11) A potential obligation that depends on the future outcome of past events is a contingent liability.
12) A contingent liability should be disclosed in the notes to the financial statements if there is a reasonable possibility that a loss (or expense) will occur.
13) All contingent liabilities should be reported as liabilities on the financial statements, even those that are unlikely to occur.
14) At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:
A) current liabilities increase and current assets increase.
B) current liabilities increase and stockholders' equity increases.
C) current liabilities decrease and stockholders' equity decreases.
D) current liabilities increase and stockholders' equity decreases.
15) At the end of the year, a company has a short-term note payable outstanding that was entered into earlier in the current year. What accounts relating to the note payable will be reported on the financial statements at the end of the year?
A) Short-term notes payable will be reported on the balance sheet and interest payable will be reported on the income statement.
B) Interest receivable will be reported on the balance sheet.
C) Short-term notes payable and interest payable will be reported on the balance sheet.
D) Short-term notes payable, interest payable and interest expense will be reported on the balance sheet.
16) The journal entry to record salaries earned by 10 employees will:
A) debit Salary Expense and credit Salary Payable for the net pay.
B) debit Salary Expense and credit Salary Payable for the gross pay.
C) debit Salary Expense for the gross pay, credit FICA Tax Payable, credit Employee Income Tax Payable and credit Salary Payable for the net pay.
D) debit Salary Expense for the net pay, debit FICA Tax Payable, debit Employee Income Tax Payable, and credit Salary Payable for the gross pay.
17) When a business receives cash from a customer before earning the revenue, they credit:
A) Accounts Receivable.
B) Sales Tax Payable.
C) Accounts Payable.
D) Unearned Revenue.
18) All of the following are reported as current liabilities EXCEPT:
A) unearned revenues for services to be provided in 16 months.
B) sales tax payable.
C) accounts payable.
D) bonds payable due in 6 months.
19) Failure to record an accrued liability for wages earned by employees causes a company to:
A) understate net income.
B) overstate assets.
C) overstate liabilities.
D) overstate stockholders' equity.
20) Which of the liability accounts below is usually NOT an accrued liability:
A) interest payable.
B) wages payable.
C) taxes payable.
D) notes payable.