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| 1 | |
The essential characteristics of a liability do not include: |
| | A) | The existence of a past causal transaction or event. |
| | B) | Present obligation. |
| | C) | The existence of a legal obligation. |
| | D) | A future sacrifice of economic benefits. |
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| 2 | |
Of the following, which usually would not be classified as a current liability? |
| | A) | A nine-month note to be paid with the proceeds from the sale of common stock. |
| | B) | Bonds payable maturing within the coming year. |
| | C) | Estimated warranty liability. |
| | D) | Subscription revenue received in advance. |
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| 3 | |
Which of the following results in an accrued liability? |
| | A) | Interest on a 6 month bank loan due in two months: Yes; Sales taxes collected on recent sales: Yes |
| | B) | Interest on a 6 month bank loan due in two months: Yes; Sales taxes collected on recent sales: No |
| | C) | Interest on a 6 month bank loan due in two months: No; Sales taxes collected on recent sales: No |
| | D) | Interest on a 6 month bank loan due in two months: No; Sales taxes collected on recent sales: Yes |
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| 4 | |
On November 1, Epic Distributors borrowed $24 million cash to fund an expansion of its facilities. The loan was made by WW BancCorp under a short-term line of credit. Epic issued a 9-month, 12% promissory note. Interest was payable at maturity. Epic's fiscal period is the calendar year. In Epic's adjusting entry for the note on December 31, interest expense will be: |
| | A) | $0 |
| | B) | $240,000 |
| | C) | $480,000 |
| | D) | $640,000 |
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| 5 | |
On October 1, 2009, Parton Industries borrowed $12 million cash to provide working capital. The loan was made by Second Bank under a short-term line of credit. Parton issued an 8-month, "noninterest-bearing note." 8% is the bank's stated "discount rate." Parton's fiscal period is the calendar year. In Parton's 2009 income statement interest expense for the note will be: |
| | A) | $0 |
| | B) | $240,000 |
| | C) | $360,000 |
| | D) | $480,000 |
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| 6 | |
Commercial paper has become an increasingly popular way for companies to raise funds. Which of the following is not true regarding commercial paper? |
| | A) | Commercial paper is often purchased by other companies as a short-term investment. |
| | B) | Commercial paper usually is sold in minimum denominations of $25,000 with maturities of greater than 270 days. |
| | C) | Interest often is discounted at the issuance of the note. |
| | D) | Usually the interest rate is lower than in a bank loan. |
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| 7 | |
On November 1, Shearer Shoes borrowed $18 million cash and issued a 6-month, "noninterest-bearing note." The loan was made by Third Commercial Bank whose stated "discount rate" is 9%. Shearer's effective interest rate on this loan is: |
| | A) | 8.61% |
| | B) | 9% |
| | C) | 9.42% |
| | D) | 9.5% |
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| 8 | |
Liabilities payable within one year can be excluded from current liabilities only if: |
| | A) | The business intends to refinance the obligations on a long-term basis. |
| | B) | The business has the demonstrated ability to refinance the obligations on a long-term basis. |
| | C) | Both a and b. |
| | D) | Liabilities payable within one year always must be classified as current liabilities. |
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| 9 | |
Reunion BBQ has $4,000,000 of notes payable due on March 11, 2010, which Reunion intends to refinance. On January 5, 2010, Reunion signed a line of credit agreement to borrow up to $3,500,000 cash on a two-year renewable basis. On the December 31, 2009, balance sheet , Reunion should classify: |
| | A) | $500,000 of notes payable as short-term and $3,500,000 as long-term obligations. |
| | B) | $500,000 of notes payable as long-term and $3,500,000 as short-term obligations. |
| | C) | $4,000,000 of notes payable as short-term obligations. |
| | D) | $4,000,000 of notes payable as long-term obligations. |
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| 10 | |
Which of the following statements concerning lines of credit is untrue? |
| | A) | A line of credit is an agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. |
| | B) | A line of credit is a formal agreement that usually requires the firm to pay a commitment fee to the bank. |
