Chapter 4.

Current Liabilities
True and False
1. A zero-interest-bearing note payable that is issued at a discount will not result in any
interest expense being recognized______________.
2. Magazine subscriptions and airline ticket sales both result in unearned
revenues_____________.
3. Discount on Notes Payable is a contra account to Notes Payable on the balance
sheet_________.
4. A short-term obligation can be excluded from current liabilities if the company intends
to refinance it on a long-term basis and demonstrates the ability to consummate the
refinancing___________.
5. Many companies do not segregate the sales tax collected and the amount of the sale at
the time of the sale_______________.
6. Companies report the amount of social security taxes withheld from employees as well
as the companies’ matching portion as current liabilities until they are
remitted______________.
7. Companies should recognize the expense and related liability for compensated
absences in the year earned by employees__________.
8. Companies should accrue an estimated loss from a loss contingency if information
available prior to the issuance of financial statements indicates that it is reasonably
possible that a liability has been incurred__________.
9. A company discloses gain contingencies in the notes only when a high probability
exists for realizing them____________.
10. Under the expense warranty approach, companies charge warranty costs only to
the period in which they comply with the warranty_________.

MULTIPLE CHOICE
1. Liabilities are
a) Any accounts having credit balances after closing entries are made.
b) Deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c) Obligations to transfer ownership shares to other entities in the future.
d) Obligations arising from past transactions and payable in assets or services in the
future.
 2) Which of the following is a current liability?
A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a
new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these answers are correct.
3) Which of the following is true about accounts payable?
1. Accounts payable are also called trade accounts payable.
2. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost
account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.
4) Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. Discount on Notes Payable is a contra account to Notes Payable
5) Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these answers are correct.
6) Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these answers are correct.
7) Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
 c. short-term obligations expected to be refinanced.
d. unearned revenues.
8) Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
9) Slack Inc. borrowed $320,000 on April 1. The note requires interest at 12% and principal
to be paid in one year. How much interest is recognized for the period from April 1 to
December 31?
a. $0.
b. $38,400.
c. $25,600.
d. $28,800.
10) Craig borrowed $350,000 on October 1, 2014 and is required to pay $360,000 on
March 1, 2015. What amount is the note payable recorded at on October 1, 2014 and how
much interest is recognized from October 1 to December 31, 2014?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
11) What is a contingency?
a) An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur.
b) An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur.
c) An existing situation where uncertainty exists as to possible gain or loss that will not be
resolved in the foreseeable future.
d) An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur.
12) When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably
estimated.
c. When the future events are probable to occur.
 d. When the future events will possibly occur and the amount can be reasonably
estimated.
13) Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
14) Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
15) Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
16) Which of the following contingencies need not be disclosed in the financial statements or
the related notes?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.

1. F 6. T 1. D 6. d 11.d
2. T 7. T 2. D 7. c 12.b
3. T 8. F 3. a 8. d 13.d
4. T 9. T 4. b 9. d 14.d
5. T 10. F 5. d 10.b 15.d
16.d