Definition Of Liability Quiz

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  • 1/69 Questions

    Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as

    • Current liabilities.
    • Deferred charges.
    • Long-term liabilities.
    • Intermediate debt.
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Take this Legal liability quiz and test your knowledge on definitions of liability. All the best for this quiz!

Definition Of Liability Quiz - Quiz

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  • 2. 

    Liabilities are

    • Any accounts having credit balances after closing entries are made.

    • Deferred credits that are recognized and measured in conformity with generallyaccepted accounting principles.

    • Obligations to transfer ownership shares to other entities in the future.

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

    Correct Answer
    A. Obligations arising from past transactions and payable in assets or services in the future.
    Explanation
    Liabilities are obligations that arise from past transactions and are payable in the future through assets or services. This means that a company has incurred a debt or obligation to another party, and it is expected to be settled by providing assets or performing services. Liabilities can include loans, accounts payable, salaries payable, and other financial obligations. This definition aligns with the answer choice "obligations arising from past transactions and payable in assets or services in the future."

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  • 3. 

    What is the relationship between current liabilities and a company's operating cycle?

    • Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

    • Current liabilities are the result of operating transactions.

    • Current liabilities can't exceed the amount incurred in one operating cycle.

    • There is no relationship between the two.

    Correct Answer
    A. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).
    Explanation
    The relationship between current liabilities and a company's operating cycle is that the liquidation of current liabilities is reasonably expected to occur within the company's operating cycle, which is typically one year or less. This means that the company expects to pay off its current liabilities using its operating cash flows within this time frame.

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  • 4. 

    Which of the following may be a current liability?

    • Withheld Income Taxes

    • Deposits Received from Customers

    • Deferred Revenue

    • All of these

    Correct Answer
    A. All of these
    Explanation
    All of the options listed - Withheld Income Taxes, Deposits Received from Customers, and Deferred Revenue - may be considered current liabilities. Withheld Income Taxes are amounts that have been deducted from employees' salaries but not yet remitted to the government. Deposits Received from Customers represent funds received in advance for goods or services that have not yet been provided. Deferred Revenue refers to income that has been received but not yet earned. All of these items represent obligations that are expected to be settled within a short period of time, typically within one year, and therefore classify as current liabilities.

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  • 5. 

    Which of the following is a current liability?

    • A long-term debt maturing currently, which is to be paid with cash in a sinking fund

    • A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue

    • A long-term debt maturing currently, which is to be converted into common stock

    • None of these

    Correct Answer
    A. None of these
    Explanation
    None of the options provided in the question are considered a current liability. A current liability refers to a debt or obligation that is expected to be settled within one year or the operating cycle of a business, whichever is longer. In this case, all the options describe long-term debts that are not due for settlement in the near future, therefore they do not qualify as current liabilities.

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  • 6. 

    The ratio of current assets to current liabilities is called the

    • Current ratio.

    • Acid-test ratio.

    • Current asset turnover ratio.

    • Current liability turnover ratio.

    Correct Answer
    A. Current ratio.
    Explanation
    The current ratio is a financial metric that compares a company's current assets to its current liabilities. It is used to assess a company's short-term liquidity and its ability to meet its short-term obligations. The current ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has more current assets to cover its current liabilities, which is generally seen as a positive sign of financial health. Therefore, the correct answer is current ratio.

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  • 7. 

    Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

    • Amount of loss is reasonably estimable and event occurs infrequently.

    • Amount of loss is reasonably estimable and occurrence of event is probable.

    • Event is unusual in nature and occurrence of event is probable.

    • Event is unusual in nature and event occurs infrequently.

    Correct Answer
    A. Amount of loss is reasonably estimable and occurrence of event is probable.
    Explanation
    This answer is correct because under current generally accepted accounting principles, a contingency should be accrued if the amount of loss can be reasonably estimated and the occurrence of the event is probable. This means that there is a likelihood that the event will occur and that the amount of loss can be reasonably determined.

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  • 8. 

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

    • Payment is probable.

    • Employee rights vest or accumulate.

    • Amount can be reasonably estimated.

