Chapter

Current Liabilities 11

Accounting
Class
before Mid

Accounting eagle

Chapter 11 Part
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Current Liabilities 11
➢TRUE-FALSE STATEMENTS
1. A current liability must be paid out of current earnings.
2. Current liabilities are expected to be paid within one year or the operating cycle,
whichever is longer.
3. The relationship between current liabilities and current assets is important in
evaluating a company's ability to pay off its long-term debt.
4. A company whose current liabilities exceed its current assets may have a liquidity
problem.
5. Notes payable usually require the borrower to pay interest.
6. Notes payable are often used instead of accounts payable.
7. A note payable must always be paid before an account payable.
8. A $30,000, 8%,
9-month note payable requires an interest payment of $1,800 at maturity. 9. Most notes
are not interest bearing.
10. With an interest-bearing note, the amount of cash received upon issuance of the
note generally exceeds the note's face value.
11. Interest expense on a note payable is only recorded at maturity.
12. Interest expense is reported under Other Expenses and Losses in the income
statement.
13. Unearned revenues should be classified as Other Revenues and Gains on the Income
Statement.
14. The higher the sales tax rate, the more profit a retailer can earn.
15. Metropolitan Symphony sells 200 season tickets for $60,000 that includes a five-
concert season. The amount of Unearned Ticket Revenue after the second concert is
$24,000.

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16. During the month, a company sells goods for a total of $108,000, which includes
sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales
Revenues and $8,000 in Sales Tax Expense.
17. Current maturities of long-term debt refers to the amount of interest on a note
payable that must be paid in the current year.
18. The current ratio permits analysts to compare the liquidity of different sized
companies.
19. Working capital is current assets divided by current liabilities.
20. Contingent liabilities should be recorded in the accounts if there is a remote
possibility that the contingency will actually occur.
21. A contingent liability is a liability that may occur if some future event takes place.
22. In concept, the estimating of Warranty Expense when products are sold under
warranty is similar to the estimating of Bad Debts Expense based on credit sales.
23. FICA taxes and federal income taxes are levied on employees' earnings without
limit.
24. FICA taxes withheld and federal income taxes withheld are mandatory payroll
deductions.
25. The employer incurs a payroll tax expense equal to the amount withheld from the
employees' wages for federal income taxes.
26. Internal control over payroll is not necessary because employees will complain if
they do not receive the correct amount on their payroll checks.
27. The timekeeping function includes supervisors monitoring hours worked through
time cards and time reports.
28. The human resources department documents and authorizes employment of new
employees.

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29. Payroll activities involve three functions: hiring employees, preparing the payroll,
and paying the payroll. a
30. Post-retirement benefits consist of payments by employers to retired employees for
health care, life insurance, and pensions.
31. A debt that is expected to be paid within one year through the creation of long-term
debt is a current liability.
32. Notes payable usually are issued to meet long-term financing needs.
33. Current maturities of long-term debt are often identified as long-term debt due
within one year on the balance sheet.
34. In a given year, total warranty expense is the sum of actual warranty costs incurred
on units sold plus the estimated cost of servicing those units in the future.
35. FICA taxes are a voluntary deduction from employee earnings.
36. FICA taxes are a deduction from employee earnings and are also imposed upon
employers as an expense.
37. The objectives of internal accounting control for payrolls are (a) to safeguard
company assets from unauthorized payments of payrolls and (b) to assure accuracy and
reliability of the accounting records pertaining to payroll. a
38. When a company gives employees' rights to receive compensation for absences and
the payment for such absences is probable and the amount can be reasonably estimated,
the company should accrue a liability.

