Liabilities

Question 1

The most common type of liability is

a. One that comes into existence due to a loss contingency.
b. One that must be estimated
c. One that comes into existence due to a gain contingency.
d. One to be paid in cash and for which the amount timing are known.

Answer 1

d. One to be paid in cash and for which the amount timing are known.

Question 2

Which is not a characteristic of a liability?

a. It represents a transfer of an economic resource.
b. It must be payable in cash.
c. It arises from present obligation to other entity.
d. It results from past transactions or event.

Answer 2

b. It must be payable in cash.

Question 3

Classifying liabilities as either current or noncurrent helps creditors assess

a. Profitability
b. The relative risk of an entity’s liabilities
c. The degree of an entity’s liabilities
d. The amount of an entity’s liabilities

Answer 3

b. The relative risk of an entity’s liabilities

Question 4

Short-term obligations are reported as noncurrent if

a. The entity has a long-term line of credit.
b. The entity has tentative plan to issue long-term bonds payable.
с. The entity has the right at the end of the reporting period to defer settlement of the liability for at least 12 months after the end of the reporting period.
d. The entity has the ability to refinance on a long-term basis.

Answer 4

d. The entity has the ability to refinance on a long-term basis.

Question 5

Which situation would require that noncurrent liabilities be reported as current?

a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual violation.
c. The long-term debt matures within the upcoming year.
d. All of these require the current classification.

Answer 5

d. All of these require the current classification.

Question 6

Which of the following represents a liability?

a. The obligation to pay for goods that an entity expects to order from suppliers next year
b. The obligation to provide goods that customers have ordered and paid for during the current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of the year
d. The obligation to distribute an entity’s own shares

Answer 6

b. The obligation to provide goods that customers have ordered and paid for during the current year.

Question 7

Which does not meet the definition of a liability?

a. The signing of a an employment contract at fixed salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount

Answer 7

a. The signing of a an employment contract at fixed salary

Question 8

Which of the following is a characteristic of a current liability but not a noncurrent liability?

a. Unavoidable obligation.
b. Present obligation to transfer an economic resource.
c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.
d. The obligating event has already occurred.

Answer 8

c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.

Question 9

Which of the following is not considered a characteristic of a liability?

a. Present obligation
b. Arises from past event
C. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require use of current assets

Answer 9

d. Liquidation is reasonably expected to require use of current assets

Question 10

Which of the following is not an acceptable presentation of current liabilities?

a. Listing current liabilities in the order of maturity
b. Listing current liabilities according to amount
C. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities in the order of liquidation preference

Answer 10

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

Question 11

Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the classification of the notes payable?

a. Current liabilities
b. Deferred credits
c. Noncurrent liabilities
d. Intermediate debt

Answer 11

a. Current liabilities

Question 12

At year-end, an entity had 120-day note payable outstanding. The entity has followed the policy of replacing the note rather than repaying it over the last three years. The entity’s treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the year-end statement of financial position?

a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability

Answer 12

c. Current liability, unless specific refinancing criteria are met

Question 13

An entity had a note payable due next year. After the end of reporting period and before the issuance of the current year financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note when due. How should the entity classify the note payable at current year-end?

а. Current liability with separate disclosure of the note refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required

Answer 13

а. Current liability with separate disclosure of the note refinancing

Question 14

An entity had a loan due for repayment in six months’ time, but the entity had the right to defer settlement for two years later. The entity planned to refinance this loan. In which section of the statement of financial position should this loan be presented?

a. Current liabilities
b. Current assets
C. Noncurrent liabilities
d. Noncurrent assets

Answer 14

C. Noncurrent liabilities

Question 15

At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note payable from current to noncurrent?

a. If the entity had the intent and ability to reclassify the note before the end of reporting period.
b. If the entity had executed an agreement to refinance the note before issuance of the financial statements.
c. If the entity had the intent and ability to reclassify the note before the issuance of the financial statements.
d. If the entity had executed an agreement to refinance the note before the end of reporting period.