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    The requirement to accrue a liability for the cost of compensated absences arises when all of the following conditions are met: payment is probable, employee rights vest or accumulate, and the amount can be reasonably estimated. In other words, if it is likely that the company will have to make payments for absences, if the employees have earned the right to take those absences or if they accumulate over time, and if the amount of the liability can be reasonably estimated, then a liability should be accrued.

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  • 9. 

    When is a contingent liability recorded?

    • When the amount can be reasonably estimated.

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

    • When the future events are probable to occur.

    • When the future events will possibly occur and the amount can be reasonably estimated.

    Correct Answer
    A. When the future events are probable to occur and the amount can be reasonably estimated.
    Explanation
    A contingent liability is recorded when there is a probable future event that may result in a loss and the amount of that loss can be reasonably estimated. This means that there is a likelihood of the event occurring, and the amount of the potential loss can be reasonably determined.

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  • 10. 

    Which of the following terms is associated with recording a contingent liability?

    • Possible.

    • Likely.

    • Remote.

    • Probable.

    Correct Answer
    A. Probable.
    Explanation
    The term "probable" is associated with recording a contingent liability. A contingent liability refers to a potential obligation that may arise in the future, depending on the outcome of a specific event. When a contingent liability is considered probable, it means that it is likely to occur. In accounting, probable contingent liabilities are recorded in the financial statements and disclosed in the accompanying notes, as they have a high chance of becoming actual liabilities.

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  • 11. 

    A contingency can be accrued when

    • It is certain that funds are available to settle the disputed amount.

    • An asset may have been impaired.

    • The amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.

    • . it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

    Correct Answer
    A. The amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
    Explanation
    A contingency can be accrued when the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred. This means that there is enough information available to estimate the potential loss and it is likely that an asset has been damaged or a liability has been created. This allows for the recognition of the potential loss in the financial statements, ensuring that the financial information accurately reflects the potential impact on the company's financial position.

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  • 12. 

    Of the following items, the only one which should not be classified as a current liability is

    • Current maturities of long-term debt.

    • Sales taxes payable.

    • Short-term obligations expected to be refinanced.

    • Unearned revenues.

    Correct Answer
    A. Short-term obligations expected to be refinanced.
    Explanation
    Short-term obligations expected to be refinanced should not be classified as a current liability because they are expected to be refinanced and therefore do not represent an obligation that will be paid within the current operating cycle or one year, whichever is longer. Current maturities of long-term debt, sales taxes payable, and unearned revenues are all examples of current liabilities because they represent obligations that are expected to be settled within the current operating cycle or one year.

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  • 13. 

    What are compensated absences?

    • Unpaid time off.

    • A form of healthcare.

    • Payroll deductions.

    • Paid time off

    Correct Answer
    A. Paid time off
    Explanation
    Compensated absences refer to paid time off, where employees are granted leave with pay for various reasons such as vacation, sick leave, or personal days. This allows employees to take time off from work while still receiving their regular pay. It is a benefit provided by employers to promote work-life balance and employee well-being.

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  • 14. 

    Stock dividends distributable should be classified on the

    • Income statement as an expense

    • Balance sheet as an asset.

    • Balance sheet as a liability.

    • Balance sheet as an item of stockholders' equity.

    Correct Answer
    A. Balance sheet as an item of stockholders' equity.
    Explanation
    Stock dividends distributable should be classified on the balance sheet as an item of stockholders' equity because it represents the portion of retained earnings that is being distributed to shareholders in the form of additional shares. It is not an expense because it does not involve any outflow of assets or incurrence of liabilities. Instead, it reflects a reallocation of existing equity among shareholders. As such, it is reported as a component of stockholders' equity on the balance sheet.

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  • 15. 

    Which of the following is a characteristic of a current liability but not a long-term liability?

    • Unavoidable obligation.

    • Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.

    • Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

    • Transaction or other event creating the liability has already occurred.

    Correct Answer
    A. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
    Explanation
    A characteristic of a current liability is that its liquidation is reasonably expected to require the use of existing resources classified as current assets or create other current liabilities. This means that in order to settle the current liability, the company will need to use its current assets or create additional current liabilities. This characteristic is not applicable to long-term liabilities, as they are typically settled over a longer period of time and do not require the use of current assets or creation of other current liabilities for their liquidation.

