Chapter 13 - T/f

Front 1

The only requirement for an obligation to be classified as a current liability is that it be liquidated within the operating cycle or one year, whichever is longer.

Back 1

F) In addition to the "operating cycle or one year, whichever is longer" criterion, one other criterion is necessary for an obligation to be classified as current. Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities.

Front 2

Notes payable are only classified as short-term

Back 2

(F) Notes payable may be classified as short-term or long-term, depending upon the payment due date.

Front 3

When a company issues a zero-interest-bearing note, the difference between the face amount of the note and the cash proceeds is most appropriately recorded as a discount on notes payable.

Back 3

(T)

Front 4

Discount on Notes Payable is an adjunct account to Notes Payable and therefore is added to Notes Payable on the balance sheet.

Back 4

(F) Discount on Notes Payable is a contra account to Notes Payable and therefore is subtracted from Notes Payable on the balance sheet.

Front 5

The currently maturing portion of a serial bond should not be classified as a current liability if it will be paid out of a long-term asset such as a sinking fund,

Back 5

(T)

Front 6

A short-term obligation expected to be refinanced may be excluded from current liabilities if (a) a company intends to refinance the obligation on a long-term basis, and (b) the company demonstrates an ability to consummate the refinancing.

Back 6

(T)

Front 7

When refinancing on a long-term basis is expected to be accomplished through the issuance of equity securities, it is not appropriate to include the short-term obligation in owners' equity.

Back 7

(T)

Front 8

If a short-term obligation is excluded from current liabilities because of refinancing, a footnote to the financial statements should be included disclosing the particulars of the refinancing. arrangement.

Back 8

(T)

Front 9

Preferred dividends in arrears should be recognized as a liability in the balance sheet.

Back 9

(F) Preferred dividends in arrears are not an obligation until formal action is taken by the board of directors authorizing the distribution of earnings (although a disclosure may be involved).

Front 10

A stock dividend distributable is classified as a long-term liability because it will not be liquidated using current assets,

Back 10

(F) A stock dividend distributable is liquidated using capital stock rather than assets. Thus, a stock dividend distributable should be classified in an entity's equity section.

Front 11

A current liability results when a company collects sales taxes from customers.

Back 11

(T)

Front 12

The amount of unremitted employee and employer social security tax on gross wages paid should be reported by the employer as a current liability.

Back 12

(T)

Front 13

GAAP requires that a liability always be accrued for the cost of compensation for future absences of full-time employees.

Back 13

(F) A liability for the cost of compensation for future absences is required if the four following conditions are met: (a) the employee's services have already been rendered, (b) the obligation relates to rights that vest or accumulate, (c) payment is probable, and (d) the amount can be reasonably estimated.

Front 14

Vested rights exist when an employer has an obligation to make payment to an employee but not if the employee is terminated.

Back 14

(F) Vested rights exist when an employer has an obligation to make payment to an employee even if his or her employment is terminated.

Front 15

If sick pay benefits accumulate but do not vest, accrual is permitted but not required.

Back 15

(T)

Front 16

The term "loss contingency," as used in accounting, refers to situations that result in a liability after the passage of a specified period of time.

Back 16

(F) Contingencies result in liabilities if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The mere passage of time is not a criteria in determining whether a loss contingency should be recorded as a liability.

Front 17

If a loss contingency is likely to occur and its amount can be reasonably estimated, it should be recorded in the accounts.

Back 17

(T)

Front 18

One factor to consider in determining whether a liability should be recorded with respect to threatened litigation is the effect such a liability will have on a reported financial condition,

Back 18

(F) Threatened litigation is a loss contingency that should be recorded as a liability if it is probable that a liability has been incurred and the amount of the loss is reasonably estimated.

Front 19

To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements.

Back 19

(T)

Front 20

Use of the cash basis method in accounting for product warranty costs is required when a company is unable to make a reasonable estimate of the amount of warranty obligations at the tine of sale.

Back 20

(T)

Front 21

When a company offers premiums to its customers in return for coupons, the cost of the premiums should be charged to expense when the premiums are distributed to customers.

Back 21

(F) The cost of premiums should be charged to expense during the period in which the sale that gave rise to the premium is made. This method will find some of the premium cost being charged to expense when the premiums are distributed to customers. However, any portion of the estimated premium expense not charged to expense during the period of sale must be accrued at year-end so that a proper matching of revenues and expense takes place.

Front 22

The number of outstanding premium offers that will be presented for redemption must be estimated in order to reflect the existing current liability and to match costs with revenues,

Back 22

(T)

Front 23

When there is an absence of insurance, a firm should estimate the amount of possible future losses and record a liability at the date of the financial statements.

Back 23

(F) The absence of insurance does not mean that a liability has been incurred at the date of the financial statements.

Front 24

Current liabilities are generally measured by the present value of the future outlay of cash required to liquidate them,

Back 24

(F) Theoretically, current liabilities should be measured by the present value of the future outlay of cash required to liquidate them. But, in practice, current liabilities are usually recorded in accounting records and reported in financial statements at their full maturity value.

Front 25

Because current liabilities tend to be liquidated within a short period of time, present value techniques are not normally applied.

Back 25

(T)