Mastering Current Liabilities: A Corporate Finance Quiz

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1. 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

D) None of these

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

About This Quiz

Mastering Current Liabilities: A Corporate Finance Quiz - Quiz

Enhance your understanding of Current Liabilities through this focused quiz. Master key terms and definitions, and assess your ability to identify and manage short-term financial obligations relevant in the corporate finance and accounting sectors.

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2. Which of the following is not true about the discount on short-term notes payable?

B) The Discount on Notes Payable account should be reported as an asset on the balance sheet.

A) The Discount on Notes Payable account has a debit balance

D) All of these are true.

The Discount on Notes Payable account should be reported as a contra-liability account, not as an asset, since it represents a reduction in a liability rather than an increase in assets.

Explanation

The Discount on Notes Payable account should be reported as a contra-liability account, not as an asset, since it represents a reduction in a liability rather than an increase in assets.

3. Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2011. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

D) Appropriation of retained earnings of $800,000

C) Operating expense of $800,000 and liability of $800,000

B) Note disclosure only

A) No recognition

The correct accounting treatment for this situation involves recognizing the recall cost as an operating expense of $800,000 and creating a liability of $800,000 on the balance sheet to account for the estimated cost of the recall.

Explanation

4. When should the accrual method in accounting for product warranty costs be used?

D) represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

B) is frequently justified on the basis of expediency when warranty costs are immaterial

C) finds the expense account being charged when the seller performs in compliance with the warranty.

A) is required for federal income tax purposes

The accrual method should be used when the warranty is a significant aspect of the sale to ensure accurate matching of expenses with revenues.

Explanation

The accrual method should be used when the warranty is a significant aspect of the sale to ensure accurate matching of expenses with revenues.

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