed $2,000 in return for a nine-month note payable with a maturity value of $2,600. Calculate the amount of interest expense and the balance sheet value for the year ending December 31.

$2,600 - $400 (unamortized discount) = $2,200 balance sheet value

Diff: Medium

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 2 / None

73) On October 1, 2020, Brooks Company borrowed $6,000 in return for a nine-month note payable with a maturity value of $6,600. Fill in the partial balance sheet that appears below as of December 31, 2020.

Current Liabilities

Note Payable XXX

Less: Discount (XXX)

Balance sheet value XXX

Note Payable $6,600

Less Discount on Notes Payable (400)

$6,200

Diff: Medium

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 3 / None

74) On July 1, Gordon Company borrowed $10,000 in return for an eight-month note payable with a maturity value of $10,600. Calculate the amount of interest expense for the current year.

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 4 / None

75) Bradley Incorporated owns a chain of retail stores. During December of 2020, a customer slipped in a doorway of its Missouri store and broke his ribs. He is suing Bradley for $200,000 for negligence. Bradley's legal counsel believes that it is only reasonably probable that Bradley will lose its defense of the lawsuit because, although the doorway was icy due to an ice storm that was occurring at the time of the fall, a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2020, before considering the effects of this lawsuit, Bradley's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate Bradley's debt/equity ratio on December 31, 2020.

Diff: Hard

Learning Objective: 10.1; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 5 / None

76) Pitts Incorporated owns a chain of retail stores. During December of 2020, a customer slipped in a doorway of its Nebraska store and broke his ribs. He is suing Pitts for $200,000 for negligence. The legal counsel of Pitts believes that it is remote that Pitts will lose its defense of the lawsuit because the doorway recently was rebuilt with all-weather traction stripping and a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2020, before considering the effects of this lawsuit, the company's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate the company's capital structure leverage ratio on December 31, 2020.

Diff: Hard

Learning Objective: 10.1; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 6 / None

77) Pacific Company estimates warranty expense as 10% of sales. On January 1, the warranty liability was $10,000. During the year, Pacific paid $8,000 to meet its warranty obligations and recorded sales of $300,000. Calculate the warranty liability on December 31.

Diff: Medium

Learning Objective: 10.1; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 7 / None

78) On January 1 and December 31, Warranty Liability is $6,000 and $4,000, respectively. During the current year, sales were $100,000, upon which 3% was estimated to be the amount required for future warranty payments. Calculate the amount paid for warranties during the current year.

Diff: Medium

Learning Objective: 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 8 / None

79) Beacon Incorporated owns a chain of retail stores. During December of 2020, a customer slipped in a doorway of its Virginia store and broke his ribs. He is suing Beacon for $200,000 for negligence. Beacon's legal counsel believes that it is likely that Beacon will have to settle this suit and estimates a settlement of $500,000. On December 30, 2020, before considering the effects of this lawsuit, Beacon's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate the effect of the lawsuit on Beacon's capital structure leverage ratio on December 31, 2020.

Capital structure leverage ratio before accrual: $840,000/ ($840,000 - $300,000) = 1.56

Capital structure leverage ratio after accrual: $840,000/($840,000 - $800,000) = 21.00.

The accrual increased the ratio by 21.00 - 1.56 = 19.44 or 21.00 / 1.56 = 13.46X.

Diff: Hard

Learning Objective: 10.1; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 9 / None

80) On December 15 2021, Roper Company had current assets (cash) of $15,000 and current liabilities (mostly accounts payable) of $8,000, resulting in a current ratio of 1.88. The company needs to increase its current ratio to 2.75 by December 31, 2021 to avoid violating a debt covenant. Calculate the amount of accounts payable that needs to be paid in order to boost the current ratio to 2.75.

Diff: Medium

Learning Objective: 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 10 / None

81) On December 31, 2020, Seminole Co. had current assets of $25,000 in cash and current liabilities of $8,000 (mostly in accounts payable), resulting in a current ratio of 3.13. The company estimates that warranty expense for 2020 is 6% of sales that totaled $200,000. Calculate Seminole's current ratio after warranty expense is recognized.