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  • 16. 

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

    • Providing trade credit to customers.

    • Selling inventory.

    • Selling magazine subscriptions.

    • Providing manufacturer warranties.

    Correct Answer
    A. Selling magazine subscriptions.
    Explanation
    Selling magazine subscriptions may give rise to unearned revenue because when a customer pays for a subscription upfront, the company has not yet provided the full service. The revenue is considered unearned until the magazines are delivered to the customer over the subscription period.

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  • 17. 

    What condition is necessary to recognize an asset retirement obligation?

    • Company has an existing legal obligation and can reasonably estimate the amount of the liability.

    • Company can reasonably estimate the amount of the liability

    • Company has an existing legal obligation.

    • Obligation event has occurred.

    Correct Answer
    A. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
    Explanation
    To recognize an asset retirement obligation, it is necessary for the company to have an existing legal obligation. This means that there is a legal requirement for the company to retire or decommission an asset in the future. Additionally, the company must be able to reasonably estimate the amount of the liability associated with this obligation. This means that the company has enough information and data to determine the potential cost or financial impact of fulfilling the obligation. Both of these conditions must be met in order to recognize an asset retirement obligation.

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  • 18. 

    Which of the following is true about accounts payable? 1. Accounts payable should not be reported at their present value. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.

    • 1

    • 2

    • 3

    • Both 2 and 3 are true.

    Correct Answer
    A. 1
  • 19. 

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

    • Trade notes payable

    • Short-term zero-interest-bearing notes payable

    • The discount on short-term notes payable

    • All of these are included

    Correct Answer
    A. All of these are included
    Explanation
    All of these items should be included in the current liabilities section of the balance sheet. Trade notes payable represent amounts owed to suppliers for goods or services purchased on credit. Short-term zero-interest-bearing notes payable are liabilities that need to be repaid within a short period of time and do not accrue interest. The discount on short-term notes payable represents the difference between the face value of the notes and the amount received when they were issued. Including all of these items provides a comprehensive view of the company's current obligations.

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  • 20. 

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

    • The obligation relates to the rights that vest or accumulate.

    • Payment of the compensation is probable

    • The obligation is attributable to employee services already performed.

    • All of these are conditions for the accrual.

    Correct Answer
    A. All of these are conditions for the accrual.
    Explanation
    The correct answer is "All of these are conditions for the accrual." This means that all three conditions mentioned in the options are necessary for accruing a liability for the cost of compensation for future absences. The first condition states that the obligation must relate to the rights that vest or accumulate, meaning that there must be a legal or contractual obligation for the compensation. The second condition states that payment of the compensation is probable, indicating that it is likely to occur. The third condition states that the obligation must be attributable to employee services already performed, meaning that the compensation is for work that has already been completed.

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  • 21. 

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

    • Management indicated that they are going to refinance the obligation.

    • Actually refinance the obligation.

    • Have capacity under existing financing agreements that can be used to refinance the obligation.

    • Enter into a financing agreement that clearly permits the entity to refinance the obligation.

    Correct Answer
    A. Management indicated that they are going to refinance the obligation.
    Explanation
    This statement only indicates management's intention to refinance the obligation but does not provide any evidence that the refinancing has actually been consummated. Evidence would require actions or documentation that demonstrate the completion of the refinancing process, such as actually refinancing the obligation, having capacity under existing financing agreements, or entering into a financing agreement that permits refinancing.

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  • 22. 

    Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2010. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

    • No recognition

    • Note disclosure only

    • Operating expense of $800,000 and liability of $800,000

    • Appropriation of retained earnings of $800,000

    Correct Answer
    A. Operating expense of $800,000 and liability of $800,000
    Explanation
    The correct answer is operating expense of $800,000 and liability of $800,000. This is because the government has clearly indicated its intention of having Ortiz recall all cans of the paint, which indicates a probable future outflow of resources. As a result, Ortiz should recognize an operating expense for the estimated cost of the recall and also recognize a liability for the same amount. This is in accordance with the principle of recognizing expenses and liabilities when they are incurred.

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  • 23. 

    Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

    • Accrued.

    • Disclosed but not accrued.

    • Neither accrued nor disclosed.

