Question 1

Which of the following statements about contingent liabilities is incorrect?

Accepted Answer

A) A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated. 
B) A disclosure note is required when the loss is probable and the amount can be reasonably estimated. 
C) A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated. 
D) A disclosure note is required when the loss is remote and the amount can be reasonably estimateD.A disclosure note is not required when the loss probability is remote. 
A) A disclosure note is required when the loss is reasonably possible and the amount cannot be reasonably estimated. 
B) A disclosure note is required when the loss is probable and the amount can be reasonably estimated. 
C) A disclosure note is required when the loss is reasonably possible and the amount can be reasonably estimated. 
D) A disclosure note is required when the loss is remote and the amount can be reasonably estimateD.A disclosure note is not required when the loss probability is remote. D

Question 2

Answer the following four questions.
A.What is a contingent liability?
B.When must a contingent liability be recorded through a journal entry?
C.When should a contingent liability be disclosed in the footnotes to the financial statements?
D.When is disclosure of a contingent liability not required?

Accepted Answer

A. Contingent liabilities are potential liabilities that arise due to past events.
B. Whether or not the potential liability becomes a recorded liability depends upon the outcome of future events. For example, if a company is currently involved in a product liability lawsuit, then the company may have to pay the plaintiff if the settlement is unfavorable. A contingent liability must be recorded if it is probable that the future events will occur and the amount can be reasonably estimated.
C. Contingent liabilities should be disclosed in the notes to the financial statements if it is probable that future events will occur but the amount cannot be reasonably estimated. There should also be note disclosure if it is reasonably possible that the future events will occur, whether or not an amount can be reasonably estimated.
D. Disclosure is not required if the probability of future events occurring is remote.

Question 3

Which of the following results in a decrease in working capital?

Accepted Answer

A) Supplies purchases with cash. 
B) Purchase of a truck in exchange for factory machinery. 
C) Acquisition of land in exchange for stock. 
D) Purchase of equipment with cash. 
A) Supplies purchases with cash. 
B) Purchase of a truck in exchange for factory machinery. 
C) Acquisition of land in exchange for stock. 
D) Purchase of equipment with cash. D

Question 4

Which of the following is not a current liability?

Accepted Answer

A) A liability due within one year for a business with a fifteen-month operating cycle. 
B) A liability due within three months for a business with a two-month operating cycle. 
C) A liability due within one year for a business with a nine-month operating cycle. 
D) A liability due within fifteen months for a business with a one-year operating cycle. 
A) A liability due within one year for a business with a fifteen-month operating cycle. 
B) A liability due within three months for a business with a two-month operating cycle. 
C) A liability due within one year for a business with a nine-month operating cycle. 
D) A liability due within fifteen months for a business with a one-year operating cycle.

Question 5

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

Accepted Answer

A) When the loss is remote and the amount cannot be reasonably estimated. 
B) When the loss is probable and the amount can be reasonably estimated. 
C) When the loss is reasonably possible and the amount can be reasonably estimated. 
D) When the loss is remote and the amount can be reasonably estimateD.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements. 
A) When the loss is remote and the amount cannot be reasonably estimated. 
B) When the loss is probable and the amount can be reasonably estimated. 
C) When the loss is reasonably possible and the amount can be reasonably estimated. 
D) When the loss is remote and the amount can be reasonably estimateD.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements.

Question 6

If income tax expense reported on the income statement is $45,000 for 2016, and the tax return for 2016 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2016 will be which of the following? Assume a 40% tax rate.

Accepted Answer

A) A $3,000 liability. 
B) A $3,000 asset. 
C) A $7,500 liability. 
D) A $7,500 asset. 
A) A $3,000 liability. 
B) A $3,000 asset. 
C) A $7,500 liability. 
D) A $7,500 asset.

Question 7

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Accepted Answer

A) True 
 B)False

Question 8

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

Accepted Answer

A) When the loss probability is remote and the amount can be reasonably estimated. 
B) When the loss is probable and the amount can be reasonably estimated. 
C) When the loss probability is reasonably possible and the amount can be reasonably estimated. 
D) When the loss is probable regardless of whether the loss can be reasonably estimateD.A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet. 
A) When the loss probability is remote and the amount can be reasonably estimated. 
B) When the loss is probable and the amount can be reasonably estimated. 
C) When the loss probability is reasonably possible and the amount can be reasonably estimated. 
D) When the loss is probable regardless of whether the loss can be reasonably estimateD.A contingent liability that is probable and can be reasonably estimated is reported as a liability on the balance sheet.