Diff: Medium

Learning Objective: 10.2; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 11 / None

82) As a security analyst for Market Masters, Inc., you have chosen to invest in one high-tech firm. You have narrowed your choice between RamTech Company or Accutrex Industries, firms of similar size and direct competitors in the industry. The following information was taken from their 2020 annual reports:

RamTech Accutrex

2020 2019 2020 2019

Deferred income tax liability $ 19,400 $15,600 $ 19,800 $21,800

Income before taxes 163,000 158,500

Income tax expense (50,000) (52,500)

Net income 113,000 106,000

Effective income tax rate 35% 35%

You are worried that the two sets of financial statements may not be comparable because one company's reporting policies may be more conservative or aggressive than the other. Assume a taxable income of 35% and compute the conservatism ratios for both companies and briefly discuss.

Conservatism Ratio = Reported Income Before Taxes ÷ Taxable Income

RamTech Company

Income Tax Expense (I/S) 50,000

Deferred Income Tax ($19,400 - $15,600) 3,800

Income Tax Liability (Plug) 46,200

Taxable Income = $46,200 ÷ 35% = $132,000

Conservatism Ratio = $163,000 ÷ $132,000 = 1.235

Accutrex Industries

Income Tax Expense (I/S) 52,500

Deferred Income Tax ($19,800 - $21,800) 2,000

Income Tax Liability (Plug) 54,500

Taxable Income = $54,500 ÷ 35% = $155,714

Conservatism Ratio = $158,500 ÷ $155,714 = 1.018

The conservatism ratio of Accutrex Industries (1.018) is lower than that of RamTech Company (1.235). Thus, the accounting policies made by Accutrex appear to be more conservative than RamTech's accounting policies, but neither company's policies seem very aggressive because RamTech's policies only result in an earnings number that is 23.5% (1.235/1.000) higher than its taxable income, which is likely a very conservative measure of its earnings.

Diff: Hard

Learning Objective: 10.10B

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 8 min.

Title/Media Ref.: Short Problem 12 / None

83) Porter Products recognizes expenses for wages and interest when cash payments are made. The following related cash payments were made during December 2020:

As of December 31, the current assets and current liabilities reported on Porter's balance sheet were $36,000 and $22,500, respectively. Porter's income statement reported net income of $11,250.

Required: Compute Porter's current ratio and net income if the company were to account for wages and interest on an accrual basis.

Current Assets Current Liabilities Net Income

Reported amounts $ 36,000 $ 22,500 $ 11,250

Adjustments:

Wages 10,000a (10,000)a

Interest 25b (25)b

Adjusted amounts $ 36,000 $ 32,525 $ 1,225

a $10,000 = ($15,000 ÷ 15 days per pay period) × 10 days left in December

b $25 = $10,000 × 6% × 15/360

Current Ratio = Current Assets ÷ Current Liabilities

= $36,000 ÷ $32,525

= 1.11

Net Income = $1,225

Diff: Medium

Learning Objective: 10.2; 10.3; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 13 / None

84) Farley Incorporated instituted a defined benefit pension plan for its employees at the beginning of 2016. An actuarial method that is acceptable under GAAP indicates that the company should contribute $80,000 each year to the pension fund to cover the benefits that will be paid to the employees. Farley funded 80% in 2016 and 2017, 90% in 2018 and 2019, and 100 percent in 2020.

Required:

(1) Prepare the journal entries to accrue the pension liability and fund it for 2016 through 2020.

(2) Compute the balance in the pension liability account as of December 31, 2020.

a. 2016 2017

Pension Expense (E, -SE) 80,000 80,000

Cash (-A) ($80,000 × 80%) 64,000 64,000

Pension Liability (+L) 16,000 16,000

Funded pension.

2018 2019

Pension Expense (E, -SE) 80,000 80,000

Cash (-A) ($80,000 × 90%) 72,000 72,000

Pension Liability (+L) 8,000 8,000

Funded pension.