    • Classified as an appropriation of retained earnings.

    Correct Answer
    A. Accrued.
    Explanation
    Based on the information provided, it is probable that a liability has been incurred for obligations related to product warranties. Additionally, the amount of the loss involved can be reasonably estimated. In accordance with accounting principles, when a liability is probable and the amount can be reasonably estimated, it should be accrued. Accruing the estimated loss contingency ensures that the financial statements accurately reflect the company's obligations and liabilities.

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  • 24. 

    What does the current ratio inform you about a company?

    • The extent of slow-moving inventories.

    • The efficient use of assets.

    • The company's liquidity.

    • The company's profitability.

    Correct Answer
    A. The company's liquidity.
    Explanation
    The current ratio informs you about a company's liquidity. It measures the company's ability to pay its short-term liabilities using its current assets. A high current ratio indicates that the company has enough current assets to cover its short-term obligations, suggesting good liquidity. Conversely, a low current ratio may indicate that the company may struggle to meet its short-term financial obligations, indicating poor liquidity.

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  • 25. 

    What is a discount as it relates to zero-interest-bearing notes payable?

    • The discount represents the lender's costs to underwrite the note.

    • The discount represents the credit quality of the borrower.

    • The discount represents the cost of borrowing.

    • The discount represents the allowance for uncollectible amounts.

    Correct Answer
    A. The discount represents the cost of borrowing.
    Explanation
    The discount represents the cost of borrowing because when a zero-interest-bearing note payable is issued, it is typically sold at a discount. This means that the borrower receives less cash upfront than the face value of the note. The difference between the face value and the cash received is the discount, which represents the cost of borrowing for the borrower. The lender is essentially providing a loan at a lower amount than the face value, and the discount compensates the lender for the time value of money and the risk associated with lending.

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  • 26. 

    The numerator of the acid-test ratio consists of

    • Total current assets

    • Cash and marketable securities.

    • Cash and net receivables.

    • Cash, marketable securities, and net receivables.

    Correct Answer
    A. Cash, marketable securities, and net receivables.
    Explanation
    The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to pay off its current liabilities without relying on the sale of inventory. It is calculated by dividing the sum of cash, marketable securities, and net receivables by the total current liabilities. These three components are included in the numerator because they represent the most liquid assets that can be quickly converted into cash to meet short-term obligations. Including only cash and marketable securities would not provide a complete picture of the company's ability to cover its liabilities, as net receivables also represent funds that are expected to be collected in the near future.

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  • 27. 

    Why is the liability section of the balance sheet of primary importance to bankers?

    • To evaluate the entity's credit quality.

    • To assist in understanding the entity's liquidity.

    • To better understand sources of repayment.

    • To evaluate operating efficiency.

    Correct Answer
    A. To assist in understanding the entity's liquidity.
    Explanation
    The liability section of the balance sheet is important to bankers because it provides information about the entity's liquidity. By analyzing the liabilities, bankers can assess the company's ability to meet its short-term obligations and determine if it has enough assets to cover its liabilities. This is crucial for bankers as it helps them evaluate the entity's financial health and make informed decisions regarding lending or extending credit to the company.

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  • 28. 

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

    • A general description of the financing arrangement.

    • The terms of the new obligation incurred or to be incurred.

    • The terms of any equity security issued or to be issued.

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

    Correct Answer
    A. The number of financing institutions that refused to refinance the debt, if any.
    Explanation
    The footnote to the financial statements describing the exclusion of a short-term obligation from current liabilities due to refinancing should include a general description of the financing arrangement, the terms of the new obligation incurred or to be incurred, and the terms of any equity security issued or to be issued. However, it is not necessary to include the number of financing institutions that refused to refinance the debt, if any.

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  • 29. 

    Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?

    • Probable losses not reasonably estimable

    • Environmental liabilities that cannot be reasonably estimated

    • Guarantees of indebtedness of others

    • All of these must be disclosed. Current Liabilities and Contingencies

    Correct Answer
    A. All of these must be disclosed. Current Liabilities and Contingencies
    Explanation
    All of the contingencies mentioned in the options must be disclosed in the financial statements or the notes thereto. This means that probable losses not reasonably estimable, environmental liabilities that cannot be reasonably estimated, and guarantees of indebtedness of others must all be disclosed in the financial statements or the accompanying notes.

