TRADE AND OTHER PAYABLES, ESTIMATED LIABILITIES
& CONTINGENT LIABILITIES – Quiz Material
1. Current liabilities are likely to arise from:
(a) accrued interest on long-term loans.
(b) receipt of advance payment for services to be rendered.
(c) purchase of inventory and operating supplies.
(d) all of the above.
2. An example of estimated liability is:
(a) interest payable on bonds
(b) wages payable
obligation
(c) allowance for uncollectibles
(d)
product
warranties
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3. An example of contingent liability is:
(a) unearned subscription revenue
(b) bond premium
(c) wages payable
(d) potential future payment on a pending breach of contract lawsuit
4. A particular warranty obligation is probable and the amount of loss can be
reasonably estimated. The particular parties that will make claims under the
warranty are not identifiable. An estimated loss contingency should then be:
(a) classified as an appropriation of retained earnings
(b) neither accrued nor disclosed
(c) disclosed but not accrued
(d) accrued
is
5. Reserves for general contingencies for general or unspecified business risks
should:
(a) be accrued on the financial statements and disclosed on the notes thereto
(b) not be accrued on the financial statements but should be disclosed on the
notes thereto
(c) not be accrued on the financial statements and need not be disclosed on the
notes thereto
(d) be accrued on the financial statements but need not be disclosed on the
notes thereto
sh
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6. Which is not an essential characteristic of an accounting liability?
(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
(c) The settlement of the liability requires an outflow of resources embodying
economic benefits.
(d) The liability is payable to a specifically identified payee.
7. The principal classifications of liabilities are:
(a) current liabilities and noncurrent liabilities.
(b) current liabilities, noncurrent liabilities and deferred revenue.
(c) current liabilities and deferred revenue.
(d) noncurrent liabilities and deferred revenue.
8. A long-term debt falling due within one year should be reported as noncurrent
liability should be reported as noncurrent liability if the following conditions are
met (choose the incorrect one):
(a) The original term is for a period of more than one year.
(b) The enterprise intends to refinance the obligation on a long-term basis.
(c) The intent to refinance is supported by an agreement to refinance which is
completed before the issuance of the financial statements.
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(d) The intent to refinance is supported by an agreement to refinance which is
completed after the issuance of the financial statements.
9. Which will demonstrate an agreement to refinance (choose the incorrect one)?
(a) Long-term obligation has in fact been issued before the issuance of the
financial statements for the purpose of refinancing.
(b) Equity security has in fact been issued before the issuance of the financial
statements for the purpose of refinancing.
(c) Before the issuance of the financial statements, the enterprise has in fact
entered into a financing agreement that clearly permits the enterprise to
refinance the currently maturing long-term debt on a long-term basis.
(d) Preferred stock has in fact been issued before the issuance of financial
statements for the purpose of obtaining working capital.
10.A provision is recognized as liability when (choose the incorrect one):
(a) the enterprise has a present obligation as a result of past event.
(b) the enterprise has a possible obligation as a result of past event.
(c) it is probable that a transfer of economic benefits will be required to settle
the obligations.
(d) the amount of the obligations can be measured reliably.
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11.An accrued expense can be best described as an amount:
(a) paid and currently matched with earnings.
(b) not paid and not currently matched with earnings.
(c) paid and not currently matched with earnings.
(d) not paid and currently matched with earnings.
12.Which of the following statements is true concerning contingent liabilities?
(a) Such liabilities should include obligations of known existence but of unknown
amount.
(b) If the definite amount is involved, it is not a contingent liability.
(c) Such liabilities are generally reported and totaled with other liabilities to
make up the liability section of most balance sheets.
(d) Such liabilities should include obligations known in amount but unknown in
existence.
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13.An item that is not a contingent liability is:
(a) premium offer to customers for labels or box tops.
(b) accommodation endorsement on customer note.
(c) additional compensation that may be payable on a dispute now being
arbitrated.
(d) note receivable discounted.
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14.On September 1, 2001, a company borrowed cash and signed a two-year interest
bearing note on which both the principal and interest are payable on September
1, 2003. How many months of accrued interest would be included in the liability
for accrued interest at December 31, 2001 and December 31, 2002?
December 31, 2001
December 31, 2002
(a)
4 months
16 months
(b)
4 months
4 months
(c)
12 months
24 months
(d)
20 months
8 months
15.On September 1, 2001, a company borrowed cash and signed a one-year
interest bearing on which both the principal and interest are payable on
September 1, 2002. How will the note payable and the accrued interest be
classified In December 31, 2001 balance sheet?
