JESSA MAE A.

CAC CURRENT LIABILITIES MIDTERMS

1. Which is not an essential characteristic of an accounting liability?

(a)The liability is the present obligation of a particular enterprise.
(b)The liability arises from past transaction or event.
(c)The settlement of the liability requires an outflow of resources embodying economic
benefits.
(d)The liability is payable to a specifically identified payee.

2. Current liabilities include:

(a)only obligations which are expected to be settled within the normal operating cycle.
(b)only obligations which are due to be settled within one year from balance sheet date.
(c)obligations which are expected to be settled within the normal operating cycle and
obligations which are due to be settled within one year from balance sheet date.
(d)refinanced long-term debt falling due within one year from balance sheet.

3. A long-term debt falling due within one year should be reported as noncurrent liability
should be reported as noncurrent liability if the following conditions are met (choose the
incorrect one):
(a)The original term is for a period of more than one year.
(b)The enterprise intends to refinance the obligation on a long-term basis.
(c)The intent to refinance is supported by an agreement to refinance which is completed
before the issuance of the financial statements.
(d)The intent to refinance is supported by an agreement to refinance which is completed
after the issuance of the financial statements.

4. Which will demonstrate an agreement to refinance (choose the incorrect one)?

(a)Long-term obligation has in fact been issued before the issuance of the financial
statements for the purpose of refinancing.
(b)Equity security has in fact been issued before the issuance of the financial statements
for the purpose of refinancing.
(c)Before the issuance of the financial statements, the enterprise has in fact entered into a
financing agreement that clearly permits the enterprise to refinance the currently
maturing long-term debt on a long-term basis.
(d)Preferred stock has in fact been issued before the issuance of financial statements for
the purpose of obtaining working capital.
5. Some obligations that are due to be repaid within the next operating cycle and expected to
be refinanced or “rolled over” should be classified as noncurrent:
 (a) If the refinancing or “rolling over” is at the discretion of the enterprise and the
refinancing agreement has been reached before the issuance of the statements.
(b) If the refinancing or “rolling over” is at the discretion of the enterprise regardless of
whether a refinancing agreement has been reached or not before the issuance of the
statements.
(c) If the refinancing or “rolling over” is not at the discretion of the enterprise.
(d) Subject to no conditions.

6. Covenants are often attached to long-term borrowing agreements which represent

undertakings by the borrower. Under these covenants, if certain, conditions related to the
borrower’s financial position are breached, the liability becomes payable on demand. This
liability can still be classified as noncurrent:
(a) when the lender has agreed, prior to the issuance of the statements, not to demand
payment.
(b) when it is probable that further breaches or violations will not occur within one year
from balance sheet date.
(c) when the lender has agreed prior to the issuance of the statements not to demand
payment and it is probable that further breaches will not occur within one year from
balance sheet date.
(d) with no conditions.

7. Which of the following is generally associated with payables classified as accounts payable?
Periodic payment of interest Secured by collateral
(a) No No
(b) No Yes
(c) Yes No
(d) Yes Yes
8. An example of an item which is not liability is:
(a) dividend payable in stock. (c) accrued estimated warranty cost.
(b) advance from customer on contract (d) the portion of long-term debt due within
one year.

9. How will the annual interest or dividend affect total liabilities each year?
(a) Interest is a current liability each year until paid.
(b) Cumulative preferred dividends in arrears are a current liability each year until paid.
(c) Both interest and cumulative preferred dividends in arrears are current liabilities each
year until paid.
(d) Interest and cumulative preferred dividends in arrears are noncurrent liabilities each
year until paid.
10. Rent revenue collected one month in advance should be accounted for as:
(a) revenue in the month collected. (c) a separate item in stockholders’ equity.
(b) a current liability. (d) an accrued liability.