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  • 30. 

    To record an asset retirement obligation (ARO), the cost associated with the ARO is

    • Expensed.

    • Included in the carrying amount of the related long-lived asset.

    • Included in a separate account.

    • None of these.

    Correct Answer
    A. Included in the carrying amount of the related long-lived asset.
    Explanation
    When recording an asset retirement obligation (ARO), the cost associated with the ARO is included in the carrying amount of the related long-lived asset. This means that the cost is added to the value of the asset on the balance sheet, increasing its carrying amount. By doing so, the company recognizes the future cost of retiring the asset and ensures that it is properly accounted for in the financial statements. This approach reflects the matching principle of accounting, which requires expenses to be recognized in the same period as the related revenue or asset.

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  • 31. 

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

    • The Discount on Notes Payable account has a debit balance.

    • The Discount on Notes Payable account should be reported as an asset on the balance sheet.

    • When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.

    • All of these are true.

    Correct Answer
    A. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
    Explanation
    The Discount on Notes Payable account should not be reported as an asset on the balance sheet because it represents a contra liability account. It is used to offset the Notes Payable account and reflects the discount given to the borrower for early payment. As a contra liability account, it has a debit balance, which is opposite to the usual credit balance of liability accounts. Therefore, the statement that the Discount on Notes Payable account should be reported as an asset on the balance sheet is not true.

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  • 32. 

    Which of the following is not considered a part of the definition of a liability?

    • Unavoidable obligation.

    • Transaction or other event creating the liability has already occurred.

    • Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.

    • Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

    Correct Answer
    A. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
    Explanation
    The given answer, "Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities," is not considered a part of the definition of a liability. The definition of a liability includes an unavoidable obligation, a transaction or event that has already occurred, and a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. However, the expectation of liquidation requiring the use of existing resources or creating other current liabilities is not a part of the definition of a liability.

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  • 33. 

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

    • Record a liability for cumulative amount of preferred stock dividends not declared.

    • Disclose the amount of the dividends in arrears.

    • Record a liability for the current year's dividends only.

    • No disclosure or recognition is required.

    Correct Answer
    A. Disclose the amount of the dividends in arrears.
    Explanation
    In this situation, the required accounting treatment or disclosure is to disclose the amount of the dividends in arrears. This means that the company needs to provide information about the cumulative preferred stock dividends that have not been declared for the past three years. This disclosure is important for investors and other stakeholders to understand the financial obligations of the company towards its preferred stockholders.

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  • 34. 

    Which of the following is a current liability?

    • Preferred dividends in arrears

    • A dividend payable in the form of additional shares of stock

    • A cash dividend payable to preferred stockholders

    • All of these

    Correct Answer
    A. A cash dividend payable to preferred stockholders
    Explanation
    A cash dividend payable to preferred stockholders is a current liability because it represents an obligation of the company to pay a dividend in cash to its preferred stockholders within a short period of time, typically within the next year. Current liabilities are obligations that are expected to be settled within one year or the operating cycle of the business, whichever is longer. Since the cash dividend payable to preferred stockholders meets this criteria, it is considered a current liability.

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  • 35. 

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

    • Vested rights are normally for a longer period of employment than are accumulated rights.

    • Vested rights are not contingent upon an employee's future service

    • Vested rights are a legal and binding obligation on the company, whereas

    • Vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

    Correct Answer
    A. Vested rights are not contingent upon an employee's future service
    Explanation
    Vested rights refer to the benefits that an employee is entitled to receive even if they leave the company before retirement or completion of a certain period of service. These rights are not contingent upon the employee's future service and are legally binding obligations on the company. On the other hand, accumulated rights represent the amount of compensated absences that an employee has earned based on their length of service. The correct answer states that vested rights are not contingent upon an employee's future service, which distinguishes them from accumulated rights.

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  • 36. 

    An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?

    • The reduction in sales price attributed to the coupon is recognized as premium expense.

    • The difference between the cost of the video game and the cash received is recognized as premium expense.

    • Premium expense is not recognized.