2020

Pension Expense (E, -SE) 80,000

Cash (-A) 80,000

Funded pension.

b. Pension Expense Amount Funded Pension Liability

2016 $80,000 $64,000 $16,000

2017 80,000 64,000 16,000

2018 80,000 72,000 8,000

2019 80,000 72,000 8,000

2020 80,000 80,000 0

$400,000 $352,000 $48,000

Thus, the balance in the Pension Liability account as of December 31, 2020 is $48,000.

Diff: Medium

Learning Objective: 10.10A

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 8 min.

Title/Media Ref.: Short Problem 14 / None

85) On December 31, 2020, Barton Incorporated had total liabilities of $60,000 and total shareholders' equity of $90,000, resulting in a debt/equity ratio of 0.67 before income tax expense is recognized. On December 31, 2020, Barton paid its 2020 income taxes of $6,000 while its income tax expense on its 2020 income statement was $8,000. This difference exists because Barton uses straight-line depreciation on its books and double-declining-balance depreciation on its tax returns. What is Barton's debt/equity ratio after the tax expense and deferred tax liability are recognized?

Diff: Medium

Learning Objective: 10.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 15 / None

86) On December 31, 2020, Carlson Incorporated had total liabilities of $60,000 and total shareholders' equity of $100,000, resulting in a capital structure leverage ratio of 1.60 before warranty expense is recognized. On December 31, 2020, Carlson estimated warranty expense to be 5% of sales of $100,000. What is Carlson's capital structure leverage ratio after the warranty expense and related liability is recognized?

Diff: Medium

Learning Objective: 10.1; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 16 / None

87) On March 2, 2020, Knight Company's CFO, Bob Martin, will receive a bonus equal to 6% of income before income taxes as reported for the year ended December 31, 2019. The current 2019 income statement shows income before income taxes as $600,000.

Required:

(1) What journal entry should be made on December 31, 2019?

(2) What journal entry should be made on March 2, 2020?

(3) If Bob decides to postpone $50,000 of 2019 research and development expenditures until 2020, what impact would this have on his bonus? Explain and show your calculations.

(1)

(2)

(3) This postponement will increase net income to $650,000 instead of $600,000. Bob's bonus would then increase to $39,000 (or $650,000 × 6%).

Diff: Easy

Learning Objective: 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 17 / None

88) On December 31, 2020, Stanley Co. had current assets of $20,000 (all cash) and current liabilities of $9,000 in accounts payable, resulting in a current ratio of 2.22. On December 31, 2020, Stanley purchased $6,000 of inventory on account. Calculate Stanley's current ratio after the inventory has been purchased.

Diff: Medium

Learning Objective: 10.2; 10.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 18 / None

89) Vista Corporation, producer of computer software packages, began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. At the beginning of business operations, Vista produced the following projected income statement and balance sheet for the first year. All amounts are in thousands.

Vista Corporation

Projected Income Statement

First Year of Operations

Vista Corporation

Projected Balance Sheet

December 31 of First Year

The new president is rather disappointed with these projected results having just quit a job of which his compensation package was $4,000,000. After examining the forecasts of a bonus of only $3,000,000, the president decides to use his knowledge of financial statements to modify his bonus. He meets with the company's CFO the next day to see what could be done. He suggested the following possibilities that would boost the first year's income:

1. Slash research and development expenditures, which are paid in cash, from $20 million to $10 million.

2. Double the estimated life of the computers, which will decrease depreciation expense from $40 million to $20 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated. Taxes require immediate payment.

3. Reduce estimated warranty expense from 10% of sales to 7% of sales.

4. Any resultant change in the bonus of 10% of operating income before the bonus will be paid to the president in cash.

A. Adjacent to the income statement for Year 1, create a new statement using the alternative accounting procedures and operating decisions.

B. Compare the president's compensation if the changes in part A are enacted with his current compensation. What are the ramifications of these changes on the future?

