Q: A company issues a $$100,000, 8% note payable on July 1, Year 1, due in one year. What is the interest expense to be accrued on December 31, Year 1? Use the formula $$\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}$.

$$100,000 \times 0.08 \times \frac{6}{12} = 4$$,000

Q: A company issues a $$10,000 bond at par with a 10% coupon rate, paying interest semi-annually. What is the amount of each interest payment? Use the formula $$\text{Coupon Payment} = \text{Face Value} \times \frac{\text{Coupon Rate}}{2}$.

$$10,000 \times 0.10 \times 0.5 = 500$$

Question 1

Which of the following best describes a contingent liability, and when should it be accrued on the financial statements?

Accepted Answer

A potential liability that depends on future events; it should be accrued if it is probable and the amount can be reasonably estimated.

Question 2

A company issues a $$100,000, 8% note payable on July 1, Year 1, due in one year. What is the interest expense to be accrued on December 31, Year 1? Use the formula $$	ext{Interest} = 	ext{Principal} 	imes 	ext{Rate} 	imes 	ext{Time}$.

Accepted Answer

$$100,000 	imes 0.08 	imes \frac{6}{12} = 4$$,000

Question 3

Which of the following is NOT a current liability?

Accepted Answer

Bonds Payable due in 10 years

Question 4

A company sells $50,000 of goods with a 6% sales tax. What is the correct journal entry to record the sale?

Accepted Answer

Dr. Cash $$53,000; Cr. Sales 50$$,000; Cr. Sales Tax Payable $3,000

Question 5

Which of the following best describes the accounting for a capital (finance) lease by the lessee?

Accepted Answer

Record a lease asset and a lease liability at the present value of lease payments.

Question 6

A company issues a $$10,000 bond at par with a 10% coupon rate, paying interest semi-annually. What is the amount of each interest payment? Use the formula $$	ext{Coupon Payment} = 	ext{Face Value} 	imes \frac{	ext{Coupon Rate}}{2}$.

Accepted Answer

$$10,000 	imes 0.10 	imes 0.5 = 500$$

Question 7

Which of the following payroll taxes is an employer NOT required to pay from their own funds?

Accepted Answer

Federal income tax withheld from employees

Question 8

If a company retires a $$10,000 bond early by paying 9$$,800, what is the journal entry for the gain or loss? Use the formula $$	ext{Gain (Loss)} = 	ext{Carrying Value} - 	ext{Amount Paid}.$$

Accepted Answer

Dr. Bonds Payable $$10,000; Cr. Cash 9$$,800; Cr. Gain $200

Question 9

Which of the following ratios measures a company's ability to cover its interest expense with operating income? Use the formula $$	ext{Times-Interest-Earned} = \frac{	ext{Operating Income}}{	ext{Interest Expense}}.$$

Accepted Answer

Times-Interest-Earned Ratio

Question 10

A company estimates warranty costs of $20,000 related to current period sales. What is the correct journal entry at the time of sale?

Accepted Answer

Dr. Warranty Expense $$20,000; Cr. Accrued Warranty Payable 20$$,000

Question 11

Which of the following best describes the debt ratio, and what does a higher ratio indicate? Use the formula $$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}.$$

Accepted Answer

It measures the proportion of assets financed by liabilities; a higher ratio indicates higher risk.

Question 12

Which of the following is a reason why companies might prefer leasing over purchasing an asset?

Accepted Answer

Leasing may require little or no up-front payment and can protect against obsolescence.

Question 13

A company has total assets of $$500,000 and total liabilities of 300$$,000. What is its debt ratio? Use the formula $$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}.$$

Accepted Answer

$$\frac{300,000}{500,000} = 0.60$$

Question 14

Which of the following is true regarding the accounting for sales tax collected from customers?

Accepted Answer

Sales tax collected increases cash and sales tax payable, but does not affect revenue.

Question 15

Which of the following is a characteristic of a financing (capital) lease under current accounting standards?

Accepted Answer

The lease transfers substantially all risks and rewards of ownership to the lessee.

Question 16

A company has operating income of $$120,000 and interest expense of 15$$,000. What is its times-interest-earned ratio? Use the formula $$	ext{Times-Interest-Earned} = \frac{	ext{Operating Income}}{	ext{Interest Expense}}.$$

Accepted Answer

$$\frac{120,000}{15,000} = 8$$

Question 17

Which of the following is true about the leverage ratio (equity multiplier)? Use the formula $$	ext{Leverage Ratio} = \frac{	ext{Average Total Assets}}{	ext{Average Total Stockholders' Equity}}.$$

Accepted Answer

A higher leverage ratio indicates more reliance on debt financing and higher risk.

Current and Long-Term Liabilities: Concepts, Calculations, and Financial Statement Analysis

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