Chapter 8 Quiz

 

1. When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

1. A debit to a liability and a credit to a revenue account.
2. A debit to a revenue and a credit to an asset account.
3. A debit to an asset and a credit to a liability account.
4. A debit to an asset and a credit to a revenue account.

 

2. Federal and state income taxes withheld by employers from their employees’ payroll are initially recorded with a credit to a(n):

1. Revenue.
2. Expense.
3. Liability.
4. Asset.

 

3. Which of the following is not a characteristic of a liability?

1. It represents a probable, future sacrifice of economic benefits.
2. It results from past transactions or events.
3. It arises from present obligations to other entities.
4. It must be payable in cash.

 

4. Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should Travel Planners record?

1. Debit Notes Payable, $5,000; Credit Cash, $5,000.
2. Debit Notes Receivable, $5,000; Credit Cash, $5,000.
3. Debit Cash, $5,000; Credit Notes Payable, $5,000.
4. Debit Cash, $5,000; Credit Notes Receivable, $5,000.

 

5 Which of the following is reported as a current liability?

1. Current portion of long-term debt.
2. Unused line of credit.
3. Notes payable due in two years.
4. Notes payable due in 15 months.

 

6. Travel Planners, Inc. borrowed $5,000 from First State Bank and signed a promissory note. What entry should First State Bank record?

1. Debit Cash, $5,000; Credit Notes Payable, $5,000.
2. Debit Cash, $5,000; Credit Notes Receivable, $5,000.
3. Debit Notes Payable, $5,000; Credit Cash, $5,000.
4. Debit Notes Receivable, $5,000; Credit Cash, $5,000.

 

7.  Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

1. Increase the current ratio and increase the acid-test ratio.
2. No change to the current ratio and decrease the acid-test ratio.
3. Increase the current ratio and decrease the acid-test ratio.
4. Decrease the current ratio and decrease the acid-test ratio.

 

8.  In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.

1. two; two
2. one; ten
3. one; two
4. one; one

 

9. When a product or service is delivered to a customer that previously paid in advance, the delivery is recorded as:

1. A debit to a revenue and a credit to a liability account.
2. A debit to an asset and a credit to a revenue account.
3. A debit to a revenue and a credit to an asset account.
4. A debit to a liability and a credit to a revenue account.

 

10. Which of the following is not a current liability?

1. Deferred revenue to be earned in nine months.
2. Current portion of long-term debt.
3. An unused line of credit.
4. Notes payable due in six months.

 

11. Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:

1. Neither disclosed or reported as a liability.
2. Disclosed and reported as a liability.
3. Disclosed but not reported as a liability.
4. Reported as a liability but not disclosed.

 

12. Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky’s legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

1. As a liability for $500,000 with disclosure of the range.
2. As a liability for $700,000 with disclosure of the range.
3. As a disclosure only. No liability is reported.
4. As a liability for $600,000 with disclosure of the range.

 

13. Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the borrowing of cash to be paid back in five years affect each ratio?

1. No change to the current ratio and decrease the acid-test ratio.
2. Increase the current ratio and decrease the acid-test ratio.
3. Increase the current ratio and increase the acid-test ratio.
4. Decrease the current ratio and decrease the acid-test ratio.

 

14. Interest expense is recorded in the period in which:

1. The interest is paid.
2. The interest is incurred.
3. The interest is paid or incurred.
4. The interest is paid and incurred.

 

15. A contingent liability that is probable and can be reasonably estimated must be

1. Paid.
2. Disclosed.
3. Not disclosed.
4. Recorded.

 

16. On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:

1. Debit interest expense and credit cash, $4,000.
2. Debit interest expense and credit interest payable, $12,000.
3. Debit interest expense and credit interest payable, $4,000.
4. Debit interest expense and credit cash, $12,000.

 

17. Aviation Systems sells its products with a three-year manufacturing warranty. The company’s sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much is the estimated warranty liability reported in the balance sheet this year?

1. $25,000.
2. $ 5,000.
3. $10,000.
4. $30,000.

 

18.  Which of the following is not included in calculating the acid-test ratio?

1. Inventory.
2. Accounts payable.
3. Current investment in marketable securities.
4. Accounts receivable.

 

19.  Which of the following statements regarding liabilities is true?

1. Liabilities result from future transactions.
2. Liabilities are all reported as current in the balance sheet.
3. Liabilities are always payable in cash.
4. Liabilities represent probable future sacrifices of benefits.

 

20. Which of the following represents a characteristic of a liability?

1. All of these are characteristics of a liability.
2. Arising from present obligations to other entities.
3. Resulting from past transactions or events.
4. A probable future sacrifice of economic benefits.

 

21. Which of the following is paid by both the employee and the employer?

1. Personal income taxes.
2. State unemployment taxes.
3. FICA taxes.
4. Federal unemployment taxes.

 

22. If Speedy Travel, Inc. borrows $50 million on September 1 for one year at 9% interest, how much interest expense should it record by December 31 of that same year?

1. $0.
2. $3.0 million.
3. $4.5 million.
4. $1.5 million.

 

23. Aviation Systems sells its products with a three-year manufacturing warranty. The company’s sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

1. $10,000.
2. $25,000.
3. $30,000.
4. $ 5,000.

 

24. If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?

1. $300,000
2. $600,000
3. $150,000
4. $450,000

 

25. Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman’s attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

1. $0.
2. $1.5 million.
3. $2.0 million.
4. $1.8 million.

 

26. Which of the following increases an employer’s payroll costs?

1. Employer’s FICA contribution.
2. Federal income tax.
3. FICA withholding from the employee.
4. State income tax.

 

27. Assume that Airline Accessories’ current ratio is greater than 1. Which of the following will decrease its current ratio?

1. Collecting an accounts receivable.
2. Issuing common stock for cash.
3. Purchasing equipment, signing a long-term note.
4. Purchasing inventory on account.

 

28. The current ratio is:

1. Current liabilities divided by current assets.
2. Current assets divided by current liabilities.
3. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.
4. Cash, short-term investments, and accounts receivable divided by current liabilities.

 

29. Which of the following is true in comparing the current ratio with the acid-test ratio?

1. The acid-test ratio will always be at least as large as the current ratio.
2. Sometimes the current ratio will be larger and sometimes the acid-test ratio will be larger.
3. The current ratio will always be at least as large as the acid-test ratio.
4. The denominator in the ratios will differ.

 

30.  On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?

1. $8,000
2. $0
3. $24,000
4. $12,000