A. (in thousands)

B. These changes would boost the CEO's bonus from $3,000,000 to $6,300,000. Items 2 (increasing depreciation lives) and 3 (reducing warranty estimates) above, although subjective, could be interpreted as fraud and to artificially boost earnings to increase a bonus is at least very unethical. At a minimum these changes overstate the company's performance. Item 1 above (cutting R&D), although not a violation of accounting standards, could be disastrous to the company and the shareholders. Underestimating warranty expense will require larger warranty expense in the very near future (an additional $3,000,000 of warranty expense for a total of $13,000,000 may be needed next year). Increasing the estimated life of its computers beyond that which is reasonable will overstate these assets and will result in major losses when they are retired or the firm is "restructured." Cutting research and development expenditures could result in an early death of the company. In such a competitive environment, firms live or die on the results of their research.

Diff: Hard

Learning Objective: 10.3; 10.4; 10.6

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting.

TOT: 10 min.

Title/Media Ref.: Short Problem 19 / None

90) On December 31, 2020, Cocoa Incorporated had total liabilities of $80,000 and total shareholders' equity of $100,000, resulting in a capital structure leverage ratio of 1.80 before executive bonus expense is recognized. During 2020, Cocoa's CEO earned a 5% bonus on net income before bonus of $100,000. If Cocoa pays the bonus due its CEO on December 31, 2020, what is Cocoa's capital structure leverage ratio after the bonus expense and what related liability is recognized?

Diff: Medium

Learning Objective: 10.1; 10.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 20 / None

91) Howell Incorporated current income statement and December 31 balance sheet follow:

Income Statement

Revenue $180,000

Expenses and losses 130,000

Net income $ 50,000

Balance Sheet

Current assets $ 10,000

Long-lived assets 200,000

Total assets $210,000

Current liabilities $ 5,000

Long-term liabilities 95,000

Shareholders' equity 110,000

Total liabilities and shareholders' equity $210,000

During an audit of Howell's current financial statements, its auditor discovered that Howell is a defendant in a $20,000 lawsuit for infringement of patent rights. Howell's management, under the advice of its legal counsel, decided that it was only reasonably possible that they would lose the suit and have to pay $20,000. However, its auditor disagreed with the treatment of the contingent loss and effectively argued that it is probable that the lawsuit will require Howell to pay $20,000 in the forthcoming year. The management of Howell decided to "take a bath" and treat the $20,000 lawsuit consistent with GAAP on probable conditional liabilities.

A. Reconstruct Howell current income statement and 12/31 balance sheet under the auditor's judgment concerning the $20,000 lawsuit.

B. Calculate and compare current, debt/equity, and debt/asset ratios resulting from Howell's initial and reconstructed financial statements. Comment on Howell's solvency.

A.

Income Statement

Revenue $180,000

Expenses and losses 150,000

Net income $ 30,000

Balance Sheet

Current assets $ 10,000

Long-lived assets 200,000

Total assets $210,000

Current liabilities $ 25,000

Long-term liabilities 95,000

Shareholders' equity 90,000

Total liabilities and shareholders' equity $210,000

B.

Initial Revised

Current ratio (Revised - $10/$25) 2.00 0.40

Debt/Equity ratio (Revised - $120/$90) 0.91 1.33

Debt/Asset ratio (Revised - $120/$210) 0.48 0.57

All ratios as an indication of solvency have deteriorated. The current ratio decreasing to less than 1.0 puts short-term solvency in question. Howell's long-term solvency position as measured by the debt/equity and debt/asset ratios have also deteriorated.

Diff: Hard

Learning Objective: 10.1; 10.2; 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 10 min.

Title/Media Ref.: Short Problem 21 / None

Short Essay Questions

92) State laws generally require insurance companies to maintain certain debt and solvency ratios. Insurance companies that fail to maintain the minimum levels are subject to severe penalties, most often affecting the company's continuation as a going concern. How may regulatory requirements such as these impact management decisions?

