Question

- All the following are reported as current liabilities except:

1. Notes payable due in 3 years

2. Deferred revenues

3. Notes payable due in 8 months

4. Accounts payable

- In each succeeding payment on installment note:

1. The amount of interest expense is unchanged

2. The amount of interest expense increases

3. The amount of interest expense decreases

4. The amounts paid for both interest and principal increase proportionately

- Which of the following is considered to be a Land Improvement asset?

1. A sprinkler system

2. A warehouse

3. A printing press

4. A dump truck

- The sale of gift cards by a company is direct example of:

1. Deferred revenues

2. Installment notes

3. Current portion of long-term debt

4. Sales tax payable

- Flamingo Company borrows $30,000 using a five-year, long-term installment note payable. The rate on the note is percent and Flamingo agrees to make monthly payments of $566.14. Which of the following statements is correct about Flamingo’s first payment?

1. Note payable reduction is $125.00 and interest is $441.14

2. Note payable reduction is $441.14 and interest is $125.00

3. Note payable reduction is $123.16 and interest is $442.98

4. Note payable reduction is $442.98 and interest is $123.16

- Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books of Young if:

1. The likelihood of losing the lawsuit is reasonably possible and the amount is reasonably estimable.

2. The likelihood of losing the lawsuit is probable and the amount is not reasonably estimable.

3. The likelihood of losing the lawsuit is remote and the amount is reasonably estimable.

4. The likelihood of losing the lawsuit is probable and the amount is reasonably estimable.

Answer 1

1.The answer is Option A. Notes Payable due in 3 years because the term is 3 years. For the current liabilities the period should not be more than a year.

• Deferred revenues is not an answer because it means unearned revenue for which the company has not transferred the goods or services for the amount received. It is treated as current liability the period is less than a year.
• Notes payable due in 8 months is not an answer the period is 8 months which is less than a year. The current liabilities means the liabilities which is to be paid within a year. So it is a current liability.
• Accounts payable means the company has purchased the raw materials for credit. Usually the period will be less than a year. So accounts payable is a current liability.

2.The answer is Option C. The amount of interest expense decreases because the whole principal is added divided in installments and the interest is paid on remaining principal every year. So, the Interest amount goes on decreasing.

• The first option is not an answer because the interest is paid on the remaining principal. Every year, after installment paid the total principal amount decreases, so the interest also decreases which means the interest expense gets changed every year.
• The Second option is not an answer because the interest amount decreases so it will not be increased because the interest amount is paid on remaining principal and the principal decreases every year.
• The fourth option is not an answer because the principal remain decrease for every installment and the interest amount will get decreased.

3. The answer is Option A. Sprinkler system because asset which improve the land by giving water to the land. So it is land improvement asset

• The warehouse is not an answer because it will not improve the land. It is a building which is used to storage the raw materials and finished products.
• A printing press is not an answer because it is a machine used to print the words or images at bulk. So it is not a land improvement asset because it will not improve the land
• The dumd truck is not an answer because it truck will not lead an improvement of land

3. The answer is Option A. Deferred revenue because the purchase of gift card is made to give it as a gift to others. The person who receive the gift card has to purchase the goods of the company from which the gift card id purchased. It means the revenue is earned but the sales are not made. So, it becomes deferred revenue until the card is redeemed.

• The installment note is not an answer because here the payment is first made the product or services is purchased later. So the installment note will never come because here the payment is made later.
• Current portion of long-term debt is not an answer the gift is card is not a debt. There will be some time period for the redemption usually less than a year. After the period ends the person cannot redeem it so it is not a long-term debt.
• Sales tax payable is not an answer it is a tax collected by company from customers on its sales. In gift card the sales is not yet made.

4.The answer is Option B Note payable reduction is $441.14 and interest is $125.00. here is the calculation.
Interest rate on note is 5% = 0.05
Principal is $30,000
Interest for first payment for a year = 30,000*0.05 = $1500
Interest for a month = 1500/12 = $125
So note payable reduction = note payable monthly instalment – Interest
= 566.14-125
Note payable reduction = $441.14
5.The answer is Option D. The likelihood of losing the lawsuit is probable and the amount is reasonably estimable because if the liability of lawsuit is probable and reasonably estimated the the liability is shown in both Income statement and balance sheet.

• The first option is not an answer because here it is treated as the company is losing and there is less probability than remote that they could win. But the company can win the case. So a note is provided on the financial statements.
• The second option is not an answer because if the liability cannot be reasonably estimable, a note in the financial statements is made.
• The third option is not an answer because if the liability is remote, then it is not disclosed