11. Which of the following is an accrued liability?

(a) cash dividends payable (c) rent revenue collected one month in advance
(b) wages payable (d) portion of long-term debt payable in current
year

12. An accrued expense can be best described as an amount:

(a) paid and currently matched with earnings.
(b) paid and not currently matched with earnings.
(c) not paid and not currently matched with earnings.
(d) not paid and currently matched with earnings.

13. Cali Company had a P4,000,000 note payable due on March 1, 2001. On January 31, 2001,
before the issuance of its 2000 financial statements, Cali issued long-term bonds payable
in the amount of P5,000,000. Proceeds from the bonds were used to repay the note when
it came due. How should Cali classify the note in its December 31, 2000 financial
statements?
(a) current liability with separate disclosure of the note refinancing
(b) current liability with no disclosure required
(c) noncurrent liability with separate disclosure of the note refinancing
(d) noncurrent liability with no separate disclosure required

14. Of the following items, the one which should be classified as a current liability is:
(a) an accommodation endorsement.
(b) a cash dividend declared before the balance sheet date when the date of record is
subsequent to the balance sheet date.
(c) unfunded past service cost of a pension plan.
(d) dividends in arrears on cumulative preferred stock.

15. If the payment of employees’ compensation for future absences is probable, the amount
can be reasonably estimated and the obligation relates to rights that accumulate, the
compensation should be:
(a) accrued if attributable to employees’ services not already rendered.
(b) accrued if attributable to employees’ services already rendered.
(c) accrued if attributable to employees’ services whether already rendered or not.
(d) recognized when paid.
16. On September 1, 2001, a company borrowed cash and signed a two-year interest bearing
note on which both the principal and interest are payable on September 1, 2003. How
many months of accrued interest would be included in the liability for accrued interest at
December 31, 2001 and December 31, 2002?
December 31, 2001 December 31, 2002
(a) 4 months 16 months
(b) 4 months 4 months
(c) 12 months 24 months
(d) 20 months 8 months

17. On October 1, 2001, a company borrowed cash and signed a three-year interest bearing on
which both the principal and interest are payable on October 1, 2004. At December 31,
1993, accrued interest should:
(a) be reported on the balance sheet as a current liability.
(b) be reported on the balance sheet as a noncurrent liability.
(c) be reported on the balance sheet as part of long-term notes payable.
(d) not be reported on the balance sheet as a liability.

18. On September 1, 2001, a company borrowed cash and signed a one-year interest bearing
on which both the principal and interest are payable on September 1, 2002. How will the
note payable and the accrued interest be classified In December 31, 2001 balance sheet?
Note payable Accrued interest
(a) Current liability Noncurrent liability
(b) Noncurrent liability Current liability
(c) Current liability Current liability
(d) Noncurrent liability No entry

19. A two-year note was issued in an arm’s length transaction at face value solely for cash at
the beginning of the year. There were no other rights or privileges exchanged. The
interest rate is specified at 10 percent per year. Principal and interest are payable at
maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What
annual interest rate should be used to record interest expense for this year and next year?
This year Next year
(a) 10 percent 15 percent
(b) 10 percent 10 percent
(c) 15 percent 15 percent
(d) 15 percent 15 percent
20. A company borrowed cash from a bank and issued to the bank a short-term noninterest-
bearing note payable. The bank discounted the note at 10% and remitted the proceeds to
the company. The effective interest rate paid by the company in this transaction would be:
(a) equal to the stated discount rate of 10%.
(b) more than the stated discount rate of 10%.
(c) less than the stated discount rate of 10%.
(d) independent of the stated discount rate of 10%.

21. A company issued a short-term note payable with a stated 12% rate of interest to a bank.
The bank charged 0.5% loan origination fees and remitted the balance to the company.
The effective interest rate paid by the company in this transaction should be:
(a) equal to 12.5% (c) less than 12.5%
(b) more than 12.5% (d) independent of 12.5%

22. Burke Company issued a note solely in exchange for cash. Assuming that the items listed
below differ in amount the present value of the note at issuance is equal to the:
(a) face amount.
(b) face amount discounted at the prevailing interest rate for similar notes.
(c) proceeds received.
(d) proceeds received discounted at the prevailing interest rate for similar notes.

