Lesson 16

Question 1

Liabilities

Answer 1

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 2

What are the three characteristics of liabilities?

Answer 2

1. it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
2. it is an unavoidable obligation.
3. the transaction or other event creating the obligation has already occurred.

Question 3

What are the two basic divisions of liabilities?

Answer 3

1. Current Liabilities
2. Long-term debt

Question 4

Current Liabilities

Answer 4

obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.

Question 5

Operating cycle

Answer 5

is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.

Question 6

Name 7 typical current liabilities

Answer 6

1. Accounts payable
2. Notes payable
3. Dividends payable
4. Customer advances and deposits
5. Unearned revenues
6. Sales tax payable
7. Current maturities of long term debt

Question 7

Accounts Payable

Answer 7

are balances owed to others for goods, supplies, or services purchased on open account.

Question 8

Notes Payable

Answer 8

are written promises to pay a certain sum of money on a specified future date.

Question 9

What are the two types of notes payable

Answer 9

1. interest bearing
2. zero interest bearing

Question 10

Zero interest bearing notes means…

Answer 10

The “bank” takes it fee “up front” rather than on the date the note matures.

Question 11

Dividends Payable

Answer 11

is an amount owed by a corporation to its stockholders as a result of its board of directors’ authorization

Question 12

preferred dividends in arrears

Answer 12

accumulated but undeclared dividends on cumulative preferred stock as a liability

Question 13

Customer advances and deposits

Answer 13

are used to guarantee performance of a contract or service or as guarantees to cover payment of expected future obligations.

Question 14

unearned revenues

Answer 14

cash received by a company in exchange for future good or services

Question 15

How to record an advance payment:

Answer 15

it debits cash and credits a current liability account (this identifies the source of unearned revenue)

Question 16

How to record when companies recognizes revenue after an advance payment?

Answer 16

it debits the unearned revenue account (current liability) and credits a revenue account

Question 17

Current maturities of long term debt

Answer 17

the portion of bonds, mortgage notes, and other long term indebtedness that matures within the next fiscal year.

Question 18

Don’t record long term debts maturing currently as current liabilities if they are: (3 things)

Answer 18

1. retired by assets accumulated for this purpose that properly have not been shown as current assets
2. refinanced, or retired from the proceeds of a new debt issue
3. converted into capital stock

Question 19

if any liability that is due on demand; needs to be classified as________

Answer 19

current liability

Question 20

What defines liabilities?

Answer 20

Obligations arising from past transactions and payable in assets or services in the future
Correct. Liabilities are defined as obligations arising from past transactions and payable in assets or services in the future.

Question 21

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

How should these notes be classified on the balance sheet of Larsen Company?

Answer 21

Current liabilities
Correct. Larson has the option to renew the obligation or not in 90 days. Therefore, the obligation is a current liability.

Question 22

For what purpose is the current liability section of the balance sheet of primary importance to bankers?

Answer 22

To assist in understanding the entity’s liquidity
Correct. Banks use the balance sheet to ascertain the liquidity of a company - the ability of the company to pay it’s obligations.

Question 23

What, if any, is the relationship between current liabilities and a company’s operating cycle?

Answer 23

Liquidation of current liabilities is reasonably expected within the company’s operating cycle or one year, if less.
Correct. In order be classified as current, liability obligations must be due and payable within one year or the operating cycle of the company, whichever is less.

Question 24

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350.

What is the amount of sales tax (to the nearest dollar) for May?

Answer 24

$49,350
Correct. Since Posner records sales tax in the Sales Revenue account. The total $754,350 includes sales tax. Posner collects 7% sales tax. Therefore: [Sales + (.07 x Sales)] = $754,350. ($754,350 / 1.07) = $705,000. $754,350 - $705,000 = $49,350 sales tax collected.