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ACCT 3010 CH. 13
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A liability has three essential characteristics, which of the following is not one of them?
A. It is a present obligation that entails settlement by probable future transfer or use of cash, goods,
or services.
B. The obligation must be liquidated using cash, goods, or services that were earned by the entity in
the performance of their normal business operation.
C. The liability must be an unavoidable obligation.
D. The transaction or other event creating the obligation must have already occurred.
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B {A liability must meet the three characteristics noted in alternatives A, C, and D. The indication in
alternative B that the obligation be liquidated using assets earned in the normal course of
operations is not an essential characteristic. The funds used to liquidate a liability could come
from borrowing. }
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Current liabilities are defined as obligations whose liquidation is reasonably expected to
a. be paid within a year.
b. require use of current assets.
c. require use of current assets or creation of other current liabilities.
d. require the distribution of cash.
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c
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A liability has three essential characteristics, which of the following is not one of them?
A. It is a present obligation that entails settlement by probable future transfer or use of cash, goods,
or services.
B. The obligation must be liquidated using cash, goods, or services that were earned by the entity in
the performance of their normal business operation.
C. The liability must be an unavoidable obligation.
D. The transaction or other event creating the obligation must have already occurred.
B {A liability must meet the three characteristics noted in alternatives A, C, and D. The indication in
alternative B that the obligation be liquidated using assets earned in the normal course of
operations is not an essential characteristic. The funds used to liquidate a liability could come
from borrowing. }
Current liabilities are defined as obligations whose liquidation is reasonably expected to
a. be paid within a year.
b. require use of current assets.
c. require use of current assets or creation of other current liabilities.
d. require the distribution of cash.
c
Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in 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 currently maturing long-term debt as part of current liabilities.
c
Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed based on estimate in year of sale.
b. Expensed when paid.
c. Expensed when incurred.
d. Expensed when warranty claims are certain.
a
An employee's net (or take-home) pay is determined by gross earnings minus amounts for income
tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. portion of FICA taxes, unemployment taxes, and any union dues.
c. and employer's portion of FICA taxes, and unemployment taxes.
d. portion of FICA taxes and any union dues.
d
Which of these is not included in an employer's payroll tax expense?
a. State unemployment taxes
b. F.I.C.A. (social security) taxes
c. Federal income taxes
d. Federal unemployment taxes
c
Employer payroll taxes include all of the following except
a. FICA taxes.
b. state unemployment taxes.
c. federal unemployment taxes.
d. state income taxes.
d
Current liabilities are:
A. liabilities that are due and payable on the balance sheet date.
B. liabilities that may be paid out of any asset pool accumulated by the enterprise as long as
payment is due within one year.
C. due within one year or one operating cycle, whichever is longer.
D. void of notes payable, as notes are always long-term.
C {Current liabilities are obligations that mature within one year or the operating cycle, whichever is
longer, and they are reasonably expected to require the use of current assets for their liquidation. }
On October 1, 2013, a company borrowed cash and signed a one-year, interest-bearing note on
which both the principal and interest are payable on October 1, 2014. How will the note payable and
the related interest be classified in the December 31, 2013, balance sheet?
Note Payable; Accrued Interest
A. Current liability; Noncurrent liability
B. Noncurrent liability; Current liability
C. Current liability; Current liability
D. Noncurrent liability; Noncurrent liability
C {Since these liabilities will be paid within one year from the December 31, 2013 balance sheet
date,
both the note payable and the related accrued interest payable should be classified as current
liabilities. }
The Diana Co. issues a $208,000 6-month, zero-interest-bearing note to the Tang National Bank. The
present value of the note is $200,000. The entry to record this transaction by Diana Co.
would include:
A. a credit to Notes Payable of $200,000.
B. a debit to Discount on Notes Payable of $8,000.
C. a credit to Discount on Notes Payable of $8,000.
D. a debit to cash of $208,000.
B
{The following entry would be made by Diana Co.:
Cash 200,000 DR
Discount on Notes Payable 8,000 DR
Notes Payable 208,000 CR}
The currently maturing portion of long-term debt should be classified as a current liability if:
A. the debt is to be converted into capital stock.
B. the debt is to be refinanced on a long-term basis.
C. the funds used to liquidate it are currently classified as a long-term investment on the balance
sheet.
D. the portion so classified will be liquidated within one year using current assets
D {The item would be classified as a current liability as long as it met the relevant criteria. The
criteria include payment within one year or the operating cycle, whichever is longer, and payment
made using assets classified as current. }
An enterprise is required to exclude a short-term obligation from current liabilities if it
intends to refinance the obligation on a long-term basis and:
A. the enterprise can demonstrate the ability to consummate the refinancing.
B. the obligation is not a part of normal operations.
C. it can demonstrate that a negative effect on working capital will result if it is not
reclassified.
D. the interest rate on the long-term obligation is not above the prime rate.
A {An enterprise is required to exclude a short-term obligation from current liabilities if it intends to
refinance the obligation on a long-term basis and the enterprise can demonstrate the ability to
consummate the refinancing. The effect on working capital and the interest rate on the long-term
obligation have nothing to do with the specific requirements for reclassifying the debt from
current to long-term. }
Which of the following would not constitute evidence concerning the ability to consummate the
refinancing of a short-term obligation?
A. Actual refinancing after the balance sheet date by issuance of a long-term obligation.
B. A statement by the board of directors that refinancing is inevitable.
C. Entering into a financing agreement that clearly permits refinancing on a long-term basis with
terms that are readily determinable.
D. Actual refinancing after the balance sheet date by issuance of equity securities.
B {The ability to consummate refinancing of a short-term obligation is best demonstrated by actual
refinancing after the financial statement date but before the financial statements are issued. A
mere statement by the board of directors that it can accomplish refinancing is not sufficient to
classify the short-term debt as long-term debt. }
Hegel Corporation has $1,500,000 of short-term debt it expects to retire with proceeds from the sale
of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance
sheet date, but before the balance sheet is issued, what amount of short-term debt could be
excluded from current liabilities?
A. $1,000,000.
B. $1,500,000.
C. $1,500,000.
D. $0
A {The maximum amount of short-term debt that can be excluded from current liabilities is limited
to
the amount secured through the refinancing arrangement. In this case the amount is $1,000,000
(50,000 x $20). }
If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to
the financial statements describing this event should include all of the following information except:
A. a general description of the financing arrangement.
B. the terms of the new obligation incurred or to be incurred.
C. the terms of any equity security issued or to be issued.
D. the number of financing institutions that refused to refinance the debt, if any.
D {Alternatives A, B, and C must be disclosed in the footnotes to the financial statements. There is no
requirement to indicate failures to secure financing. }
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