Question 9

Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin: • Lawsuit A: The loss is probable and the loss can be reasonably estimated.
• Lawsuit B: The loss is reasonably possible and the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.
Which of the following statements is incorrect?

Accepted Answer

A) A disclosure note is required for lawsuit A. 
B) A disclosure note is required for lawsuit C. 
C) A disclosure note is not required for lawsuit B. 
D) Lawsuit A is reported on the balance sheet as a liability. 
A) A disclosure note is required for lawsuit A. 
B) A disclosure note is required for lawsuit C. 
C) A disclosure note is not required for lawsuit B. 
D) Lawsuit A is reported on the balance sheet as a liability.

Question 10

Which of the following questions is asked with respect to determining the accounting for leases?

Accepted Answer

A) Is the lease term greater than 90% of the asset's estimated life? 
B) Is the present value of the payments greater than 75% of the asset's fair market value? 
C) Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value? 
D) Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee? 
A) Is the lease term greater than 90% of the asset's estimated life? 
B) Is the present value of the payments greater than 75% of the asset's fair market value? 
C) Does the lease provide for an opportunity for the lessee to purchase the leased asset during the lease term at fair market value? 
D) Does the lease provide for a transfer of title of the leased asset at the end of the lease term to the lessee?

Question 11

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

Accepted Answer

A) Present value of a single amount. 
B) Present value of an annuity. 
C) Future value of a single amount. 
D) Future value of an annuity. 
A) Present value of a single amount. 
B) Present value of an annuity. 
C) Future value of a single amount. 
D) Future value of an annuity.

Question 12

A company's income statement reported net income of $80,000 during 2016. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2017. Which of the following statements is incorrect assuming a 35% tax rate?

Accepted Answer

A) Income tax expense on the income statement exceeds the tax liability to the IRS. 
B) The $6,000 of revenue creates a deferred tax liability. 
C) A $2,100 deferred tax liability is reported as of December 31, 2016. 
D) Income tax expense on the income statement is $25,900. 
A) Income tax expense on the income statement exceeds the tax liability to the IRS. 
B) The $6,000 of revenue creates a deferred tax liability. 
C) A $2,100 deferred tax liability is reported as of December 31, 2016. 
D) Income tax expense on the income statement is $25,900.

Question 13

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The liability reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made, is closest to:

Accepted Answer

A) $44,633. 
B) $50,000. 
C) $54,633. 
D) $60,000. 
A) $44,633. 
B) $50,000. 
C) $54,633. 
D) $60,000.

Question 14

On January 1, 2016, Mission Company agreed to buy some equipment from Anna Company. Mission Company signed a non-interest-bearing note, agreeing to pay Anna Company the entire $500,000 for the equipment on December 31, 2018. The market rate of interest for this note was 10%.
Required:
(Round all answers to whole dollar amounts.)
A.Prepare the journal entry Mission Company would record on January 1, 2016 related to this purchase.
B.Prepare the December 31, 2016, adjusting entry to record interest expense related to the note for the first year.Assume that no adjusting entries have been made during the year.
C.Prepare the December 31, 2017, adjusting entry to record interest expense related to the note for the second year.Assume that no adjusting entries have been made during the year.
D.Prepare the entry Mission Company would record on December 31, 2018, the due date of the note to record interest expense for the third year and payment of the note.Assume that no adjusting entries have been made during the year.Round the interest expense to an amount that will increase notes payable to the correct final payoff amount.

Accepted Answer

A. @#IMG-DLM& $500,000 × 0.7513 (present value of

Question 15

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2016 balance sheet is which of the following?

Accepted Answer

A) $250. 
B) $300. 
C) $500. 
D) $750. 
A) $250. 
B) $300. 
C) $500. 
D) $750.

