Exam 7: Accounting for Liabilities

Indicate whether each of the following statements about contingent liabilities is true or false. 1. If the likelihood of a future obligation from a contingent liability is remote, a company does not report it on the financial statements or disclose it in the notes to the financial statements 2. If a company has a contingent liability where the future obligation is deemed probable but the amount cannot be estimated, the liability should be disclosed in the footnotes to the financial statements 3. Employees' vacation pay is a contingent liability that usually should be recognized on the financial statements 4. If a customer was injured while using a company's product, the company might need to disclose a contingent liability 5. If a company has a contingent liability where the future obligation is deemed possible, the liability should be reported on the balance sheet

Accruing product warranty expense at the end of an accounting period is a/an ________ transaction.

Indicate whether each of the following statements is true or false. 1. Some long-term loans have variable interest rates 2. Cash for acquiring machinery or buildings is often obtained by issuing long-term debt 3. Short-term notes payable normally mature within a year 4. Installment notes payable usually have terms of 2-5 years 5. Most businesses finance part of their activities with long-term debt

What term is used for liabilities that are uncertain as to amount?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ On January 1, 2014, Jordan Co. issued $100,000 of bonds. Indicate the effects of issuing these bonds. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Regardless of the specific type of long-term debt, which of the following are normally required with debt transactions?

When a bond's issue price is greater than its face value, the actual rate of interest that must be paid is called the

Discuss one advantage of issuing bonds versus borrowing money from a bank.

Barrett Company obtained a $80,000 line of credit from the Garden State Bank on January 1, 2014. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2014 are shown in the following table. Assume that Barrett borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. The amount of interest expense recognized in March, rounded to the nearest dollar, would be

Borrowing by issuing a note payable is a/an

Under what circumstances must a contingent liability be reported on a company's balance sheet?

Indicate whether each of the following statements about lines of credit is true or false. 1. The signing of a line of credit agreement is an asset source transaction 2. Line of credit agreements generally involve a fluctuating rate of interest 3. Interest rates may vary with the rates of US Treasury Bills 4. Line of credit agreements generally have a five-year term 5. Lines of credit frequently are extended at the end of their term by renewing the agreement

On January 1, 2014, Darek Corporation issued a five-year note payable. The note requires an annual cash payment on December 31 of each year, which includes a principal reduction and interest. Indicate whether each of the following statements is true or false. 1. The entry to record the note issuance will increase assets and liabilities 2. The second payment will include more interest expense than the first payment 3. The note is an installment note payable 4. Each payment will result in a decrease in cash flow from operating activities and an increase in cash flow from investing activities 5. The first payment will reduce liabilities and net income of Darek Corporation

A company's obligation for product warranties is a contingent liability that generally must be recognized in the financial statements.

What is the going concern assumption, and how does it affect accounting for liabilities?

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a discount?

Using the effective interest rate method to amortize bond premium will

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ On January 1, 2014, Pedroia Co. issued $100,000 of bonds. Interest is paid in cash on December 31 of each year. Indicate the effects of payment of interest on December 31, 2014. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Nevada Company remitted to the state $1,800 in sales taxes that it had previously collected from customers. The effects on the financial statements were:

What is the effect of the recognition of warranty expense on the statement of cash flows?