Republic of the Philippines

City of Caloocan
St. Vincent de Ferrer College of Camaranin, Inc.
SVFC Compound, San Vicente de Ferrer Rd. Area D, Brgy. 179, Caloocan City

COURSE TITLE: Intermediate Accounting 2 Professor: Orland L. Adrigado, CPA

TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest
expense being recognized.

2. Dividends in arrears on cumulative preference shares should be recorded as a current

liability.

3. Magazine subscriptions and airline ticket sales both result in unearned revenues.

4. All long-term debt maturing within the next year must be classified as a current liability on
the statement of financial position.

5. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.

6. Many companies do not segregate the sales tax collected and the amount of the sale at the
time of the sale.

7. Short-term debt obligations are classified as current liabilities unless an agreement to

refinance is completed before the financial statements are issued.

8. A company can exclude a short-term obligation from current liabilities if it intends to

refinance the obligation and has an unconditional right to defer settlement of the obligation
for at least 12 months following the due date.

9. Preference dividends in arrears are not a liability until declared by the Board of Directors,
but should be disclosed in the notes to the financial statements.

10. A company must accrue a liability for sick pay that accumulates but does not vest.

11. 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.

12. Accumulated rights exist when an employer has an obligation to make payment to an
employee even after terminating his employment.

13. Companies should recognize the expense and related liability for compensated absences
in the year earned by employees.

14. The expected profit from a sales type warranty that covers several years should all be
recognized in the period the warranty is sold.
15. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.

MULTIPLE CHOICE—Conceptual
16. 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. present obligations arising from past events and results in an outflow of resources.

17. Which of the following is a current liability?

a. 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 ordinary shares
d. None of these

18. Among the short-term obligations of Lance Company as of December 31, the statement
of financial position date, are notes payable totaling $250,000 with the Madison National
Bank. These are 90-day notes, renewable for another 90-day period. These notes should
be classified on the statement of financial position of Lance Company as
a. current liabilities.
b. deferred charges.
c. non-current liabilities.
d. intermediate debt.

19. Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Unearned Revenue
d. All of these

20. 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 due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
21. Which of the following should not be included in the current liabilities section of the
statement of financial position?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. Unearned revenues
d. All of these are included
22. Which of the following is a current liability?
a. Preference dividends in arrears
b. A dividend payable in the form of additional shares
c. A cash dividend payable to preference shareholders
d. All of these

23. Share dividends distributable should be classified on the

a. income statement as an expense.
b. statement of financial position as an asset.
c. statement of financial position as a liability.
d. statement of financial position as an item of equity.

24. 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.

25. Which of the following is a characteristic of a current liability but not a non-current liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Settlement is expected within the normal operating cycle, or within 12 months after the
reporting date.
d. Transaction or other event creating the liability has already occurred.
26. Sodium Inc. borrowed $175,000 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. $21,000.
c. $5,250.
d. $15,750.

27. Collier borrowed $175,000 on October 1 and is required to pay $180,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $175,000 and $0.
b. $175,000 and $3,000.
c. $180,000 and $0.
d. $175,000 and $5,000.
28. On September 30, Yang Company signed a HK$150,000, one-year zero-interest-bearing
note at First Solvent Bank. Yang’s borrowing rate on such obligations is 12% (.89286
present value factor). The September 30 journal entry to record issuance of the note would
include:
a. a debit to Cash for HK$150,000.
b. a debit to Notes Receivable for HK$150,000.
c. a credit to Notes Payable for HK$133,929.
d. a debit to Interest Expense for HK$16,071.

29. On June 20, Ying Company purchased goods from Chee-Chow Company for HK$30,000,
terms 2/10, n/30. The invoice was paid on June 27. The company uses a perpetual
inventory system and records purchases gross. The June 27 journal entry to record
payment of the account would include:
a. a credit to Cash for HK$30,000.
b. a credit to Purchases Discounts for HK$600.
c. a debit to Accounts Payable for HK$29,400.
d. a credit to Inventory for HK$600.

30. On December 31, 2011, Frye Co. has £4,000,000 of short-term notes payable due on
February 28, 2012. On December 23, 2011, Frye arranged a line of credit with County
Bank which allows Frye to borrow up to £3,500,000 at one percent above the prime rate
for three years. On February 2, 2007, Frye borrowed £2,500,000 from County Bank and
used £500,000 additional cash to liquidate £3,000,000 of the short-term notes payable.
The amount of the short-term notes payable that should be reported as current liabilities
on the December 31, 2011 statement of financial position which is issued on March 15,
2012 is
a. $0.
b. $500,000.
c. $1,000,000.
d. $4,000,000.