    • The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

    Correct Answer
    A. The difference between the cost of the video game and the cash received is recognized as premium expense.
    Explanation
    When a customer purchases a video game using the discount coupon, the store would recognize the difference between the cost of the video game and the cash received as a premium expense. This means that the store would account for the discount given to the customer as an expense, reducing their profit margin on the sale. This is because the store is essentially selling the second game at a discounted price, which results in a reduction in revenue for the store.

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  • 37. 

    Which of the following items is a current liability?

    • Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.

    • Bonds due in three years.

    • Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

    • Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

    Correct Answer
    A. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
    Explanation
    The correct answer is "Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months." This is because a current liability is a debt or obligation that is expected to be settled within one year or the operating cycle of a business, whichever is longer. In this case, the bonds are due in eleven months, which falls within the one-year timeframe. Additionally, the fact that there is an adequate appropriation of retained earnings further supports the classification of these bonds as a current liability.

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  • 38. 

    What is the relationship between present value and the concept of a liability?

    • Present values are used to measure certain liabilities.

    • Present values are not used to measure liabilities.

    • Present values are used to measure all liabilities.

    • Present values are only used to measure long-term liabilities.

    Correct Answer
    A. Present values are used to measure certain liabilities.
    Explanation
    Present values are used to measure certain liabilities because the concept of present value takes into account the time value of money, which means that the value of money decreases over time. When measuring liabilities, it is important to consider the timing of cash flows. By using present value calculations, the future cash flows associated with certain liabilities can be discounted to their present value, providing a more accurate measure of the liability. However, not all liabilities require present value calculations as some may not involve future cash flows or have a significant time component. Therefore, present values are used to measure certain liabilities, but not all liabilities.

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  • 39. 

    Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial statements should include the following related to the incident:

    • Recognition of a loss and creation of a liability for the value of the land.

    • Recognition of a loss only.

    • Creation of a liability only

    • Disclosure in note form only

    Correct Answer
    A. Recognition of a loss and creation of a liability for the value of the land.
    Explanation
    The correct answer is recognition of a loss and creation of a liability for the value of the land. This is because the incident of the hay being set on fire due to the Railroad's negligence has resulted in a loss for Jeff Beck. The offer made by the Railroad to assign any rights they may have in the land to Beck in exchange for releasing his right to reimbursement indicates that there is a liability involved. Therefore, the financial statements should include the recognition of the loss and the creation of a liability for the value of the land.

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  • 40. 

    How do you determine the acid-test ratio?

    • The sum of cash and short-term investments divided by short-term debt.

    • Current assets divided by current liabilities.

    • Current assets divided by short-term debt.

    • The sum of cash, short-term investments and net receivables divided by current liabilities.

    Correct Answer
    A. The sum of cash, short-term investments and net receivables divided by current liabilities.
    Explanation
    The acid-test ratio is a measure of a company's ability to pay off its short-term liabilities using its most liquid assets. It excludes inventory from current assets because inventory may not be easily converted into cash. The correct answer states that the acid-test ratio is calculated by dividing the sum of cash, short-term investments, and net receivables by current liabilities. This formula takes into account the most liquid assets available to the company and compares them to its short-term obligations, providing a more accurate measure of its liquidity position.

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  • 41. 

    Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty

    • Should be reported as long-term.

    • Should be reported as current.

    • Should be reported as part current and part long-term.

    • Need not be disclosed.

    Correct Answer
    A. Should be reported as part current and part long-term.
    Explanation
    The liability for the warranty should be reported as part current and part long-term because the manufacturing corporation has a one-year operating cycle and a continuing policy of guaranteeing new products against defects for three years. This means that a portion of the warranty liability will be incurred and settled within the current operating cycle, while the remaining portion will extend beyond the current operating cycle and be settled in future periods. Therefore, it is appropriate to report the liability as part current and part long-term.

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  • 42. 

    Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

    • Zero.

    • The minimum of the range.

    • The mean of the range.

    • The maximum of the range.

    Correct Answer
    A. The minimum of the range.
    Explanation
    In this scenario, Espinosa Co. has a loss contingency where the loss amount can only be reasonably estimated within a range of outcomes. Since no single amount within the range is a better estimate than any other amount, the company should choose the most conservative approach and accrue the minimum amount of loss. This ensures that the company is prepared for the worst-case scenario and does not overstate its financial position. Therefore, the correct answer is "the minimum of the range."

