Liability Basics
Which of the following is a liability?
A. Future revenue
B. Probable future sacrifice of economic benefits
C. Cash received from owners
D. A prepaid asset
B
A liability is defined as a probable future sacrifice of economic benefits arising from past transactions.
A current liability is due within:
A. 6 months
B. 1 year or the operating cycle
C. 2 years
D. 5 years
B
Current liabilities are due within one year or the operating cycle, whichever is longer.
Sales tax collected from customers is recorded as:
A. Revenue
B. An asset
C. A liability
D. An expense
C
The company holds the tax temporarily before paying the government.
Interest formula is:
A. Principal × Rate
B. Principal × Time
C. Principal × Rate × Time
D. Rate × Time
C
Interest always uses principal, rate, and time.
Warranty expense is recorded in the period of:
A. Payment
B. Sale
C. Claim
D. Repair
B
Matching principle: record expense when revenue is earned.
contingent liability is recorded when:
A. Possible + measurable
B. Probable + measurable
C. Remote + measurable
D. Probable + not measurable
B
Only probable AND estimable losses are recorded.
A liability must arise from:
A. Future planned transactions
B. Activities that have already occurred
C. Only cash transactions
D. Only credit transactions
B
Liabilities come from past events, not future intentions.
Unearned revenue is classified as:
A. An asset
B. A liability
C. Revenue
D. Equity
B
The company owes goods/services, so it’s a liability.
A company sells $225,000 of goods with 8% total sales tax. What is Sales Tax Payable?
A. $15,750
B. $18,000
C. $225,000
D. $243,000
B
($225,000 × 0.08 = $18,000)
Borrowed $100,000 at 10% on Oct 1. Interest at Dec 31?
A. $1,000
B. $2,500
C. $10,000
D. $3,000
B ($100,000 × 10% × 3/12 = $2,500)
A warranty is a guarantee to:
A. Replace inventory
B. Repair or replace defective goods
C. Refund all sales
D. Increase revenue
B
Warranties promise repair or replacement.
A reasonably possible contingent loss should be:
A. Recorded
B. Ignored
C. Disclosed only
D. Capitalized
C
Reasonably possible losses require footnote disclosure.
Which two conditions are required to recognize a liability?
A. Probable + remote
B. Possible + measurable
C. Probable + measurable
D. Remote + measurable
C
GAAP requires the obligation to be probable AND reasonably estimable.
A company collects $123,000 for services to be performed next year. What is recorded?
A. Revenue
B. Accounts receivable
C. Unearned revenue
D. Notes payable
C
Cash received before earning revenue creates a liability.
Which payroll tax is paid by both employer and employee?
A. Federal income tax
B. State unemployment tax
C. FICA
D. Federal unemployment tax
C
Social Security and Medicare are matched by employers.
Interest payable is recorded when:
A. Cash is paid
B. Interest accrues but is unpaid
C. The note is issued
D. The note matures
B
Accrued interest becomes a liability until paid.
Warranty estimate = 3% of $4,000,000 sales. Expense?
A. $12,000
B. $40,000
C. $120,000
D. $400,000
C
4,000,000×3% = 120,000.
A remote contingent liability should be:
A. Recorded
B. Disclosed
C. Neither recorded nor disclosed
D. Estimated
C
Remote risks require no action.
Which of the following is not a liability?
A. Accounts payable
B. Unearned revenue
C. Notes payable
D. Sales revenue
D
Revenue is equity, not a liability.
Which of the following is not a current liability?
A. Accounts payable
B. Accrued expenses
C. Current portion of long‑term debt
D. 10‑year bonds payable
D
Bonds payable due in 10 years are long‑term.
Gross pay = $63,000. Calculate employee FICA withheld.
A. $4,820
B. $3,906
C. $4,500
D. $914
A
SS = 63,000×6.2% = 3,906
Medicare = 63,000×1.45% = 913.50.
Borrowed $50,000 at 12% for 9 months. Total interest?
A. $3,000
B. $4,500
C. $6,000
D. $1,500
B
50,000×12%×9/12 = 4,500.
Journal entry to record estimated warranty liability includes:
A. Dr Cash
B. Dr Warranty Expense
C. Cr Sales Revenue
D. Dr Accounts Receivable
B
Warranty expense is recognized immediately.
A lawsuit is probable and estimated at $2,000,000. What is recorded?
A. Nothing
B. Footnote only
C. Dr Loss; Cr Liability for $2,000,000
D. Dr Expense; Cr Cash
C
Probable + estimable = record the liability.
Which of the following best describes a contingent liability?
A. A guaranteed future payment
B. A potential obligation depending on future events
C. A prepaid obligation
D. A certain obligation with unknown timing
B
Contingent liabilities depend on uncertain future events.
A company has current assets of $900,000 and current liabilities of $600,000. What is the current ratio?
A. 1.25
B. 1.50
C. 2.00
D. 0.67
B
Current ratio = 900,000 ÷ 600,000 = 1.50.
Employer unemployment taxes: 3% state + 0.8% federal on $63,000. Total?
A. $504
B. $1,890
C. $2,394
D. $3,906
C ($1,890 + $504 = $2,394)
State: 63,000×3% = 1,890; Federal: 63,000×0.8% = 504; Total = 2,394.
When a note matures, the company must:
A. Pay only principal
B. Pay only interest
C. Pay principal + all accrued interest
D. Refinance automatically
C
Both principal and all accumulated interest must be paid.
Warranty repairs: $10,400 cash + $8,300 parts. What is debited?
A. Warranty Expense
B. Warranty Liability
C. Cash
D. Parts Inventory
B
Repairs reduce the liability previously recorded.
If a contingent liability is probable but cannot be estimated:
A. Record it
B. Disclose it
C. Ignore it
D. Record half the amount
B
Probable but not measurable = disclose only.