23. If the present value of a note issued in exchange for a plant asset is less than its face
amount, the difference should be:
(a) included in the cost of the asset.
(b) amortized as interest expense over the life of the note.
(c) amortized as interest expense over the life of the asset.
(d) included in interest expense in the year of issuance.

24. A retail store received cash and issued gift certificates that are redeemable in merchandise.
The gift certificates lapse one year after they are issued. How would the deferred revenue
account be affected by each of the following transactions?
Redemption of certificates Lapse of certificates
(a) Decrease No effect
(b) Decrease Decrease
(c) No effect No effect
(d) No effect Decrease
25. A retail store received cash and issued gift certificate that is redeemable in merchandise.
When the gift certificate was issued, a:
(a) deferred revenue account should be decreased.
(b) deferred revenue account should be increased.
(c) revenue account should be decreased.
(d) revenue account should be increased.

26. Magazine subscriptions collected in advance are treated as:

(a) contra account to magazine subscriptions receivable.
(b) deferred revenue in the liability section.
(c) deferred revenue in the stockholders’ equity section.
(d) magazine subscription refunds in the income statement in the period collected.

27. A company receives an advance payment for special order goods that are to be
manufactured and delivered within six months. The advance payment should be reported
in the company’s balance sheet as a:
(a) deferred charge. (c) current liability.
(b) contra asset account. (d) noncurrent liability.

28. Jersey Company is a retailer of home appliances and offers a service contract on each
appliance sold. Jersey sells appliances on installment contracts, but all service contracts
must be paid in full at the time of sale. Collections received for service contracts should be
recorded as an increase in a:
(a) deferred revenue account. (c) stockholders’ equity valuation account.
(b) sales contracts receivable valuation account.(d) service revenue account.

29. Under a royalty agreement with another enterprise, a company will receive royalties from
the assignment of a patent for four years. The royalties received in advance should be
reported as revenue:
(a) in the period received. (c) evenly over the life of the royalty agreement.
(b) in the period earned. (d) at the date of the royalty agreement.

30. In June 2001, North sold refundable merchandise coupons. North received P100 for each
coupon redeemable from July 1 to December 31, 2001, for merchandise with a retail price
of P110. At June 30, 2001, how should North report these coupon transactions?
(a) unearned revenue at the merchandises’ retail price.
(b) unearned revenue at the case received.
(c) revenue at the merchandise’s retail price.
(d) revenue at the cash received.
31. How would the proceeds received from the advance sale of nonrefundable tickets for a
theatrical performance be reported in the seller’s financial statements before the
performance?
(a) revenue for the entire proceeds.
(b) revenue to the extent of related costs expended.
(c) unearned revenue to the extent of related costs expended.
(d) unearned revenue for the entire proceeds.

32. On March 31, 2001, Dallas Company received an advance payment of 60% of the sales
price for special order goods to be manufactured and delivered within five months. At the
same time, Dallas subcontracted for production of the special order goods at a price equal
to 40% of the main contract price. What liabilities should be reported in Dallas’ March 31,
2001 balance sheet?
(a) none
(b) deferred revenue equal to 60% of the main contract price and payable to subcontractor
equal to 40% of the main contract price
(c) deferred revenue equal to 60% of the main contract price and no payable to
subcontractor
(d) no deferred revenue but payable to subcontractor is reported at 40% of the main
contract price

33. For P500 a month, Raw Company visits its customers’ premises and performs insect
control services. If customers experience problems between regularly scheduled visits,
Raw makes service calls at no additional charge. Instead of paying monthly, customers
may pay an annual fee of P5,400 in advance. For a customer who pays the annual fee in
advance, Raw should recognize the related revenue:
(a) when the cash is collected.
(b) at the end of the fiscal year.
(c) at the end of the contract year after all of the services have been performed.
(d) evenly over the contract year as the services are performed.