| | C) | Banks sometimes require the company to maintain a compensating balance on deposit with the bank (say 5%) as part of the line of credit agreement. |
| | D) | Most short-term bank loans are arranged under an existing line of credit. |
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| 11 | |
On January 1, 2009, Yukon Company agreed to grant its employees two weeks vacation each year, with the provision that vacations earned in a particular year could be taken the following year. For the year ended December 31, 2009, all twelve of Yukon's employees earned $1,200 per week each. Eight of these vacation weeks were not taken during 2009. In Yukon's 2009 income statement, how much expense should be reported for compensated absences? |
| | A) | $0 |
| | B) | $9,600 |
| | C) | $14,4000 |
| | D) | $28,8000 |
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| 12 | |
An enterprise should accrue a liability for compensation of employees' unpaid vacations if certain conditions exist. Each of the following is a condition for accrual except: |
| | A) | Compensation for the vacations is probable. |
| | B) | The employee has the right to carry forward the vacation time beyond the current period. |
| | C) | The amount of compensation is known. |
| | D) | The employee benefit has been earned. |
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| 13 | |
In its 2009 financial statements, an enterprise should accrue a liability for a loss contingency involving a possible cash payment if certain conditions exist. Each of the following is a condition for accrual except: |
| | A) | The payment is probable. |
| | B) | The cause of the loss contingency occurred prior to the end of 2009. |
| | C) | The amount of payment can be estimated before the 2009 financial statements are issued. |
| | D) | The obligation is a legally enforceable claim. |
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| 14 | |
Which of the following loss contingencies generally do not require accrual? |
| | A) | Manufacturers' product guarantees. |
| | B) | Claims by government agencies with probable negative outcomes. |
| | C) | Obligations due to cash rebate offers. |
| | D) | Retailers' extended warranties. |
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| 15 | |
Warren Advertising becomes aware of a lawsuit after the end of the fiscal year, but prior to the issuance of financial statements. A loss should be accrued and a liability should be reported if the amount can be reasonably estimated and: |
| | A) | The cause for action occurred prior to the end of the fiscal year. |
| | B) | The damages would be payable within a year. |
| | C) | Both a. and b. |
| | D) | The contingency should not be accrued. |
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| 16 | |
A loss contingency should be accrued when the amount of loss is known and the occurrence of the loss is: |
| | A) | Remote: No; Reasonably possible: No |
| | B) | Remote: Yes; Reasonably possible: Yes |
| | C) | Remote: Yes; Reasonably possible: No |
| | D) | Remote: No; Reasonably possible: Yes |
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| 17 | |
During 2009 Green Thumb Company introduced a new line of garden shears that carry a two-year warranty against defects. Experience indicates that warranty costs should be 2% of net sales in the year of sale and 3% in the year after sale. Net sales and actual warranty expenditures were as follows: | Net | Actual warranty | | sales | expenditures | 2009 | $ 45,000 | $1,000 | 2010 | 120,000 | 3,500 |
At December 31, 2010, Green Thumb should report as a warranty liability of: |
| | A) | $900 |
| | B) | $1,250 |
| | C) | $3,750 |
| | D) | $4,500 |
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| 18 | |
There is a possibility of a safety hazard for a manufactured product. As yet, no claim has been made for damages, though there is a reasonable possibility that a claim will be made. If a claim is made, it is probable that damages will be paid and the amount of the loss can be reasonably estimated. This possible loss must be: |
| | A) | Accrued: Yes; Disclosed: Yes |
| | B) | Accrued: Yes; Disclosed: No |
| | C) | Accrued: No; Disclosed: Yes |
| | D) | Accrued: No; Disclosed: No |
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| 19 | |
Gain contingencies usually are recognized in the income statement when: |
| | A) | The gain is realized. |
| | B) | The gain is probable and the amount is known. |
| | C) | The gain is probable and the amount can be reasonably estimated. |
| | D) | The gain is reasonably possible and the amount can be reasonably estimated. |
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