25 Multiple Choice Questions

1) Blocker, Inc. had $10,000 of notes coming due on January 10, 2011. On January 5, 2011, the company used $2,000 of excess cash to pay off part of the note. On January 8, 2011, a refinancing was completed. The $2,000 payment was refunded and added back to the note balance, and the note was extended for another two years. On the December 31, 2010 balance sheet, how much of the $10,000 note should be shown as current?
Select one:
a. $ 8,000
b. $10,000
c. $ 2,000
d. $ 0

2) Bonita places a coupon in each box of its product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes of product were sold in 2010. It was estimated that 6% of the coupons would be redeemed. During 2010, 8,000 coupons were redeemed. Which entry should be made at December 31, 2010?

Select one:
a. Premium Expense 6,400
Inventory of Premiums 6,400
b. Premium Expense 16,000
Estimated Premium Claims Outstanding 16,000
c. Premium Expense 6,400
Estimated Premium Claims Outstanding 6,400
d. Premium Expense 9,600
Estimated Premium Claims Outstanding 9,600

3) Analysts use the quick ratio (also known as the acid test ratio) and the current ratio. The use of both ratios has become common because
Select one:
a. the acid test is a more severe test of a company's liquidity
b. the quick ratio is much easier to compute than the current ratio
c. interpretation of the current ratio is more difficult because of its complexity
d. the acid test a better measure of management's effectiveness

4) Blocker, Inc. had $10,000 of notes coming due on January 10, 2011. On January 5, 2011, the company used $2,000 of excess cash to pay off part of the note. On January 8, 2011, a refinancing was completed. The $2,000 payment was refunded and added back to the note balance, and the note was extended for another two years. On the December 31, 2010 balance sheet, how much of the $10,000 note should be shown as current?
Select one:
a. $ 8,000
b. $10,000
c. $ 2,000
d. $ 0

5) Bonita places a coupon in each box of its product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes of product were sold in 2010. It was estimated that 6% of the coupons would be redeemed. During 2010, 8,000 coupons were redeemed. Which entry should be made at December 31, 2010?

Select one:
a. Premium Expense 6,400
Inventory of Premiums 6,400
b. Premium Expense 16,000
Estimated Premium Claims Outstanding 16,000
c. Premium Expense 6,400
Estimated Premium Claims Outstanding 6,400
d. Premium Expense 9,600
Estimated Premium Claims Outstanding 9,600

6) Consolidated Business Services introduced a new machine on January 1, 2010. The machine carried a two-year warranty against defects. The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year after sale. Additional information follows:





Actual Warranty

Year

Sales

Expenditures

2010

$50,000

$ 900

2011

80,000

4,200



If the expense warranty accrual method is used, what amount relating to warranties should be reflected on the December 31, 2011, balance sheet?

Select one:
a. $9,100
b. $5,300
c. $6,400
d. $6,500

7) Cooper's inventory has been financed 100% with a long-term note. The note is coming due in 2011. Cooper has received a commitment from a new lender that permits five-year refinancing of debt up to an amount equal to 50% of inventory, which is expected to range between $9,000 and $15,000 in 2011. At December 31, 2010, how much of the company's currently maturing note payable can be classified as long-term debt?
Select one:
a. $4,500
b. $7,500
c. $6,000
d. $9,000

8) Existing claims related to product warranties and litigation as of December 31, 2010, indicate that it is probable that a liability has been incurred. However, as of December 31, 2010, the amount of the obligation cannot be reasonably estimated. Based on these facts, an estimated loss contingency should be
Select one:
a. disclosed but not accrued
b. classified as an appropriation of retained earnings
c. accrued
d. neither accrued nor disclosed

9) Existing claims related to product warranties and litigation as of December 31, 2010, indicate that it is probable that a liability has been incurred. However, as of December 31, 2010, the exact amount of the obligation cannot be reasonably estimated, but a range of possible amounts has been determined. Based on these facts, an estimated loss contingency should be
Select one:
a. accrued
b. neither accrued nor disclosed
c. disclosed but not accrued
d. classified as an appropriation of retained earnings


10) GAAP relating to compensated absences
Select one:
a. does not require the accrual of accumulated nonvested sick pay
b. applies to items such as vacation pay, severance pay, sick pay, and other long-term fringe benefits
c. establishes the same accruing standards for vacation pay, holiday pay, and sick pay
d. requires the use of current pay rates to accrue for compensated absences

11) Management of current liabilities arises, in part, because of a concern over
Select one:
a. relevance
b. profitability
c. reliability
d. liquidity

12) On December 1, 2010, Brothers, Inc. borrowed money at the bank by signing a 90-day non-interest-bearing note for $40,000 that was discounted at 12%. Which of the following entries is not correct?

Select one:
a. December 1, 2010
Cash 38,800
Discount on Note Payable 1,200
Note Payable 40,000
b. December 31, 2010
Interest Expense 400
Discount on Note Payable 400
c. December 31, 2010
Discount on Note Payable 400
Interest Expense 400
d. March 1, 2011
Interest Expense 800
Discount on Note Payable 800

13) On December 1, 2010, Young Co. borrowed money at the bank by signing a 90-day non-interest-bearing note for $24,000 that was discounted at 8%. Which of the following entries is correct?