Diff: Medium

Learning Objective: 10.1; 10.2

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 1 / None

93) A major airline issues frequent flyer credits that allow the passenger to receive credit toward future flights. For every ticket sold the customer receives a credit which, when 40 are collected, can be exchanged for a free ticket. During the year, the airline company recorded revenues of $60 million, which represented 100,000 tickets. The airline did not recognize the flyer credits on its income statement or its balance sheet. In the context of contingent liabilities, comment on the airline's accounting procedures.

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 2 / None

94) What concerns might exist when a company's leverage ratios increase?

Diff: Medium

Learning Objective: 10.1

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 3 / None

95) What concerns might management have with additional debt on its balance sheet?

Diff: Medium

Learning Objective: 10.1; 10.2

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 4 / None

96) What three characteristics should all liabilities that appear on the balance sheet have in common?

1. They should be present obligations that entail settlements by probable future transfers or uses of cash, goods, or services.

2. They should be unavoidable obligations.

3. The transaction or event obligating the enterprise must have happened already.

Diff: Medium

Learning Objective: 10.1

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 5 / None

97) During the 1990's, Golden Inc. entered into long-term contracts with corporate customers to supply one million ounces of ore for $100 an ounce over the next 5 years. During the following years, the price of ore increased to $175 an ounce, which Golden Inc., because it did not hedge the price, would have to pay in order to meet its sales contracts. Although Golden Inc.'s auditor argued that a $75 million loss and liability should be recognized, Golden Inc. stated that the amount of the loss cannot be reasonably estimated prior to the results of renegotiations it was conducting with its corporate customers. Golden Inc. expected to renegotiate an increase in the initial contract price of $100 or reduce the amount of ounces to be delivered under the long-term sales contract. Defend a position of how the long-term contract should be treated from an accounting perspective.

Diff: Medium

Learning Objective: 10.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 6 min.

Title/Media Ref.: Short Essay Question 6 / None

98) Identify the primary problem related to accounting for current liabilities.

Diff: Medium

Learning Objective: 10.2

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 7 / None

99) How do 'determinable' current liabilities differ from 'contingent' liabilities?

Diff: Medium

Learning Objective: 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 8 / None

100) Sunshine Company obtained a line of credit with its bank of $4 million. How should Sunshine Company disclose the line of credit on its financial statements?

Diff: Medium

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 9 / None

101) Identify two different third-party collections and explain why they should be reported as liabilities.

Diff: Medium

Learning Objective: 10.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 5 min.

Title/Media Ref.: Short Essay Question 10 / None

102) Explain why short-term notes often have a face amount that differs from the cash received upon signing a note payable. Describe what this difference represents.

Diff: Medium

Learning Objective: 10.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 11 / None

103) How is unamortized interest on short-term notes payable reported on a balance sheet?

Diff: Medium

Learning Objective: 10.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 12 / None

104) Harrison Inc. issues community concert season tickets to a number of corporations for $1,000 each. Revenue is accrued equally throughout the season that the pass is valid. How should Harrison Inc. report any amounts that have not yet been recognized as revenue?

Diff: Medium

Learning Objective: 10.3

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 13 / None

105) Why are gain contingencies typically omitted from financial statement disclosure?

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 14 / None

106) What impact have environmental cleanup costs had on corporate disclosures?

Diff: Medium

Learning Objective: 10.4

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 15 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

Key ratios for Raytheon, a competitor in the aerospace industry, for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.

Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income

107) The change in ROE from 2018 to 2019 was driven primarily by:

A) the change in leverage.

B) the change in return on assets.

C) the change in COGS as a percent of sales.

D) the change in accounts payable turnover.

Diff: Hard

Learning Objective: 10.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 1 / None

108) Which of Raytheon's solvency ratios signals higher levels of solvency in 2019 than in 2018:

A) Current ratio.

B) Quick ratio.

C) Interest coverage.

D) Accounts payable turnover.

Diff: Hard

Learning Objective: 10.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 2 / None

109) Choose the best answer.

A) Raytheon showed more reliance on both total debt and long-term debt across the 3-year period.