Question 16

Sharp Company borrowed $500,000 on a 6% one-year, interest-bearing note dated November 1, 2016 with interest payable at maturity. The annual accounting period ends on December 31. Assume that adjusting entries are only made at December 31, the company's fiscal year-end.
Required:
Prepare journal entries for each of the following dates:
A.November 1, 2016.
B.December 31, 2016.
C.October 31, 2017.

Accepted Answer

A.
Cash
500,000
Note payable
500,000
B.

Question 17

Which of the following best describes the accrual of interest?

Accepted Answer

A) Assets and stockholders' equity decrease. 
B) Assets and liabilities decrease. 
C) Net income and expenses decrease. 
D) Expenses and liabilities increase. 
A) Assets and stockholders' equity decrease. 
B) Assets and liabilities decrease. 
C) Net income and expenses decrease. 
D) Expenses and liabilities increase.

Question 18

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. Upon the first payment of the note on December 31, 2016, the amount of interest expense to be recorded is:

Accepted Answer

A) $1,000,000. 
B) $2,790,800. 
C) $3790, 800. 
D) $4,000,000. 
A) $1,000,000. 
B) $2,790,800. 
C) $3790, 800. 
D) $4,000,000.

Question 19

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated.
• Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated.
• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.
Which of the following statements is correct?

Accepted Answer

A) A disclosure note is required for each of the three lawsuits. 
B) A disclosure note is required only for lawsuits A & C. 
C) A disclosure note is required only for lawsuit A. 
D) A disclosure note is required only for lawsuits B & C. 
A) A disclosure note is required for each of the three lawsuits. 
B) A disclosure note is required only for lawsuits A & C. 
C) A disclosure note is required only for lawsuit A. 
D) A disclosure note is required only for lawsuits B & C.

Question 20

Information Company purchased an asset with a cash equivalent value of $70,000 on January 1, 2016. Arrangements were made with the supplier to pay $10,000 cash on January 1, 2016, and the balance was to be paid over a three-year period, with equal annual payments of $24,553 to be made at the end of 2016, 2017, and 2018. Each payment will include principal plus interest on the unpaid balance at 11% per year.
Required:
A.Complete the following table:
   
B.Prepare the journal entry for the payment on December 31, 2017.
C.Explain the change, over time, on the amount of interest and the balance of the debt principal.

Accepted Answer

A. @#IMG-DLM& B. @#IMG-DLM& C. Interest decreases

Which of the following statements about contingent liabilities is incorrect?

Answer the following four questions. A.What is a contingent liability? B.When must a contingent liability be recorded through a journal entry? C.When should a contingent liability be disclosed in the footnotes to the financial statements? D.When is disclosure of a contingent liability not required?

Which of the following results in a decrease in working capital?

Which of the following is not a current liability?

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

If income tax expense reported on the income statement is $45,000 for 2016, and the tax return for 2016 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2016 will be which of the following? Assume a 40% tax rate.

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

Which of the following questions is asked with respect to determining the accounting for leases?

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

Which of the following best describes the accrual of interest?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

Adjustments, Financial Statements, and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Reporting and Interpreting Bond Securities

Reporting and Interpreting Stockholders Equity

Statement of Cash Flows

Analyzing Financial Statements

PPA: Reporting and Interpreting Investments in Other Corporations

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Exam 9: Reporting and Interpreting Liabilities

Which of the following statements about contingent liabilities is incorrect?

Answer the following four questions. A.What is a contingent liability? B.When must a contingent liability be recorded through a journal entry? C.When should a contingent liability be disclosed in the footnotes to the financial statements? D.When is disclosure of a contingent liability not required?

Which of the following results in a decrease in working capital?

Which of the following is not a current liability?

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

If income tax expense reported on the income statement is $45,000 for 2016, and the tax return for 2016 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2016 will be which of the following? Assume a 40% tax rate.

The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

Which of the following questions is asked with respect to determining the accounting for leases?

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

Which of the following best describes the accrual of interest?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

Adjustments, Financial Statements, and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Reporting and Interpreting Bond Securities

Reporting and Interpreting Stockholders Equity

Statement of Cash Flows

Analyzing Financial Statements

PPA: Reporting and Interpreting Investments in Other Corporations

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