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➢MULTIPLE CHOICE QUESTIONS
39. All of the following are reported as current liabilities except
a. accounts payable. b. bonds payable.
c. notes payable. d. unearned revenues.
40. The relationship between current liabilities and current assets is
a. useful in determining income. b. useful in evaluating a company's liquidity.
c. called the matching principle. d. useful in determining the amount of a company's
long-term debt.
41. Most companies pay current liabilities
a. out of current assets. b. by issuing interest-bearing notes payable.
c. by issuing stock. d. by creating long-term liabilities.
42. A current liability is a debt that can reasonably be expected to be paid
a. within one year. b. between 6 months and 18 months.
c. out of currently recognized revenues. d. out of cash currently on hand.
43. Liabilities are classified on the balance sheet as current or
a. deferred. b. unearned. c. long-term. d. accrued.
44. From a liquidity standpoint, it is more desirable for a company to have current
a. assets equal current liabilities. b. liabilities exceed current assets.
c. assets exceed current liabilities. d. liabilities exceed long-term liabilities.
45. The relationship of current assets to current liabilities is used in evaluating a
company's
a. operating cycle. b. revenue-producing ability.
c. short-term debt paying ability. d. long-range solvency.

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46. Which of the following is usually not an accrued liability?
a. Interest payable b. Wages payable
c. Taxes payable d. Notes payable
47. In most companies, current liabilities are paid within
a. one year through the creation of other current liabilities.
b. the operating cycle through the creation of other current liabilities.
c. one year out of current assets.
d. the operating cycle out of current assets.
48. The entry to record the issuance of an interest-bearing note credits Notes Payable
for the note's
a. maturity value. b. market value. c. face value. d. cash realizable value.
49. With an interest-bearing note, the amount of assets received upon issuance of the
note is generally
a. equal to the note's face value. b. greater than the note's face value.
c. less than the note's face value. d. equal to the note's maturity value.
50. A note payable is in the form of
a. a contingency that is reasonably likely to occur.
b. a written promissory note.
c. an oral agreement.
d. a standing agreement.
51. The entry to record the proceeds upon issuing an interest-bearing note is
a. Dr Interest Expense Dr Cash CrNotes Payable B. Dr Cash Cr Notes Payable
c. Dr Notes Payable Crash D. Dr Cash Cr Notes Payable Cr Interest Payable

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Use the following information for questions 52-54.
Coffey County Bank agrees to lend Adcock Brick Company $200,000 on January 1.
Adcock Brick Company signs a $200,000, 8%, 9-month note.
52. The entry made by Adcock Brick Company on January 1 to record the proceeds
and issuance of the note is
a. Interest Expense. 12,000
Cash. 188,000
Notes Payable 200,000
b. Cash 200,000
Notes Payable 200,000
c. Cash.200,000
Interest Expense 12,000
Notes Payable 212,000
d. Cash 200,000
Interest Expense. 12,000
Notes Payable 200,000
Interest Payable. 12,000
53. What is the adjusting entry required if Adcock Brick Company prepares financial
statements on June 30?
a. Interest Expense. 8,000
Interest Payable 8,000
b. Interest Expense. 8,000
Cash 8,000

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c. Interest Payable. 8,000
Cash8,000
d. Interest Payable.8,000
Interest Expense. 8,000
54. What entry will Adcock Brick Company make to pay off the note and interest at
maturity assuming that interest has been accrued to September 30?
a. Notes Payable...................................................................... 212,000
Cash ............................................................................ 212,000
b. Notes Payable...................................................................... 200,000
Interest Payable ................................................................... 12,000
Cash ............................................................................ 212,000
c. Interest Expense .................................................................. 12,000
Notes Payable...................................................................... 200,000
Cash ............................................................................ 212,000
d. Interest Payable ................................................................... 8,000
Notes Payable...................................................................... 200,000
Interest Expense .................................................................. 4,000
Cash ............................................................................ 212,000
55. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is
decreased.

c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is
increased.

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56. When an interest-bearing note matures, the balance in the Notes Payable account is

a. less than the total amount repaid by the borrower.

b. the difference between the maturity value of the note and the face value of the note.

c. equal to the total amount repaid by the borrower.

d. greater than the total amount repaid by the borrower.

Use the following information for questions 57–58.

