Chapter 10

Question 1

Characteristic of lilabilities?

Answer 1

(1) Requires future economic sacrifice
(2) No chance to avoid the obligation (present obligation)
(3) Event giving rise to obligation came from past transaction

Question 2

Is there a contra-Account Payable account just like a contra-Account Receivable account of AFDA (Allowance for Doubtful Account)?

Answer 2

No

Question 3

What are the three types of liabilites?

Answer 3

(1) Determinable (known) liabilities
(2) Estimated liabilites
(3) Contingent liabilities

Question 4

Why are estimated liabilities hard to measure?

Answer 4

(1) Economic benefit to be given up cannot be measured with certainty
(2) Involves a level of judgement
(3) Provides management some margin to assess the value of the laibility

Question 5

Journal entry for sales with warranty

Answer 5

(Dr) Warranty expense

(Cr) Warranty provision

Question 6

What does contingency mean?

Answer 6

A potential liability that may become an actual liability in the future, dependent (continhent) on some future event

Question 7

When is a contingent loss recognized as a loss on the I/S and a liability on the B/S?

Answer 7

(1) It is probable that the future even will happen and create a liability for the company, which requires a transfer of assets or the performance of service
(2) The amont of the loss and resulting liability can be reasonably estimated

Question 8

Shortly before its fiscal year end, a company lost a lawsuit and had damages of $200,000 awarded against it. However, it said that it will
appeal the decision in the new year. Its lawyers are extremely confident that the lower court’s decision will be reversed. How should this situation be reported in the year-end financial statements?

Answer 8

Only disclosure would be necessary

Question 9

Journal entry for facing a lawsuit with high probability of losing?

Answer 9

(Dr) Lawsuit settlement

(Cr) Provision for liability

Question 10

What is liquidity?

Answer 10

Measure of short-term ability to pay maturing obligations and meet cash eneds

Question 11

What is solvency?

Answer 11

Measures the ability to meet long-term obligations

Question 12

Debt to total assets ratio?

Answer 12

Total liabilities/total assets

Question 13

Equation for times interest earned?

Answer 13

Profit + interest expense + Income tax expense (EBIT) / interest expense
(company’s ability to meet interest payments as they come due)

Question 14

Journal entry for selling a good with tax?

Answer 14

(Dr) Cash

(Cr) Sales revenues, Sales tax payable

Question 15

Journal entry for date of note payable?

Answer 15

(Dr) Cash

(Cr) Notes payable

Question 16

Journal entry for end of month (where due date of loan is later)?

Answer 16

(Dr) Interest expense

(Cr) Interest payable

Question 17

Journal entry for date note payable is due?

Answer 17

(Dr) Not payable, interest payable, interestt expense

(Cr) Cash