B) Raytheon showed less reliance on both total debt and long-term debt across the 3-year period.

C) Raytheon showed less reliance on total debt but more reliance on long-term debt over the 3-year period.

D) Raytheon showed more reliance on total debt but less reliance on long-term debt over the 3-year period.

Diff: Hard

Learning Objective: 10.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 3 / None

110) Which of the following statements is false?

A) The change in Raytheon's reliance on debt financing put downward pressure on Raytheon's ROE.

B) The change in Raytheon's reliance on debt financing was key in explaining the change in Raytheon's ROA.

C) Raytheon is better able to cover its debt payments with operating funds in 2019 compared to 2018.

D) Raytheon paid its suppliers more slowly from 2017 to 2019.

Diff: Hard

Learning Objective: 10.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 4 / None

Video Questions

111) Which of the following is an accurate statement about a liability?

A) Expenses owed by a company.

B) Obligations to disburse assets or perform services in the future.

C) Revenues prior to the receipt of cash.

D) A form of financing used by large companies that is less popular than equity.

Diff: Easy

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 1 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

112) Debt is a relatively popular form of financing because:

A) it is less risky to issue than equity.

B) debtholders are paid after equity in the event of liquidation.

C) interest is tax deductible.

D) dividends do not reduce net income.

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 2 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

113) Which of the following does not represent a way to classify liabilities?

A) operating vs. non-operating

B) determinable vs. contingent

C) current vs. non-current

D) short-term vs. long-term

Diff: Easy

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 3 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

114) Which of the following is a characteristic of a contingency?

A) A past event that has been resolved.

B) An existing condition with an uncertain outcome.

C) A capitalized cost.

D) A receipt of cash for a future service.

Diff: Easy

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Knowledge

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 4 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

115) Which of the following accounting methods would be appropriate for a reasonably probable contingent gain?

A) Ignore on the financial statements and the footnotes.

B) Ignore on the financial statements but describe in the footnotes.

C) Book a gain on the income statement but ignore in the footnotes.

D) Book a gain on the income statement and an asset on the balance sheet.

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 5 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

116) Which of the following accounting methods would be appropriate if the company knew that it was going to lose a lawsuit but was unsure about the size of the settlement?

A) Ignore on the financial statements and the footnotes.

B) Ignore on the financial statements but describe in the footnotes.

C) Book a loss on the income statement and describe in the footnotes.

D) Book a loss on the income statement and a liability on the balance sheet.

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 6 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

117) Highly likely contingent losses that can be reasonably estimated are recorded with journal entries of which one of the following forms?

A) Debit: expense; credit: liability

B) Debit: liability; credit: expense

C) Debit: liability; credit : cash

D) Debit: expense; credit: cash

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 7 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

118) If a company has decided to close a plant in the future, how should it proceed?

A) A loss should be booked while the plant is being closed.

B) A loss should be booked after the plant is closed.

C) A loss and a liability should be estimated and booked as soon as the company decides to close the plant.

D) A loss should be booked immediately, but the associated liability should not be added to the balance sheet until the plant closing has begun.

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 8 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

119) In which of the following areas does US GAAP and IFRS not differ?

A) in the valuation of non-current contingent liabilities

B) in the recognition of reversals of over-stated contingent expenses

C) in the ordering of assets on the balance sheet

D) in the recognition of contingent gains

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 9 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

120) The balance as of the end of the year in a contingent (or provision) liability account is equal to:

A) the beginning balance, plus additional accruals, less cash payments, plus reversals.

B) the beginning balance, less additional accruals, plus cash payments, plus reversals.

C) the beginning balance, less cash payments, plus additional accruals, less reversals.

D) the beginning balance, less cash payments, plus additional accruals, plus reversals.

Diff: Medium

Learning Objective: 10.1; 10.2; 10.3; 10.4

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Introduction to liabilities and contingencies - Volkswagen Video: Question 10 / Video: Introduction to liabilities and contingencies - Volkswagen. www.wiley.com/go/pratt/financialaccounting11e

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