Note payable
Accrued interest
(a)
Current liability
Noncurrent liability
(b)
Noncurrent liability
Current liability
(c)
Current liability
Current liability
(d)
Noncurrent liability
No entry.
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16.Grip Company started a new promotional campaign program. For every 10 box
tops returned to Grip, customers receive a ballpen. Grip estimates that only
40% of the box tops reaching the market will not be redeemed. Additional
information is as follows:
Units
Amount
Sales of product
100,000
30,000,000
Ballpens purchased5,500
4,125,000
Ballpens distributed
4,000
What is the amount of year-end estimated liability associated with this
promotion?
(a) 4,125,000
(b) 1,500,000
(c) 3,000,000
(d)
4,500,000
17.On April 1, 2002, Art Corporation began offering a new product for sale under a
one-year warranty. Of the 50,000 units in inventory at April 1, 2002, 30,000 had
been sold by June 30, 2002. Based on its experience with similar products, Art
estimated that the average warranty cost per unit sold would be P80. Actual
warranty costs incurred from April 1 through June 30, 2002 were P700,000. At
June 30, 2002, what amount should Art report as warranty expense?
(a) 700,000
(b) 900,000
(c) 1,700,000
(d)
2,400,000
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18.Right Store sells gift certificates, redeemable for store merchandise, that expire
one year after their issuance. Right has the following information pertaining to
its gift certificate sales and redemptions:
Unredeemed at 12/31/2002
750,000
2003 sales
2,500,000
2003 redemptions of prior year sales
250,000
2003 redemptions of current year sales
1,750,000
Right’s experience indicates that 10% of gift certificates sold will not be
redeemed. In its December 31, 2003 income statement, what amount should
Right report as revenue?
(a) 2,500,000
(b) 2,000,000
(c) 1,250,000
(d)
500,000
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19.Kite Company sells magazine subscriptions of one to three-year periods. Cash
receipts from subscribers are credited magazine subscriptions collected in
advance, and this account had a balance of P2,400,000 at December 31, 2002
before year-end adjustment. Outstanding subscriptions at December 31, 2002
expire as follows:
During 2003
600,000
During 2004
900,000
During 2005
400,000
In its December 31, 2002 balance sheet, what amount should Kite report as the
balance for magazine subscriptions collected in advance?
(a) 500,000
(b) 1,200,000
(c) 1,900,000
(d)
2,400,000
sh
20.Jar Company must determine the December 31, 2002 year-end accruals for
advertising and rent expense. A P50,000 advertising bill was received January 7,
2003 comprising costs of P35,000 for advertisements in December 2002 issues,
and P15,000 advertisements in January 2003 issues of the newspaper.
A store lease, effective December 16, 2001, calls for fixed rent of P120,000
per month, payable one month from the effective date and monthly thereafter.
In addition, rent equal to 5% of net sales over P6,000,000 per calendar year is
payable on January 31 of the following year.
Net sales for 2003 were
P9,000,000.
In its December 31, 2002 balance sheet, Jar should report accrued liabilities
of:
(a) 260,000
(b) 185,000
(c) 210,000
(d) 245,000
21.On March 1, 2002, Fine Company borrowed P1,000,000 and signed a 2-year note
bearing interest at 12% per annum compounded annually. Interest is payable in
full at maturity on February 28, 2004. What amount should Fine report as a
liability for accrued interest at December 31, 2003?