Select one:
a. December 31, 2010
Interest Expense 160
Discount on Notes Payable 160
b. December 31, 2010
Interest Expense 160
Interest Payable 160
c. December 1, 2010
Cash 24,000
Note Payable 24,000
d. March 1, 2011
Note Payable 23,520
Cash 23,520

14) Prince sells a certain product for $20,000. Included in this price is an implied service contract of $800. Fifty machines were sold in 2010. Warranty expense incurred during 2010 amounted to $25,000. The company uses the sales warranty accrual method. Which entry would probably not be made in 2010?

Select one:
a. Cash 1,000,000
Sales 960,000
Unearned Warranty Revenue 40,000
b. Unearned Warranty Revenue 25,000
Warranty Revenue 25,000
c. Cash 40,000
Warranty Revenue 40,000
d. Warranty Expense 25,000
Cash 25,000

15) Paul Company includes three coupons in each package of crackers it sells. In exchange for 20 coupons, a customer will receive a cheese plate. Paul estimates that 30% of the coupons will be redeemed. In 2010, Paul sold 4,000,000 boxes of crackers and purchased 150,000 cheese plates at $2.50 each. During the year, 970,000 coupons were redeemed.

What amount should Paul record as premium expense for 2010?

Select one:
a. $500,000
b. $121,250
c. $375,000
d. $450,000

16) Paul Company includes three coupons in each package of crackers it sells. In exchange for 20 coupons, a customer will receive a cheese plate. Paul estimates that 30% of the coupons will be redeemed. In 2010, Paul sold 4,000,000 boxes of crackers and purchased 150,000 cheese plates at $2.50 each. During the year, 970,000 coupons were redeemed.

What amount should Paul report as estimated premium claims outstanding at December 31, 2010?

Select one:
a. $328,750
b. $450,000
c. $121,250
d. $500,000

17) Tractor Company estimates its annual warranty expense at 4% of annual net sales. The following information relates to the calendar year 2010:



Net sales

$3,000,000

Estimated liability under warranties:





January 1, 2010

100,000



December 31, 2010, after year-end adjustment

80,000

The amount of expenditures for warranty costs for 2010 is

Select one:
a. $140,000
b. $240,000
c. $ 80,000
d. $120,000

18) Tractor Company estimates its annual warranty expense at 4% of annual net sales. The following information relates to the calendar year 2010:



Net sales

$3,000,000

Estimated liability under warranties:





January 1, 2010

100,000



December 31, 2010, after year-end adjustment

80,000

The amount of warranty expense for 2010 is

Select one:
a. $120,000
b. $140,000
c. $240,000
d. $ 80,000

20) The Peters Company is affected by the following contingencies at the end of 2010:

1.

Expropriation of Peters' foreign assets, valued at $3,000,000, appears reasonably possible.

2.

Peters' legal counsel has concluded that it is probable that the company will be required to pay damages of $500,000 in a lawsuit.

3.

It appears remotely possible that a major customer will be unable to repay Peters on a note receivable for $100,000.

4.

Peters' controller estimates that $250,000 of the company's pledged receivables are likely to be uncollectible, and the lender will require Peters to honor the amounts.



What total amount should Peters accrue for loss contingencies in 2010?

Select one:
a. $3,500,000
b. $ 850,000
c. $3,850,000
d. $ 750,000

21) Under current standards of the FASB, liabilities include
Select one:
a. legal, nonlegal, and illegal obligations
b. both legal and illegal obligations
c. only legal obligations
d. both legal and nonlegal obligations

22) Walter Corp. introduced a new machine on January 1, 2010. The machine carried a two-year warranty against defects. The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year after sale. Additional information follows:





Actual Warranty

Year

Sales

Expenditures

2010

$40,000

$ 600

2011

60,000

2,200

If the expense warranty accrual method is used, what amount relating to warranty expense should be reflected on the December 31, 2011 income statement?

Select one:
a. $5,200
b. $2,200
c. $4,800
d. $7,400

23) Which journal entry would probably be made if the modified cash basis of accounting for warranties is in use for a sale made in 2010?

Select one:
a. 2010
Cash XX
Sales XX
Unearned Warranty Revenue XX
b. 2011
Estimated Liability under Warranties XX
Cash XX
c. 2010
Warranty Expense XX
Estimated Liability under Warranties XX
d. 2011
Warranty Expense XX
Cash XX

24) Which of the following is a legal liability?
Select one:
a. bribes due to foreign traders
b. gambling debt owed
c. sales taxes payable to the state
d. sick pay that may be taken as time off

25) Which of the following is the most appropriate way to display liabilities on the balance sheet?
Select one:
a. nearness to maturity
b. relative likelihood of payment
c. order of magnitude
d. alphabetically by payee