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  • 43. 

    Use of the accrual method in accounting for product warranty costs

    • Is required for federal income tax purposes.

    • Is frequently justified on the basis of expediency when warranty costs are immaterial.

    • Finds the expense account being charged when the seller performs in compliance with the warranty.

    • Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

    Correct Answer
    A. Represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.
    Explanation
    The use of the accrual method in accounting for product warranty costs represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale. This means that the expense account should be charged when the seller performs in compliance with the warranty. This method ensures that the costs associated with the warranty are properly recognized and matched with the revenue generated from the sale. It also provides a more accurate representation of the financial position and performance of the company.

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  • 44. 

    Which of the following best describes the cash-basis method of accounting for warranty costs?

    • Expensed based on estimate in year of sale.

    • Expensed when liability is accrued

    • Expensed when warranty claims are certain.

    • Expensed when incurred.

    Correct Answer
    A. Expensed when incurred.
    Explanation
    The cash-basis method of accounting for warranty costs means that the expenses related to warranties are recognized when they are actually incurred. This means that the expenses are recognized and recorded in the accounting books at the same time the cash is paid for the warranty costs. This method does not take into account estimates, accruals, or the certainty of warranty claims.

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  • 45. 

    Which of the following statements is false?

    • A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.

    • Cash dividends should be recorded as a liability when they are declared by the board of directors.

    • Under the cash basis method, warranty costs are charged to expense as they are paid.

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

    Correct Answer
    A. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority
    Explanation
    The statement that FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority is false. FICA taxes withheld from employees' payroll checks should be recorded as a liability because the employer has an obligation to remit these amounts to the appropriate taxing authority. The employer is acting as a trustee for the employees and is responsible for withholding and remitting these taxes on their behalf. Therefore, the amount withheld should be recognized as a liability until it is remitted.

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  • 46. 

    Which of the following is the proper way to report a gain contingency?

    • As an accrued amount.

    • As deferred revenue.

    • As an account receivable with additional disclosure explaining the nature of the contingency.

    • As a disclosure only.

    Correct Answer
    A. As a disclosure only.
    Explanation
    The proper way to report a gain contingency is as a disclosure only. This means that the gain contingency is not recognized as an accrued amount, deferred revenue, or an account receivable. Instead, it is disclosed in the financial statements to provide information to the users about the nature of the contingency and its potential impact on the entity's financial position.

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  • 47. 

    Which of the following is not acceptable treatment for the presentation of current liabilities?

    • Listing current liabilities in order of maturity

    • Listing current liabilities according to amount

    • Offsetting current liabilities against assets that are to be applied to their liquidation

    • Showing current liabilities immediately below current assets to obtain a presentation of working capital

    Correct Answer
    A. Offsetting current liabilities against assets that are to be applied to their liquidation
    Explanation
    Offsetting current liabilities against assets that are to be applied to their liquidation is not an acceptable treatment for the presentation of current liabilities. This is because offsetting implies that the liabilities are being settled using specific assets, which may not always be the case. Current liabilities should be presented separately from assets and should not be offset against them.

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  • 48. 

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

    • F.I.C.A. (social security) taxes

    • Federal unemployment taxes

    • State unemployment taxes

    • Federal income taxes

    Correct Answer
    A. Federal income taxes
    Explanation
    An employer's payroll tax expense includes F.I.C.A. (social security) taxes, federal unemployment taxes, and state unemployment taxes. However, federal income taxes are not included in an employer's payroll tax expense. Federal income taxes are the responsibility of the employees and are withheld from their wages by the employer, but they are not considered a part of the employer's payroll tax expense.

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  • 49. 

    What is a contingency?

    • An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.

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

    • An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.

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

    Correct Answer
    A. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.
    Explanation
    A contingency refers to an existing situation where there is uncertainty regarding a possible gain or loss. This uncertainty will be resolved when one or more future events occur or fail to occur.

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Quiz Review Timeline (Updated): Mar 21, 2023 +

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 11, 2012
    Quiz Created by
    Jlyons08

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