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(a) 112,000
(b) 120,000
(c) 232,000
(d)
0
For items 22 and 23:
On December 31, 2001, the bookkeeper of Glory Corporation provided the
following information:
Accounts payable, including deposits and advances from
customers of P25,000
P125,000
Notes payable, including note payable to bank on
December 31, 2003 of P50,000
150,000
Acceptances payable
10,000
Liabilities under trust receipts
80,000
Stock dividends payable
200,000
Credit balances in customers’ accounts
20,000
Serial bonds payable in semiannual installment of P50,000
500,000
Accrued interest on bonds payable
15,000
Dividends in arrears on preferred stock
70,000
Contested BIR assessment
30,000
Unearned rent income
5,000
22.The amount of current liabilities on December 31, 2001 is:
(a) P455,000
(b) P480,000
(c) P450,000
P485,000
23.The amount of noncurrent liabilities on December 31, 2001 is:
(a) P455,000
(b) P480,000
(c) P450,000
(d)
P485,000
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(d)
24.Anette Video Company sells 1-and 2-year subscriptions for its video-of-the-month
business. Subscriptions are collected in advance and credited to sales. An
analysis of the recorded sales activity revealed the following:
1997
1998
Sales
P420,000
P500,000
Less: Cancelations
20,000
30,000
Net sales
P400,000
P470.000
Subscription expirations:
1997
1998
1999
2000
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P120,000
155,000
P130,000
125,000
200,000
________
140,000
P400,000
P470,000
In Anette’s December 31, 1998 balance sheet, the balance for unearned
subscriptions revenue should be:
(a) P495,000
(b) P470,000
(c) P465,000
(d) P340,000
sh
25.Felly Company operates a retail grocery store that is required by law to collect
refundable deposits of P5 on soda cans. Information for 2001 follows:
Liability for refundable deposits – 12/31/2000
P150,000
Cans of soda sold in 2001
100,000
Soda cans returned in 2001
110,000
On February 1, 2001, Felly subleased space and received a P25,000 deposit to be
applied against rent at the expiration of the lease in 2005. In Felly’s December
31, 2001 balance sheet, the current and noncurrent liabilities for deposits were:
Current
Noncurrent
(a)
P125,000
P
0
(b)
100,000
25,000
(c)
100,000
0
(d)
25,000
100,000
26.In an effort to increase sales, Mills Company inaugurated a sales promotional
campaign on June 30, 1998. Mills placed a coupon redeemable for a premium in
each package of cereal sold. Each premium cost Mills P20 and a customer to
receive a premium must present five coupons. Mills estimated that only 60% of
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the coupons issued will must be redeemed. For the 6 months ended December
31, 1998, the following information is available:
Packages of cereal sold Premiums purchased
Coupons
redeemed
160,000
12,000
40,000
What is the estimated liability for premium claims outstanding at December 31,
1998?
(a) P160,000
(b) P224,000
(c) P288,000
(d)
P384,000
B
27.During 1998, Day Company sold 500,000 boxes of cake mix under a new sales
promotional program.
Each box contains one coupon, which entitle the
customer to a baking pan upon remittance of P4.00. Day pays P5.00 per pan
and P0.50 for handling and shipping. Day estimates that 80% of the coupons
will be redeemed, even though only 300,000 coupons had been processed
during 1998. What amount should Day report as a liability for unredeemed
coupons at December 31, 1998?
(a) P100,000
(b) P150,000
(c) P300,000
(d)
P500,000
B
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28.Mill Company sells washing machines that carry a three-year warranty against
manufacturer’s defects. Based on company experience, warranty costs are
estimated at P30 per machine. During 1998, Mill sold 24,000 washing machines
and paid warranty costs of P170,000. In its income statement for the year ended
December 31, 1998, Mill should report warranty expense of:
(a) P170,000
(b) P240,000
(c) P550,000
(d)
P720,000
D
29.Bold Company estimates its annual warranty expense at 2% of annual net sales.
The following data are available:
Net sales
P4,000,000
Warranty liability:
December 31, 1997
P60,000 credit
Warranty payments during 1998
P50,000 debit
After recording the 1998 estimated warranty expense, the warranty liability
account would show a December 31, 1998 balance of:
(a) P10,000
(b) P70,000
(c) P80,000
(d) P90,000 D
is
30.At December 31, 1998, Raft Boutique had 1,000 gift certificates outstanding,
which had been sold to customers during 1998 for P70 each. Raft operates on a
gross margin of 60% of its sales. What amount of revenue pertaining to the
1,000 outstanding gift certificates should be deferred at December 31, 1998?
(a) P
0
(b) P28,000
(c) P42,000
(d) P70,000
D
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31.Ryan Company sells major appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from
contracts are credited to unearned service contract revenue. This account had a
balance of P720,000 at December 31, 1998 before year-end adjustment. Service
contract costs are charged as incurred to the service contract expense account,
which had a balance of P180,000 at December 31, 1998. Outstanding service
contracts at December 31, 1998 expire as follows:
During 1999
P150,000
During 2000
225,000
During 2001
100,000
What amount should be reported as unearned service contract revenue in Ryan’s
December 31, 1998 balance sheet?
(a) P540,000
(b) P475,000
(c) P295,000
(d)
P245,000
B
32.Kent Company, a division of National Realty Corporation, maintains escrow
accounts and pays real estate taxes for National’s mortgage customers. Escrow
funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is
credited to the mortgagee’s account and used to reduce future escrow
payments. Additional information follows:
Escrow accounts liability, 1/1/2000
P 700,000
Escrow payments received during 2000
1,580,000
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Real estate taxes paid during 2000
Interest on escrow funds during 2000
1,720,000
50,000
What amount should Kent report as escrow accounts liability in its December 31,
2000 balance sheet?