34. AFFLUENT RICH Co. sells service contracts that cover a 2-year period. The sales price of
each contract is P2,000. AFFLUENT sold 1,000 contracts evenly throughout 20x1.
AFFLUENT's past experience shows that of the total pesos spent for repairs on service
contracts, 40% incurred evenly during the first contract year and 60% evenly during the
second contract year.
Requirements:
(a) How much are the current and noncurrent portions of the deferred revenue to be
presented in AFFLUENT's 20x1 statement of financial position?
(b) How much is the service revenue recognized in 20x2?
Answer:
(a) How much are the current and noncurrent portions of the deferred revenue to be
presented in AFFLUENT's 20x1 statement of financial position?

Total Current Deferred Revenue P1,000,000

Total Noncurrent Deferred Revenue P600,000

Solution:
Current Portion:
(P2,000x1,000) x 40% x 6 months/12months 400,000
(P2,000x1,000) x 60% x 6 months/12months 600,000
Total Current Deferred Revenue P1,000,000

Noncurrent Portion:
(P2,000x1,000) x 60% x 6 months/12months 600,000
Total Noncurrent Deferred Revenue P600,000

(b) How much is the service revenue recognized in 20x2?

Answer:

Total Service Revenue recognized in 20x2 is P1,000,000

Solution:
(P2,000x1,000) x 40% x 6 months/12months 400,000
(P2,000x1,000) x 60% x 6 months/12months 600,000
Total Service Revenue P1,000,000

*Observe that the service revenue recognized in 20x2 is the current deferred revenue on
20x1, as shown on my number 1 answer above.

Explanation:
The revenue recognized for 20x1 is the half of 40% of the contract price. The other half of
40% will be recognized on 20x2. The half of 60% of contract price will be recognized as
revenue on 20x2 and the other half will be recognized on 20x3.
Therefore, on 20x1 only half of 40% will be recognized as earned totaling to 400,000. So, the
deferred revenue at the end of 20x1 is (Contract price 2,000,000 - Revenue recognized
400,000) 1,600,000.
The current portion of deferred revenue is amounting to 1,000,000.
Current Portion:
(P2,000x1,000) x 40% x 6 months/12months 400,000
(P2,000x1,000) x 60% x 6 months/12months 600,000
Total Current Unearned Revenue P1,000,000

The noncurrent Portion is 600,000.

Noncurrent Portion:
(P2,000x1,000) x 60% x 6 months/12months 600,000
Total Noncurrent Unearned Revenue P600,000

Remember: Revenue will be recognized only when service is already performed. Upon
recognition, the corresponding deferred revenue will be considered as earned. The
performance of service is "evenly" per year. It means only 1/2 of percentage assigned will be
performed. Example:40% of service performed on the first year. In this case, only half of 40%
will be performed on the first year. The other half will be performed next year.

35. At December 31, 20x7. Cain, Inc., owed notes payable of 1,750,000 due on May 15 20x8.
Cain expects to retire this debt with proceeds from the sale of 100,000 shares of its common
stock. The stock was sold for 15 per share on March 10, 20x8, prior to the issuance of the year-
end financial statements. In Cain's December 31, 20x7, balance sheet what amount of the
notes payable should be excluded from current liabilities?
Answer: 100,000 x 15 = $1,500,000 is able to be EXCLUDED from current liabilities

36. Pam, Inc., has P1,000,000 of notes payable due June 15, 20x6. At the signed an financial
statement date of December 31, 20x5, Pam agreement to borrow up to P1,000,000 to
refinance the notes payable on a long-term basis. The refinancing agreement is at the
discretion of Pam, Inc. The financing agreement called for borrowings not to exceed 80% of
the value of the collateral Pam was providing. At the date of issue of the December 31, 20x5,
financial statements, the value of the collateral was 1,200,000 and was not expected to fall
below this amount during 20x0. In its December 31, 20x5, balance sheet, how much is short
term note payable and long term note payable?
Answer: Short-term payable $40,000 & Long term payable $960,000
Explanation:
It was provided that value of the collateral was $1,200,000. So, 80% of the collateral shall be
recognized as long term payable.
Long term payable
=$1,200,000 x 80%
=$960,000