On October 1, Jerry's Carpet Service borrows $250,000 from First National Bank on a 3-month,
$250,000, 8% note.

57. What entry must Jerry's Carpet Service make on December 31 before financial statements are
prepared?

a. Interest Payable ................................................................... 5,000

Interest Expense.......................................................... 5,000

b. Interest Expense .................................................................. 20,000

Interest Payable........................................................... 20,000

c. Interest Expense .................................................................. 5,000

Interest Payable........................................................... 5,000

d. Interest Expense .................................................................. 5,000

Notes Payable ............................................................. 5,000

58. The entry by Jerry's Carpet Service to record payment of the note and accrued interest on
January 1 is

a. Notes Payable...................................................................... 255,000

Cash ............................................................................ 255,000

b. Notes Payable...................................................................... 250,000

Interest Payable ................................................................... 5,000

Cash ............................................................................ 255,000

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c. Notes Payable ..................................................................... 250,000

Interest Payable................................................................... 20,000

Cash ........................................................................... 270,000

d. Notes Payable ..................................................................... 250,000

Interest Expense.................................................................. 5,000

Cash ........................................................................... 255,000

59. Interest expense on an interest-bearing note is

a. always equal to zero. b. accrued over the life of the note.
c. only recorded at the time the note is issued. d. only recorded at maturity when the
note is paid.
60. The entry to record the payment of an interest-bearing note at maturity after all
interest expense has been recognized is
a. Notes Payable
Interest Payable
Cash
b. Notes Payable
Interest Expense
Cash
c. Notes Payable
Cash
d. Notes Payable
Cash
Interest Payable

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61. Sales taxes collected by a retailer are recorded by
a. crediting Sales Taxes Revenue. b. debiting Sales Taxes Expense.
c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.
62. Unearned Rental Revenue is
a. a contra account to Rental Revenue. b. a revenue account.
c. reported as a current liability. d. debited when rent is received in advance.
63. Sales taxes collected by the retailer are recorded as a(n)
a. revenue. b. liability. c. expense. d. asset.
Use the following information for questions 64–65.
On September 1, Ken's Painting Service borrows $50,000 from National Bank on a 4-month,
$50,000, 6% note.

64. What entry must Ken's Painting Service make on December 31 before financial statements are
prepared?

a. Interest Payable ................................................................... 1,000

Interest Expense.......................................................... 1,000

b. Interest Expense .................................................................. 3,000

Interest Payable........................................................... 3,000

c. Interest Expense .................................................................. 1,000

Interest Payable........................................................... 1,000

d. Interest Expense .................................................................. 1,000

Notes Payable ............................................................. 1,000

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65. The entry by Ken's Painting Service to record payment of the note and accrued interest on
January 1 is

a. Notes Payable...................................................................... 51,000

Cash ............................................................................ 51,000

b. Notes Payable...................................................................... 50,000

Interest Payable ................................................................... 1,000

Cash ............................................................................ 51,000

c. Notes Payable...................................................................... 50,000

Interest Payable ................................................................... 3,000

Cash ............................................................................ 53,000

d. Notes Payable...................................................................... 50,000

Interest Expense .................................................................. 1,000

Cash ............................................................................ 51,000

66. The interest charged on a $100,000 note payable, at the rate of 8%, on a 90-day note would be

a. $8,000. b. $4,444. c. $2,000. d. $667.

67. The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be

a. $6,000. b. $3,333. c. $1,500. d. $1,000.

68. The interest charged on a $50,000 note payable, at the rate of 8%, on a 3-month note would be

a. $4,000. b. $2,000. c. $1,000. d. $667.

69. The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be

a. $3,000. b. $1,500. c. $750. d. $500.

70. A company receives $132, of which $12 is for sales tax. The journal entry to record the sale
would include a

a. debit to Sales Tax Expense for $12. b. credit to Sales Tax Payable for $12.

c. debit to Sales for $132. d. debit to Cash for $120.

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