(a) P510,000
(b) P515,000
(c) P605,000
(d) P610,000 C
33.Dix Company operates a retail store and must determine the proper December
31 200 year-end accrual for the following expenses:
(a) The store lease calls for fixed rent P12,000 per month, payable at the
beginning of the month, and additional rent equal to 6% of net sales over
P2,500,000 per calendar year, payable on January 31 of the following year.
Net sales for 2000 are P4,500,000.
(b) An electric bill of P8,500 covering the period December 31, 2000 through
January 15,2002 was received January 22, 2001.
(c) A P4,000 telephone bill was received January 7, 2001 covering:
Service in advance for December 2001
P1,500
Local and toll calls for December 2000
2,500
In its December 31, 200 balance sheet, Dix should report accrued liabilities of:
(a) P150,750
(b) P131,000
(c) P128,250
(d) P126,750 D
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34.On September 1, 2000, Pine Company issued a note payable to National Bank in
the amount of P1,800,0000, bearing interest at 12% and payable in three equal
annual principal payments of P600,000. On this date, the bank’s prime rate was
11%. The first interest and principal payment was made on September 1, 2001.
At December 31, 2001, Pine should record accrued interest payable of:
(a) P44,000
(b) P48,000
(c) P66,000
(d) P72,000 B
35.Mann Corporation’s liability account balances at June 30,2001, included a 10%
note payable in the amount of P3,600,000. The note is dated October 1, 2000,
and is payable in three equal annual payments of P1,200,000 plus interest. The
first interest and principal payments were made on October 1, 2001. In its June
30, 2002 balance sheet, what amount should Mann report as accrued interest
payable for this note?
(a) P270,000
(b) P180,000
(c) P90,000
(d) P60,000 A
36.On January 1, 2000, Pares Company borrowed P3,600,000 from a major
customer evidenced by a non-interest bearing note due in three years. Pares
agreed to supply the customer’s inventory needs for the loan period at lower
than market price. At the 12% imputed interest rate for this type of loan, the
present value of the note is P2,550,000 at January 1, 2000. What amount of
interest expanse should be included in Pares’ 2000 income statement?
(a) P432,000
(b) P350,000
(c) P306,000
(d) P0
C
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37.Able, Inc. had the following amounts of long-term debt outstanding at December
31, 2000:
14% term note, 2001
P 3,000
11% term note, due 2004
107,000
8% note, due in 11 equal annual principal payments,
plus interest beginning December 31, 2001 110,000
7% guaranteed debentures, due 2005
100,000
Total
P320,000
Able’s annual sinking fund requirement on the guaranteed debentures is P4,000
per year. What amount should Able report as current maturities of long-term
debt in its December 31, 2000 balance sheet?
(a) P4,000
(b) P7,000
(c) P10,000
(d) P13,000
D
38.Eliot Corporation’s liabilities at December 31, 2000 were as follows:
Accounts payable and accrued interest
P200,000
12% note payable issued November 1, 2000
maturing July 1,2001
60,000
10% debentures payable, next annual principal
installment of P100,000 due February 1, 2001 700,000
On March 1, 2001, Eliot consummated a noncancelable agreement with the
lender to refianace the 12% note payable on a long-ter basis, on readily
determinable terms that have not yet been implemented. Both parties are
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fianacially capable of honoring the agreement’s provisions. Eliot’s December 31,
2000 financial statement were issued on March 31, 2001. In its December 31,
2000 balance sheet, Eliot should report current liabilities at:
(a) P200,000
(b) P260,000
(c) P300,000
(d) P360,000C
39.On February 5, 2001, an employee filed a P2,000,000 lawsuit against Steel
Company for damages suffered when one of Steel’s plants exploded on
December 29,2000. Steel’s legal counsel expects the company will lose the
lawsuit and estimates the loss to be between P500,000 and P1,000,000. The
employee has offered to settle the lawsuit out of court for P900,000, but Steel
will not agree to the settlement. In its December 31, 2000 balance sheet, what
amount should Steel report as liability from lawsuit?
(a) P2,000,000
(b) P1,000,000
(c) P900,000
(d) P500,000D
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40.Sony Corporation sells color TV sets with a three-year repairs warranty. The
sales price for each set is P10,000. The average expense of repairing a set is
P500. Research has shown that 3% of all sets sold are repaired in the first year,
6% in the second year, and 11% in the third year. The number of sets sold were
as follows:
2000
500 units
2001
1,000 units
2002
2,000 units
Total payments for repairs associated with the warranties were: 2000, P20,000;
2001, P70,000; and 2002, P150,000. Under the accrual approach, how much is
the estimated liability for warranties on December 31, 2002?
(a) P350,000
(b) P240,000
(c) P50,000
(d) P110,000D
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