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c11
Student: ___________________________________________________________________________
1. A liability is a future payment of assets or services that a company is currently obligated to make as a result
of past transactions or events.
True False
2. A company’s obligations not expected to be paid within the longer of one year of the balance sheet date or the
next operating cycle are reported as current liabilities.
True False
3. All expected future payments are liabilities.
True False
4. A liability exists because of a past event that creates a future obligation for future sacrifices.
True False
5. Long-term liabilities are obligations of a company requiring payment within one year.
True False
6. A long-term liability can have a current component.
True False
7. Amounts received in advance from a customer for future products or services are initially recorded as
liabilities.
True False
8. Trade accounts payable are amounts owed to suppliers for products or services purchased on credit.
True False
9. Unearned revenue is another name for sales revenue.
True False
10. Sales taxes payable is credited and cash is debited when firms send sales taxes collected from customers to
the government.
True False
11. Known liabilities are agreements, contracts, or laws that are measurable and have little uncertainty.
True False
12. The Toronto Raptors received $6 million in season ticket sales. Prior to the beginning of the basketball
season, these sales are recorded as a credit to unearned season ticket revenue.
True False
13. Gross pay is the same as net pay.
True False
14. Provincial Sales Tax Payable is a tax levied on sales to all final consumers of taxable products.
True False
15. Goods and Services Tax (GST) is not paid by a wholesaler.
True False
16. A short-term note payable is a written promise to pay a specified amount on a specified future date within
one year or the payee’s operating cycle, whichever is shorter.
True False
17. A note payable can be used to extend the credit period for an account payable.
True False
18. The stated interest rate on a short-term note payable is to compensate for the time until payment is made.
True False
19. The matching principle requires that the total interest expense be allocated over the term of the note.
True False
20. Estimated liabilities include employee health benefits, property taxes, and warranties.
True False
21. An estimated liability is a known obligation of an uncertain amount that can be reasonably estimated.
True False
22. Estimated liabilities are also referred to as provisions.
True False
23. Both partnerships and corporations calculate an income tax liability based on their taxable incomes, but
proprietorships do not.
True False
24. At their fiscal year end, Lorax Corp has an (unadjusted) $62,000 credit balance in their Income Tax Payable
account. However, a review reveals that the actual liability is $70,000. Lorax Corp should prepare an adjusting
entry to debit Income Tax Expense for $8,000 and credit Income Taxes Payable for $8,000.
True False
25. Kirland performed warranty repair work for a customer which cost $800. The journal entry to record the
work should be a debit of $800 to Warranty Expense and a $800 credit to Estimated Warranty Liability.
True False
26. A company can have a liability even if the amount of the obligation is uncertain.
True False
27. The accounting for a contingent liability is the same as for a provision.
True False
28. A pending lawsuit is an example of a contingent liability.
True False
29. A contingent liability exists when a potential liability that depends on a future event arising out of a past
transaction liability is either not probable or it cannot be reliably estimated.
True False
30. Contingent assets should be recognized as soon as they are probable and can be reliably estimated.
True False
31. Recording provisions is required when it is probable that the liability will occur and the amount can be
reasonably estimated.
True False
32. The relevance principle requires that contingent assets be recorded.
True False
33. A warranty is a contingent liability.
True False
34. Management can withhold any information regarding future events if releasing the information could cause
a share price decline.
True False
35. The characteristics of a liability include:
A. Occurrence of a past transaction or event.
B. Requirement of future payment of assets or rendering of services.
C. A liability can be current or long term.
D. Existence of a present obligation.
E. All of these answers are correct.
36. Obligations due to be paid within one year or the company’s operating cycle, whichever is longer, are:
A. Current assets.
B. Revenues.
C. Current liabilities.
D. Operating cycle liabilities.
E. Long term liabilities.
37. Obligations not expected to be paid within one year are reported as:
A. Current assets.
B. Current liabilities.
C. Long term liabilities.
D. Operating cycle liabilities.
E. Revenues.
38. On December 31, 2015, Peligrino Co. has a long term note payable of $800,000. Of that balance, $100,000
will be paid within one year from the balance sheet date. How much of the note payable should Peligrino Co.
report as a long term liability when they prepare the December 31, 2015 balance sheet?
A. $700,000.
B. $800,000.
C. $900,000.
D. $1,000,000.
E. Nothing. Disclose in a note to the financial statements.
39. Liabilities:
A. Can be reliably estimated.
B. Must be certain.
C. Must be for a specific amount.
D. Must have a date for payment.
E. Must have a known payee.
40. Long-term liabilities:
A. Are liabilities arising from future events.
B. Are sometimes reported on the income statement.
C. Are obligations requiring payment within one year or less.
D. Are not recorded until they are paid.
E. Are obligations of a company not requiring payment within one year.
41. The current portion of long-term debt:
A. Refers to the part of long-term debt that is due within one year.
B. Is shown separately from the long term portion on the balance sheet.
C. Must be disclosed.
D. Will be a known amount.
E. All of these answers are correct.
42. Fees accepted in advance from a client:
A. Are recorded as earned revenues on the income statement.
B. Increase income.
C. Are recorded as liabilities.
D. Do not increase assets.
E. None of these answers is correct.
43. Known liabilities:
A. Have definite due dates.
B. Are set by agreements, contracts, or laws.
C. Are measurable.
D. Have a known payee.
E. All of these answers are correct.
44. Provincial sales tax payable:
A. Is an estimated liability.
B. Is a contingent liability.
C. Is a current liability for retailers.
D. Is a business expense.
E. All of these answers are correct.
45. Unearned revenues are:
A. Amounts received in advance from customers for future delivery of products or services.
B. Not recorded as liabilities.
C. The same as accrued revenues.
D. Reduce assets.
E. All of these answers are correct.
46. Unearned revenue is initially recognized with a:
A. Credit to revenue payable.
B. Credit to revenue.
C. Credit to unearned revenue.
D. Debit to revenue.
E. Debit to unearned revenue.
47. The receipt of $6,000 in advance ticket sales would be recorded as:
A. Debit Cash, credit Unearned Revenue.
B. Debit Unearned Revenue, credit Sales.
C. Debit Sales, credit Unearned Revenue.
D. Debit Unearned Revenue, credit Cash.
E. Debit Cash, credit Revenue Payable.
48. Gross pay is:
A. Take-home pay.
B. Deductions withheld by an employer.
C. Salaries after taxes are deducted.
D. Total compensation earned by an employee.
E. The amount of the paycheque.
49. The employer should record payroll deductions as:
A. Employee receivables.
B. Current liabilities.
C. Payroll taxes expense.
D. Wages payable.
E. Employee payables.
50. A combined GST and PST rate of 12% applied to taxable supplies is called:
A. Zero-rated tax.
B. Harmonized Sales Tax.
C. Input Tax Credit.
D. Combined Sales Tax.
E. None of these answers is correct.
51. Accounts payable:
A. Have specific due dates.
B. Are long-term liabilities.
C. Are estimated liabilities.
D. Are amounts owed to suppliers for products and services purchased on credit.
E. All of these answers are correct.
52. Payroll liabilities for current employees are:
A. Contingent liabilities.
B. Estimated liabilities.
C. Can be either current or long-term depending on when workers retire.
D. Current liabilities.
E. None of these answers is correct.
53. The difference between the amount received from a note payable and the amount repaid is:
A. Interest.
B. Principal.
C. Face value.
D. Discount.
E. Premium.
54. A short-term note payable:
A. Is a written promise to pay a specified amount.
B. Is a contingent liability.
C. Is an estimated liability.
D. Is not recorded until it is repaid.
E. Usually does not bear interest.
55. Short-term notes payable:
A. Can replace an account payable.
B. Usually represent money borrowed from a bank.
C. Are usually interest bearing.
D. Are recorded as current liabilities.
E. All of these answers are correct.
56. Promissory notes:
A. Are negotiable.
B. Can be transferred from party to party by endorsement.
C. Are due on a specific date.
D. Can be current or long term.
E. All of these answers are correct.
57. Which of the following is created by the adjusting entry to recognize interest expense incurred but not yet
paid?
A. Prepaid interest.
B. Unearned revenue.
C. Interest revenue.
D. Interest expense.
E. Notes payable.
58. West Coast Outdoor Co. signed a $8,000, 90-day, 4% interest-bearing note payable at the bank in exchange
for cash. Which of the following journal entries should West Coast Outdoor Co. use to record the note?
A.
B.
C.
D.
E.
59. MiniCompany borrowed $6,000 by signing an 8% interest-bearing 45-day note payable in exchange for an
overdue accounts payable. To record this transaction, MiniCompany should prepare a journal entry that includes
a:
A. Credit to Accounts Payable for $6,000.
B. Credit to Notes Payable for $6,000.
C. Debit to Cash for $6,000.
D. Debit to Notes Payable for $6,000.
E. Debit to Cash for $6,300.
60. An estimated liability:
A. Is an unknown liability of a certain amount.
B. Can be the result of a lawsuit.
C. Is a liability that may occur if a future event occurs.
D. Is a known obligation of an uncertain amount.
E. None of these answers is correct.
61. Estimated liabilities can arise from:
A. Warranties.
B. Property taxes.
C. Income taxes.
D. Employee benefits.
E. All of these answers are correct.
62. Employee vacation benefits:
A. Are estimated liabilities.
B. Are contingent liabilities.
C. Become an expense when the employee takes a vacation.
D. Are not recorded until the employee leaves.
E. Are not required by law.
63. West Coast Outdoor Co. sold $22,000 worth of trampolines with a one year warranty. The company
estimates that 2% of the sales will result in warranty work. West Coast Outdoor Co. should:
A. Recognize warranty expense at the time of sale.
B. Recognize warranty expense at the time warranty work is performed.
C. Recognize warranty liability at the time of sale.
D. Recognize warranty expense and warranty liability at the time of sale.
E. Recognize warranty expense at the time warranty work is performed and warranty liability at the time of sale.
64. West Coast Outdoor Co. estimates that warranty expense will be 1% of sales. The current period’s sales
were $740,000. The entry to record the warranty expense is:
A.
B.
C.
D.
E.
65. A contingent liability:
A. Is a liability of a specific amount.
B. Is a potential obligation that depends on a future event arising out of a past transaction.
C. Is an obligation not requiring immediate payment.
D. Is an obligation arising from the purchase of goods or services on credit.
E. None of these answers is correct.
66. Contingent liabilities occur when the liability is:
A. Probable and can be reliably estimated.
B. Cannot be reliably estimated.
C. Known and determinable.
D. Reliably estimated.
E. All of these answers are correct.
67. Provisions must be recorded if:
A. The future event is probable and the amount can be reliably estimated.
B. The future event is unlikely.
C. The future event is probable, but the amount cannot be estimated.
D. The future event is unlikely, but the amount can be reliably estimated.
E. All of these answers are correct.
68. Pending lawsuits:
A. Are always considered estimated liabilities.
B. Should always be recorded.
C. Should always be disclosed.
D. Should be disclosed if payment for damages is probable but the amount cannot be reliably estimated.
E. None of these answers is correct.
69. Uncertainties such as doubtful accounts:
A. Are not provisions because they are future events not arising out of past transactions.
B. Are provisions because they are future events arising from past transactions.
C. Should not be disclosed.
D. Are provisions because the amounts are uncertain.
E. Are not provisions since they relate to normal business activities.
70. Explain the difference between current and long-term liabilities.
71. Explain known current liabilities.
72. Explain the concept of interest.
73. Discuss the types of estimated liabilities.
74. Discuss how to account for contingent liabilities.
75. Breathe Therapeutic Company is located in Medicine Hat, Alberta and is a retailer of massage supplies.
Beginning inventory is $70,000, and Breathe uses the perpetual inventory system. Complete the journal entries
on the following dates, including 5% GST as applicable.
76. On November 16, 2015, Kinsmen Sports gave Source for Sports a 120-day, 8%, $120,000 note payable to
extend a past due account payable.
What amount of interest expense should Source for Sports report for calendar 2015?
77. On November 16, 2015, Source for Sports gave Kinsmen Sports a 90-day, 12%, $60,000 note payable to
extend a past due account payable.
Prepare the journal entry for Source for Sports to record the note and the extension of the past due account.
78. On November 16, 2015, Williams Industrial gave Phillip Co. a 90-day, 8%, $80,000 note payable to extend
a past due account payable.
Prepare the journal entry for Williams Industrial to record payment of the note on Feb 14, 2016. Williams
Industrial recorded a December 31st year end adjusting entry.
79. On June 14 , Multi Sports received a 90-day note payable from Single Sport, instead of cash payment of an
overdue account. The amount of the note was $45,000 at an interest rate of 10%.
What is the total amount of interest for the note?
80. On June 14, Cool Sports gave a 90-day note payable to Quick Skis, instead of cash payment of an overdue
account. The amount of the note was $85,000 at an interest rate of 12%.
Prepare the journal entry on Cool Sports books to record the note payable.
81. On June 14, Cool Sports gave a 90-day note payable to Slip and Slide Co., instead of cash payment of an
overdue account. The amount of the note was $65,000 at an interest rate of 12%.
Prepare the journal entry and determine the maturity date for Cool Sports to record payment of the note.
82. On September 15, Lohr Co. borrowed $50,000 from Close Bank. The loan had an interest rate of 12% and
was due in 60 days.
Prepare the journal entry for Lohr Co. to record the note.
83. On November 15, Lohr Co. borrowed $20,000 from Convenient Bank. The loan had an interest rate of 12%
and was due in 120 days.
Prepare the journal entry to record the payment of the note on Lohr’s books, assuming an adjusting entry was
made at December 31st , Lohr Co.’s year end.
84. On November 16, Predator Company borrowed $112,000 from DT Bank. The loan had an interest rate of
10% and was due in 90 days. Predator Company’s fiscal year-end is December 31.
Prepare the journal entry to record the receipt of the cash.
85. On November 16, Predator Company borrowed $112,000 from DT Bank. The loan had an interest rate of
10% and was due in 90 days. Predator Company’s fiscal year-end is December 31.
Prepare the journal entry to record the interest due at December 31.
86. On November 16, Predator Company borrowed $112,000 from DT Bank. The loan had an interest rate of
10% and was due in 90 days. Predator Company’s fiscal year-end is December 31.
Prepare the journal entry to record the payment of the note on Predator’s books.
87. Elder Helpers Ltd estimates its income taxes at 35% of pre-tax income. For the quarter ended September 30,
pre-tax income was $300,000. Prepare the journal entry to record the estimated income taxes and the subsequent
remittance on October 5.
88. A company sells its product subject to a warranty that covers the cost of parts and labour for repairs during
the six months after sale. Warranty costs are estimated to be 4.5% of sales for parts, and 1.5% of sales for
labour. During the month of June, the company performed warranty work and used $8,000 worth of parts and
paid $4,000 in wages for labour to do the warranty work. Sales for June amounted to $450,000.
(1) What account should be debited for the $4,000 in labour?
(2) What should be the amount of estimated warranty expense for June?
(3) If the Estimated Warranty Liability account had a $10,000 credit balance on May 31, what should be the
account balance as of June 30?
89. Buy Best Company sells personal computers for $2,300 each. The price includes a two-year warranty.
During 2015, the company sells 600 computers. On the basis of past experience, the warranty costs are
estimated to be $150 per computer. The actual warranty costs paid by Buy Best during 2015 were $45,000.
Prepare general journal entries to record the estimated warranty expense and the warranty payments during
2015.
90. Honest Computers sells computers with a 6-month warranty. In January, the company sold 35,000
computers at $2,600 each and 1,500 computers were returned for repairs. The total repair costs amounted to
$185,000. It is estimated that 3% of all units sold will need repairs under warranty at an estimated cost of $300
per unit. Prepare the journal entry to record warranty expense for January.
91. _______________ are obligations expected to be paid using current assets or by creating other current
liabilities.
________________________________________
92. Unearned revenues are amounts received _______________.
________________________________________
93. Taxable goods or services on which GST is calculated and that include everything except zero-rated and
exempt supplies are called ________________.
________________________________________
94. A refund of GST would be received if the balance in the GST ________________ account exceeded the
balance in the GST __________________ account.
________________________________________
95. The difference between the amount received from a promissory
