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 and timing are known

Answer 1

d. One to be paid in cash and for which the amount and 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 transaction 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.
c. The entity has the right at the end of reporting period to defer settlement of liability for at least twelve months after the end of reporting period.
d. The entity has the ability to refinance on a long-term basis.

Answer 4

c. The entity has the right at the end of reporting period to defer settlement of liability for at least twelve months after the end of reporting period.

Question 5

Which situation would not require a noncurrent liability to 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.