Total notes payable is $1,000,000. Thus, the portion of short-term payable is:

Short-term payable
=$1,000,000 - $960,000
= $40,000

37. Wilk Co. reported the following: Accounts payable-trade 750,000; Short-term borrowings
400,000; Bank loan of P3,500,000 with current portion P100,000; Other bank loan, matures
June 30, 20X2 P1,000,000.
The bank loan of P3,500,000 was in violation of the loan agreement. The creditor had not
waived the rights for the loan.
What amount should Wilk report as current liabilities at December 31, 20x1?
Answer: $5,650,000

Current liabilities are obligations of an entity that are expected to require the use of current
assets or the providing of services (or the creation of another liability that will require the use
of current assets or provision of services) during the next year or operating cycle, whichever is
longer. For Wilk Co., accounts payable-trade, short-term borrowings, and the other bank loan,
which matures during next year, are all (conventional) current liabilities.
The bank loan for $3,500,000 also must be classified in total as a current liability because Wilk
is in violation of the terms of the loan agreement, and the creditor has not waived its right to
demand immediate loan payment.
The sum of the four accounts is $5,650,000

38. Regal Department Store sells gift certificates, redeemable for store merchandise, that
expire one year after their issuance. Regal has the following information pertaining to its gift
certificates sales and redemptions:

Unredeemed at 12/31/x2 75,000

20x3 sales 250,000

20x3 redemptions of prior year sales 25,000

20x3 redemptions of current year sales 175,000

Regal experience indicates that 10% of gift certificates sold will not be redeemed. In its
December 31, 20x3 balance sheet, what amount should Regal report as unearned revenue?
Answer: Revenue should be recognized when (or as) the entity satisfies a performance
obligation by transferring a promised good or service (merchandise) to a customer. The
good or service is transferred when the customer obtains control of that good or
service. Because the certificates expire after 1 year, all revenue from sales prior to Year
2 is recognized because no performance obligation remains to be satisfied. Thus, the
unearned revenue (contract liability) balance for gift certificate sales at the end of Year
2 relates solely to Year 2 sales. Given Year 2 sales of $250,000 and redemptions of
$175,000, $75,000 of certificates are unredeemed at year end. However, 10% of total
certificates sold in Year 2 ($250,000 × 10% = $25,000) are not expected to be
redeemed. Accordingly, unearned revenue is $50,000 ($75,000 - $25,000).

39. Aneen's Video Mart sells one- and two-year mail order subscriptions for video-of-the-
month business. Subscriptions are collected in advance and credited to sales. An analysis of
the recorded sales activity revealed following:

20x2 20x3

Sales 420,000 500,000

Less cancellations 20,000 30,000

Net sales 400,000 470,000

Subscriptions expirations:

20x2 120,000

20x3 155,000 130,000

20x4 125,000 200,000

20x5 140,000

Totals 400,000 470,000

In Aneen's December 31, 20x3 balance sheet, the balance for unearned subscription revenue
should be
Answer: At 12/31/12, the liability account unearned subscription revenue should have
a balance which reflects all unexpired subscriptions. Of the 2011 sales, $125,000
expires during 2013 and would still be a liability at 12/31/12. Of the 2012 sales,
$340,000 ($200,000 + $140,000) expires during 2013 and 2014, and therefore is a
liability at 12/31/12. Therefore, the total liability is $465,000 ($125,000 + $340,000).
This amount would have to be removed from the sales account and recorded as a
liability in a 12/31/12 adjusting entry.

