107. Which of the following is not a characteristic of an estimated liability?
A. The liability is known to exist.
B. The precise dollar amount cannot be determined until a later date.
C. The liability should not be recorded in the accounting records until future events have determined the exact amount.
D. The liability stems from past transactions.
108. Commitments, such as contracts for future transactions:
A. Are classified as liabilities.
B. Are classified as assets.
C. Are footnoted in financial statements, if material.
D. Are only disclosed if negative due to the principle of conservatism.
109. Which of the following is an example of a contingent liability?
A. A lawsuit pending against a restaurant chain for improper storage of perishable food items.
B. The liability for future warranty repairs on computers sold during the current period.
C. A corporation’s long-term employment contract with its chief executive officer.
D. A liability for notes payable with interest included in the face amount.
110. Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?
A. Quick ratio.
B. Inventory turnover.
C. Current ratio.
D. Debt ratio.
111. Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company’s ultimate financial responsibility. This situation is an example of:
A. Off-balance-sheet financing.
B. A loss contingency which should be disclosed in notes to Ultimate Company’s financial statements.
C. An estimated liability which must appear in Ultimate Company’s balance sheet.
D. A loss in purchasing power caused by inflation.
112. The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:
A. A contingent liability which should be recorded in the accounting records.
B. A contingent liability requiring footnote disclosure.
C. An estimated liability, since the number of albums to be produced is not yet determined.
D. A commitment which, if material, may be disclosed in a footnote.
113. A discount on bonds payable is best described as:
A. An element of future interest expense.
B. A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds.
C. The present value of the future interest payments of bond interest and principal.
D. An amount below par which the bondholders may be called upon to make good.
114. Deferred taxes are classified as:
A. Only a liability.
B. Only an asset.
C. Either an asset or liability, depending upon the situation.
D. A non-operating expense.
115. Amortizing a discount on bonds payable:
A. Increases interest expense.
B. Increases periodic cash payments to bondholders.
C. Decreases interest expense.
D. Decreases periodic cash payments to bondholders.
116. Premium on bonds payable:
A. Is an asset account.
B. Increases the carrying value of the liability.
C. Is a contra-asset account.
D. Is disclosed by a footnote.
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