Answer 15

d. If the entity had executed an agreement to refinance the note before the end of reporting period.

Question 16

The most relevant measurement of liabilities at initial recognition should always reflect

a. The expectation of the management
b. Historical cost
C. The credit standing of the entity
d. The single most likely minimum possible amount

Answer 16

C. The credit standing of the entity

Question 17

Which statement best describes the term liability?

a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity
d. A present obligation arising from past event

Answer 17

d. A present obligation arising from past event

Question 18

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

a. Present value is used to measure certain liabilities.
b. Present value is not used to measure liabilities.
c. Present value is used to measure all liabilities.
d. Present value is used to measure noncurrent liabilities only.

Answer 18

a. Present value is used to measure certain liabilities.

Question 19

If a long-term debt becomes callable due to the violation of a loan covenant

a. The debt may continue to be classified as noncurrent if the covenant can be renegotiated.
b. The debt should be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted.

Answer 19

b. The debt should be reclassified as current.

Question 20

What is the classification of debt callable by the creditor?

a. Noncurrent liability
b. Current liability
с. Current liability if the creditor intends to call the debt within one year
d. Current liability if it is probable that the creditor will call the debt within one year

Answer 20

b. Current liability

Question 21

An entity received an advance payment for special order goods that are to be manufactured and delivered within
six months. How should the advance payment be reported?

a. Deferred credit
b. Contra asset account
c. Current liability
d. Noncurrent liability

Answer 21

c. Current liability

Question 22

At year-end, an entity sold refundable merchandise coupons. The entity received a certain amount for each coupon redeemable next year for merchandise with a certain retail price. At year-end, how should the entity report these coupon transactions?

a. Unearned revenue at the merchandise’s retail price
b. Unearned revenue at the cash received
c. Revenue at the merchandise’s price
d. Revenue at the cash received

Answer 22

b. Unearned revenue at the cash received

Question 23

Advance payments from customers represent

a. Liabilities until the product is provided.
b. A component of shareholders’ equity.
c. Assets until the product is provided.
d. Revenue upon receipt of the advance payment.

Answer 23

a. Liabilities until the product is provided.

Question 24

All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?

a. Large increase because unearned revenue becomes revenue when earned.
b. Large decrease because unearned revenue implies that less revenue has been earned which reduces future revenue.
c. No effect because unearned revenue is a liability.
d Large decrease because unearned revenue indicates collection problems that will reduce net revenue in future period.

Answer 24

a. Large increase because unearned revenue becomes revenue when earned.

Question 25

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the statement of financial position before the performance?

a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expanded
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds

Answer 25

d. Unearned revenue for the entire proceeds

Question 26

Magazine subscriptions collected in advance should be treated as

a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the liability section c. Deferred revenue in the shareholders’ equity section
d. Magazine subscription revenue in the income statement in the period collected

Answer 26

b. Deferred revenue in the liability section

Question 27

Under a royalty agreement with another entity, an entity shall receive royalties from the assignment of a patent for four years. The royalties received in advance should be reported as revenue

a. In the period received
b. In the period earned
C. Evenly over the life of the royalty agreement
d. At the date of the royalty agreement

Answer 27

b. In the period earned

Question 28

An entity is a retailer of home appliances and offers a service contract on each appliance sold. Collections received for service contracts should be recorded as an increase in

a. Deferred revenue account
b. Sales contracts receivable valuation account
C. Shareholders’ equity valuation account
d. Service revenue account

Answer 28

a. Deferred revenue account

Question 29

An entity sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty costs are expected to be incurred for each machine sold. When should the entity recognize the warranty costs?

a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold

Answer 29

d. When the machines are sold

Question 30

At the end of the current year, an entity received an advance payment of 60% of the sale price for special order goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for production of the special order goods at a price equal to 40% of the main contract price.
What liabilities should be reported in the year-end statement of financial position?

a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main contract price
c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price

Answer 30

c. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor