chapter9 practice question PDF

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CHAPTER 9CURRENT LIABILITIESSUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVEAND LEVEL OF DIFFICULTYItem LO LOD Item LO LOD Item LO LOD Item LO LOD Item LO LOD True-False Statements 1 E 5. 3 E 9. 3 E 13. 7 E 1 E 6. 3 E 10. 4 E 14. 7 M 2 E 7. 3 M 11. 5 M 15. 9 M 2 E 8. 3 E 12. 5 M 16. 9 M Multiple Choi...

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CHAPTER 9 CURRENT LIABILITIES SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE AND LEVEL OF DIFFICULTY Item 1. 2. 3. 4. 17. 18. 19. 20. 21. 22. 23. 52. 57. 58. 61. Note:

LO

LOD Item LO LOD Item LO LOD Item True-False Statements 1 E 5. 3 E 9. 3 E 13. 1 E 6. 3 E 10. 4 E 14. 2 E 7. 3 M 11. 5 M 15. 2 E 8. 3 E 12. 5 M 16. Multiple Choice Questions 1 M 24. 3 E 31. 5 E 38. 1 E 25. 3 M 32. 5 M 39. 2 E 26. 4 E 33. 5 H 40. 2 E 27. 4 E 34. 5 E 41. 2 M 28. 4 M 35. 5 E 42. 3 E 29. 5 M 36. 5 E 43. 3 E 30. 5 M 37. 5 H 44. Exercises 3,5–8 M 53. 5 M 54. 5 M 55. Matching 1,3,6–8 E Short-Answer Essay 1 M 59. 2 M 60. 5 M Essay 5 M E = Easy

M = Medium

LO LOD Item LO LOD 7 7 9 9

E M M M

5 5 5 5 5 5 6

H H H H H H M

45. 46. 47. 48. 49. 50. 51.

6 6 6 7 8 8 9

M M M M M M M

6

M

56.

9

M

H = Hard

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Test Bank for Understanding Financial Accounting, Canadian Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Learning Objective 1 MC 18. MC 57. Ma Learning Objective 2 MC 20. MC 21. MC

1.

TF

2.

TF 17.

3.

TF

4.

TF 19.

5. 6.

TF TF

7. 8.

TF 9. TF 22.

10.

TF 26.

MC 27.

Learning Objective 3 TF 23. MC 25. MC MC 24. MC 52. Ex Learning Objective 4 MC 28. MC

11. 12. 29. 30.

TF TF MC MC

MC MC MC MC

MC MC MC MC

44.

MC 45.

MC 46.

13.

TF 14.

TF 48.

31. 32. 33. 34.

35. 36. 37. 38.

49.

MC 50.

MC 52.

15.

TF 16.

TF 51.

Note:

Learning Objective 5 39. MC 43. MC 40. MC 52. Ex 41. MC 53. Ex 42. MC 54. Ex Learning Objective 6 MC 47. MC 52. Ex Learning Objective 7 MC 52. Ex 57. Ma

Item

Type

58.

SAE

52.

Ex

57.

Ma

60. 61.

SAE Es

55.

Ex

Item

Type

59.

SAE

57.

Ma

Learning Objective 8 Ex 57. Ma Learning Objective 9 MC 56. Ex

TF = True-False MC = Multiple Choice

Ex = Exercise Ma = Matching

SAE = Short-Answer Essay Es = Essay

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Current Liabilities

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CHAPTER LEARNING OBJECTIVES 1. Explain why current liabilities are of significance to users. • Working capital is an important liquidity measure in assessing a company’s ability to meet its short-term obligations and whether any additional financing is required. A company’s current liabilities must be identified and measured in order to correctly determine working capital. 2. Describe the valuation methods for current liabilities. • Current liabilities are carried at their fair value (or face value). • They are not discounted to take into account the time value of money because the time period in which they will be settled is short (less than one year). 3. Identify the current liabilities that arise from transactions with lenders and explain how they are accounted for. • Common current liabilities that arise from transactions with lenders include bank indebtedness, short-term loans, and the current portion of long-term debt. • Bank indebtedness represents a company’s use of a line of credit or revolving credit facility. It will normally be repaid with the company’s subsequent cash deposits. • Short-term loans (also known as working capital loans) are often secured by the company’s accounts receivable and/or inventory, with the maximum amount of the loan changing as the level of the related security change. • The current portion of long-term debt represents the principal portion of long-term loans that is due within the next year. 4. Identify the current liabilities that arise from transactions with suppliers and explain how they are accounted for. • Accounts payable (or trade payables) are common current liabilities for all companies. • They are sometimes considered “free debt” because payment to suppliers is not required for 30 or more days depending on the terms agreed to with the supplier. 5. Identify the current liabilities that arise from transactions with customers and explain how they are accounted for. • Common current liabilities that arise from transactions between a company and its customers include unearned revenue, gift card liability, customer loyalty provision, sales return provision, and warranty provision. • Unearned revenues (or deferred revenues) represent payments received from customers in advance of them receiving the goods or services being purchased. • Gift card liabilities arise when customers purchase gift cards (or gift certificates) from a company. Until such time as the gift card is used, the company has a liability. Some gift cards will never be used or never fully used by their owners. This is known as breakage and companies record the estimated amount of breakage as revenue, reducing their gift card liability. • Customer loyalty provisions are related to programs that enable customers to accumulate points or other credits when making purchases. These points can be

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Test Bank for Understanding Financial Accounting, Canadian Edition

subsequently redeemed for free goods or services. Companies offering such programs must estimate the value of the outstanding loyalty points and establish a liability for them. • The sales return provision is established to record the estimated returns based on a company’s past experience and market conditions. The Sales Returns and Allowances account, which is a contra revenue account (that is, it reduces sales revenue), is used to record this liability. • The warranty provision is established to record the estimated costs of honouring any warranties offered by a company and is based on historical warranty claims or industry averages. 6. Identify the current liabilities that arise from transactions with employees and explain how they are accounted for. • Common employee-related current liabilities include wages payable, CPP payable, EI payable, and employee income taxes payable. • As employees normally work prior to being paid, a liability (wages payable) arises as employees work. • Employers are responsible for withholding source deductions from the wages of their employees. These include CPP, EI, and income taxes. Employers are also required to pay CPP and EI based on the wages earned by their employees. These source deductions and employer portions result in current liabilities until they are remitted (sent in) to the government. 7. Identify the current liabilities that arise from transactions with government and explain how they are accounted for. • Companies are required to file corporate tax returns (a T2). They must also make monthly income tax instalment payments, which are usually based on the taxes paid in the previous year, with any outstanding taxes due within two months of year end. Until it is paid, any outstanding income tax balance would be a current liability (income taxes payable). 8. Identify the current liabilities that arise from transactions with shareholders and explain how they are accounted for. • The most common liability that companies have to their shareholders is in relation to dividends that have been declared but not yet paid. When dividends are declared, a company establishes a liability (dividends payable) that is extinguished when they are paid, which generally occurs within four to six weeks. 9. Calculate the accounts payable turnover ratio and average payment period and assess the results. • The accounts payable turnover ratio can be determined by dividing a company’s credit purchases by its average accounts payable. It measures the number of times per year that a company settles (or pays) its trade payables. • The average payment period is equal to 365 days divided by the accounts payable turnover ratio. It measures the number of days on average a company took to pay its accounts payable.

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Current Liabilities

9-5

• The results of the accounts payable turnover ratio and average payment period help users assess the extent of any change in the supplier payment portion of the cash-tocash cycle from one period to another. It is ideally assessed in relation to the credit terms normally available in the industry in which the company operates.

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9-6

Test Bank for Understanding Financial Accounting, Canadian Edition

TRUE-FALSE STATEMENTS 1. All current liabilities are settled with cash. 2. Liabilities are the result of events or transactions that have already occurred. 3. Accounting standards require that liabilities be recorded at their present value. 4. The difference between the face value of a liability and its present value is due to the time value of money. 5. All current liabilities have fixed due dates and fixed payment amounts. 6. A line of credit helps a company deal with temporary cash shortages. 7. Bankers will often compare current assets to current liabilities to assess viability. 8. Long-term debt that is due within one year is classified with other long-term debt. 9. A line of credit is always reflected under the current liabilities regardless of the size of the debt. 10. Accounts receivable occur when a company buys goods or services on credit. 11. Gift cards are an example of a contingent liability. 12. Unearned revenue is an example of a liability that is settled by the provision of services. 13. The balance for outstanding income tax balances are reported as a current liability. 14. The amount owing on income taxes is recorded as income taxes deferred. 15. The accounts payable turnover ratio measures the number of times per year that a company settles their trades payable.

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Current Liabilities

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16. The accounts payable turnover ratio can be converted to days by using the accounts payable payment period formula.

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Test Bank for Understanding Financial Accounting, Canadian Edition

ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6.

Ans. F T T T F T

Item 7. 8. 9. 10. 11. 12.

Ans. T F T F F T

Item 13. 14. 15. 16.

Ans. T F T T

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Current Liabilities

9-9

MULTIPLE CHOICE QUESTIONS 17. Which of the following is NOT a characteristic of a liability? a) There is a probable future sacrifice of resources. b) There is a fixed payment amount and payment date. c) There is little discretion to avoid the obligation. d) The event giving rise to the liability has already occurred. 18. All of the following are examples of current liabilities, EXCEPT for a) accrued expenses. b) unearned revenues. c) interest payable. d) prepaid expenses. 19. Accounts payable are recorded on the books at their a) net present value. b) net amount. c) net realizable value. d) face value. 20. Non-current liabilities are recorded in the books at their a) net present value. b) net amount. c) net realizable value. d) gross amount. 21. On December 31, 2017, a company has a $500,000 15-year mortgage outstanding. Over the next year they will make 12 monthly payments of $5,000 representing $33,500 of interest and $26,500 of principal repayment. Which of the following best represents how the mortgage will be reported on the December 31, 2017 balance sheet? Current liabilities Non-current liabilities a) $26,500 $473,500 b) $26,500 $440,000 c) $60,000 $440,000 d) $60,000 $473,500 22. For which of the following reasons would a user examine the current liabilities? a) to determine how quickly accounts receivable are collected b) to determine how much cash will be required to meet obligations in the short-term c) to determine how much cash will be required to meet obligations in the long-term d) to evaluate company performance 23. A short-term liability used by a company to finance the purchase of current assets

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Test Bank for Understanding Financial Accounting, Canadian Edition

and that is often secured by accounts receivable or inventory is referred to as a(n) a) accounts payable. b) current liability. c) line of credit. d) overdraft protection. 24. All of the following are ways that corporations can finance current cash shortages EXCEPT a a) line of credit. b) current portion of long-term debt. c) short-term loan. d) working capital loan. 25. A company has $5,000,000 in long-term debt outstanding. They expect to repay it evenly over the next four years. Which of the following represents how it will be shown on the year-end balance sheet? a) Accounts Payable: $1,250,000, Long-Term Debt: $3,750,000 b) Current Portion of Long-Term Debt: $1,250,000, Long-Term Debt: $3,750,000 c) Current Portion of Long-Term Debt: $2,500,000, Long-Term Debt: $2,500,000 d) Long-Term Debt: $5,000,000 26. Which of the following liabilities is often referred to as “free debt” because it rarely carries any interest if paid within a specified period of time? a) line of credit b) working capital loan c) accounts payable d) None of the above—all current liabilities carry an interest rate. 27. Typically acquisition costs for inventory can be financed through the use of a) overdraft protection. b) accounts payable. c) working capital. d) notes payable. 28. Which of the following statements about accounts payable is NOT true? a) They are usually due within 30 to 60 days. b) They normally carry implicit interest charges. c) There may be a penalty for late payment. d) They are typically used to finance inventory purchases. 29. During 2017 Albany Appliances sold 400 appliances worth $2,000,000. Each appliance comes with a one-year warranty, which Albany estimates will cost $75 each. During the year Albany spent $12,500 on warranty costs for the appliances sold in 2017. At the end of the 2017 the warranty liability and the warranty expense related to these sales would be closest to

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Current Liabilities

Warranty Liability a) $17,500 b) $17,500 c) $12,500 d) $30,000

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Warranty Expense $12,500 $30,000 $12,500 $30,000

30. Which of the following liabilities requires the use of an estimate when it is initially recorded? a) Wages Payable b) Unearned Revenue c) Warranty Obligation d) Accounts Payable 31. Which of the following companies would be MOST likely to have an unearned revenue account? a) grocery store b) department store c) hotel chain d) car dealership 32. Which of the following companies would usually NOT have an unearned revenue account? a) magazine publishing company b) property management company c) airline d) hardware store 33. All of the following situations contribute to the need for a company to recognize deferred revenues, EXCEPT for a) partially executed contracts between buyers and sellers. b) the requirement by sellers for the prepayment of goods and services. c) mutually unexecuted contracts between buyers and sellers. d) the seller has collected a deposit but not yet met the criteria for revenue recognition. Use the following information for questions 34–35. Malaya’s Manicures sells $2,500 worth of gift certificates in November and December. 25% of the gift certificates are redeemed in December prior to the December 31 year end. 34. The entry to record the sale of the gift certificates is a) Dr. Cash, Cr. Gift Card Revenue b) Dr. Gift Card Revenue, Cr. Deferred Gift Card Revenue c) Dr. Prepaid Gift Cards, Cr. Gift Card Revenue d) Dr. Cash, Cr. Deferred Gift Card Revenue

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Test Bank for Understanding Financial Accounting, Canadian Edition

35. The required year end adjusting entry is a) Dr. Revenues $625, Cr. Deferred Gift Card Revenues $625 b) Dr. Revenues $1,875, Cr. Deferred Gift Card Revenues $1,875 c) Dr. Deferred Gift Card Revenues $625, Cr. Revenues $625 d) Dr. Gift Card Revenues $1,875, Cr. Revenues $1,875 36. Lokus Lofts is a rental company that requires its tenants to pay rent one month in advance. Lokus should record the cash received as a) Prepaid Rent. b) Rent Revenue. c) Unearned Revenue. d) Accounts Payable. Use the following information for questions 37–39. Jems & Jewels Inc. offers a two-year warranty against failure of its products. The estimated liability is 4% of sales in the year of sale and 6% in the second year. Sales for 2016 and 2017 were: $2,500,000 and $2,800,000, respectively. They incurred no warranty costs in 2016 but in 2017 they spent $175,000 on repairs related to the warranties from 2016 and 2017. 37. The warranty liability as at the year-end 2016 was a) $0. b) $100,000. c) $150,000. d) $250,000. 38. The warranty expense for 2016 was a) $80,000. b) $100,000. c) $150,000. d) $250,000. 39. The warranty liability as at the end of the 2017 year was a) $75,000. b) $280,000. c) $355,000. d) $530,000 Use the following information for questions 40–42. Melman Microscopes Inc. offers a two-year warranty against failure of its products. The estimated liability is 1.5% in the year of sale and 3% in the second year. Sales and

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Current Liabilities

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actual warranty expense for 2016 and 2017 were: 2016 2017

Sales $3,500,000 $3,900,000

Actual Warranty Costs Incurred During Year $110,000 $195,000

40. The warranty liability on the December 31, 2016 balance sheet was a) $47,500. b) $105,000. c) $110,000. d) $157,500 41. The warranty liability on the December 31, 2017 balance sheet was a) $0. b) $28,000. c) $138,000. d) $175,500. 42. The warranty expense for 2017 was a) $157,500. b) $175,500. c) $195,000. d) $305,000. 43. The awarding of frequent flyer miles by airline companies is accounted for in a manner similar to a) warranty expenses. b) accounts payable. c) contingent liabilities. d) commitments. 44. The following information relates to Blink & Block payroll for the month of March: Total wages...................................... $15,000 Income tax withheld......................... 3,000 Employees’ CPP contributions......... 7452.50 Employees’ EI contributions............. 282 Compan...