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business multiple choice: current liabilities

43) Which of the following items is a current liability?

A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
C. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
D. Bonds due in three years.

44) Stock dividends distributable should be classified on the

A. income statement as an expense.
B. balance sheet as a liability.
C. balance sheet as an item of stockholders' equity.
D. balance sheet as an asset.

45) Which of the following statements is false?

A. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
B. Under the cash basis method, warranty costs are charged to expense as they are paid.
C. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.
D. Cash dividends should be recorded as a liability when they are declared by the board of directors.

46) Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,000,000 per year. The company estimates that on average it will incur losses of $800,000 per year. During 2007, $350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2007?

A. $350,000 in losses and $450,000 in insurance expense
B. $0 in losses and $1,000,000 in insurance expense
C. $0 in losses and $800,000 in insurance expense
D. $350,000 in losses and no insurance expense

47) Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2006 the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007. Information relative to these employees is as follows:

Year Hourly Wages Vacation Days Earned by Each Employee Vacation Dayse Used by Each Employee
2006 $28.50 10 0
2007 $27.00 10 8
2008 $28.50 10 10
What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2008?

A. $90,720.
B. $95,760.
C. $79,800.
D. $94,920.

48) A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events?

A. Depreciation expense of $100,000 and interest expense of $7,711
B. Depreciation expense of $107,710 and interest expense of $7,711
C. Depreciation expense of $100,000 and interest expense of $20,000
D. Depreciation expense of $120,000

49) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007 financial statements should include the following related to the incident:

A. recognition of a loss only.
B. disclosure in note form only.
C. creation of a liability only.
D. recognition of a loss and creation of a liability for the value of the land.

50) Which of the following is the proper way to report a gain contingency?

A. As deferred revenue.
B. As a disclosure only.
C. As an account receivable with additional disclosure explaining the nature of the contingency.
D. As an accrued amount.

51) A contingency can be accrued when

A. an asset may have been impaired.
B. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
C. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
D. it is certain that funds are available to settle the disputed amount.

52) Bonds for which the owners' names are NOT registered with the issuing corporation are called

A. term bonds.
B. secured bonds.
C. debenture bonds.
D. bearer bonds.

53) An example of an item which is NOT a liability is

A. advances from customers on contracts.
B. the portion of long-term debt due within one year.
C. accrued estimated warranty costs.
D. dividends payable in stock.

54) The term used for bonds that are unsecured as to principal is

A. debenture bonds.
B. junk bonds.
C. indebenture bonds.
D. callable bonds.

Solution Preview

-- To be used in combination with your textbook and other study, class, and reference materials for studying purposes only:

43) Which of the following items is a current liability?

A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months. <-- this is a current liability and due in 11 months.
C. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
D. Bonds due in three years.

44) Stock dividends distributable should be classified on the

A. income statement as an expense.
B. balance sheet as a liability.
C. balance sheet as an item of stockholders' equity. <-- correct, it's part of equity.
D. balance sheet as an asset.

45) Which of the following statements is false?

A. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. <-- this is never permitted, it is against GAAP.
B. Under the cash basis method, warranty costs are charged to expense as they are paid.
C. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.
D. Cash dividends should be ...

Solution Summary

This solution provides the correct answers with explanations to the multiple choice questions listed. All questions are answered in the solution.

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