40. On July 1, 20x0, Ran County issued realty tax assessments for its fiscal year ended June 30,
20X1. On September 1, 20x0, Day Co. purchased a warehouse in Ran County. The purchase
price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real
estate tax obligation, but instead records tax expenses at the end of each month by adjusting
prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, 20x0,
Day paid the first of two equal installments of P12,000 for realty taxes. What amount of this
payment should Day record as a debit to real estate taxes payable?
Answer: $8,000

The total annual real estate tax is 2($12,000) or $24,000. Therefore, the tax per month is
$2,000. Day assumed the taxes, already assessed on the property, for the full year.

The payment on November 1 covers the four months July, August, September, and October, for
a total cost of $8,000. This portion of the $12,000 payment is debited to real estate taxes
payable, because the full annual property tax amount is already accrued on Day's books from
the purchase of the property. Pre-paid real estate taxes are debited for the remaining $4,000 of
the payment.

The $4,000 pre-pays the tax for the next two months (November and December). At the end of
each of those two months, the payable is debited for $2,000 and the pre-paid is credited for
$2,000. The cycle begins again when the second payment is made. In this jurisdiction, the tax
is assessed for a year at the beginning of the year.

Therefore, payments are debited to pre-paid real estate taxes unless previously accrued, as
was the case here.

41. Black Co. requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable. Information for 20x0 is as
follows: Customer advances-balance 1/1/20x0 P118,000;
Advances received with orders in 20x0 P184,000;
Advances applied to orders shipped in 20x0 P164,000;
Advances applicable to orders canceled in 20x0 P50,000
In Black's December 31, 20x0, balance sheet, what amount should be reported as a current
liability for advances from customer?
Answer:
-Customer advances-balance 1/1/20x0 P118,000
-Add: Advances received with orders in 20x0 184,000
-Total 302,000
-Less: Advances applied to orders shipped in 20x0 164,000
-Customer's Advances, December 31, 20x0 P138,000

42. Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate
taxes for National's mortgage customers. Escrow funds are kept in interest-bearing accounts.
Interest, less a 10% service fee, is credited to the mortgagee's account and used to reduce
future escrow payments. Additional information follows:
Escrow accounts liability, 1/1/20x9 P 700,000;
Escrow payments received during 20x9 1,580,000;
Real estate taxes paid during 20x9 1,720,000;
Interest on escrow funds during 20x9 P50,000
What amount should Kent report as escrow accounts liability in its December 31, 20x9,
balance sheet?
Answer: $605,000

The liability at the beginning of the year was $700,000. Escrow payments of $1,580,000 were
credited and taxes paid of $1,720,000 were debited to the account during the year.
Furthermore, interest of $45,000 [$50,000 – ($50,000 × 10%) service fee] was credited. Thus,
the year-end balance was $605,000 ($700,000 + $1,580,000 – $1,720,000 + $45,000).

43. Lyle, Inc. is preparing its financial statements for the year December 31, 20x9. Accounts
payable amounted to P360,000 before any necessary year-end adjustment related to the
following:
· At December 31, 20x9, Lyle has a P50,000 debit balance in its accounts payable to Ross, a
supplier, resulting from a P50,000 advance payment for goods to be manufactured to
Lyle's specifications.
· Checks in the amount of 100,000 were written to vendors and recorded on December 29,
20x9. The checks were mailed on January 5, 2000. What amount should Lyle report as
accounts payable in its December 31 20x9, balance sheet?
Answer: Before adjustment, the balance in the Accounts Payable account is $360,000.
This amount is net of a $50,000 debit balance in Lyle �s account payable to Ross
resulting from a $50,000 advance payment for goods to be manufactured to Lyle �s
specifications. The $50,000 should be reclassified as a current asset, Advance to
Suppliers. The checks recorded on 12/29/Y2 incorrectly reduced the accounts payable
balance by $100,000. The $100,000 reduction should not have been recorded until the
checks were mailed on 1/5/Y3. The 12/31/Y2 accounts payable must be increased by
$100,000. Therefore, the corrected 12/31/Y2 accounts payable is $510,000. Unadjusted
AP $360,000 Reclassification of advance 50,000 Error correction 100,000 $510,000