Test bank with answers for financial accounting 6e by libby chapter 09

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Chapter 009: Reporting and Interpreting Liabilities

True / False Questions
1. The mixture of debt and equity for a business is called its capital structure.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

2. A current liability is always a short-term obligation expected to be paid within one year of
the balance sheet date.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

3. A current ratio that is high according to an industry average might mean the company may
have excessive inventory levels or slow moving inventory items.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

4. A current ratio can be manipulated by management through paying off current liabilities
before the end of the accounting period.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

9-1
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Chapter 009: Reporting and Interpreting Liabilities

5. A liability, to be reported on the balance sheet, must have a fixed, known amount to be paid
in the future.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

6. The FICA (social security) tax is a matching tax with a portion paid by both the employer
and the employee.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

7. The accounts payable turnover ratio is computed by dividing sales by average accounts
payable.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

8. Interest is a function of the amount borrowed times the interest rate.

FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

9-2
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Chapter 009: Reporting and Interpreting Liabilities

9. A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no
adjusting entries have been made during the year, the entry to record interest accrued on
December 31, 2009 would include a debit to interest expense and a credit to interest payable
for $3,000.
FALSE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

10. All contingent liabilities should be classified as either current or long-term liabilities on
the balance sheet for the current period.
FALSE

AACSB Tag: Communication
Difficulty: Medium
L.O.: 5

11. A contingent liability that is "probable" and can be "reasonably estimated" must be
accrued and reported as a liability.
TRUE

AACSB Tag: Communication
Difficulty: Medium
L.O.: 5

12. When current liabilities decrease during the year, then we create a positive effect on cash
flow from operating activities.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

9-3

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Chapter 009: Reporting and Interpreting Liabilities

13. Excessive or slow moving inventory could be the reason working capital is low.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

14. A secured debt is where the borrowing company pledges specific assets as collateral for
the loan.
TRUE

AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 7

15. As corporations have expanded globally, it has become common to borrow money in
foreign currencies as a way to lessen exposure to exchange rate risk.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

16. For the present value of a single amount, the compounding period may only be once a
year.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 8

9-4
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Chapter 009: Reporting and Interpreting Liabilities

17. An annuity is a series of consecutive payments, each one increasing by a fixed dollar
amount over the payment amount of the prior year.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 8

18. In the recognition of revenues and expenses, temporary and permanent differences
between the financial statements and the tax return will result in deferred taxes.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: Sup A

19. Tax evasion involves illegal means to avoid paying taxes, but tax planning considers legal
means to postpone paying taxes.
TRUE

AACSB Tag: Ethics
Difficulty: Medium

L.O.: Sup B

20. A reciprocal relationship exists between the "future value of $1" and the "present value of
$1."
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: Sup. D

9-5
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Chapter 009: Reporting and Interpreting Liabilities

Multiple Choice Questions

21. A liability is measured in terms of its
A. amount owed plus interest.
B. current cash equivalent.
C. historical cost.
D. none of the other answers is correct.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

22. Which of the following statements is true?
A. Use of more debt in the company's capital structure usually reduces the rate of return
generated for stockholders.
B. Use of more debt in the capital structure can lead to positive financial leverage if we can
generate a return on investment in assets greater than the cost of borrowing.
C. Use of more debt decreases the level of risk assumed by a company.
D. All statements are false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

23. Which of the following statements is true?
A. Liabilities are initially recorded at the amount of their principle plus interest.
B. Liabilities can decrease the return on stockholders' equity if the interest rate paid is less
than the return on assets.
C. Capital structure is the relative proportion of debt and equity financing.
D. Liabilities are current if due within 60 days.

AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 1

9-6
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Chapter 009: Reporting and Interpreting Liabilities

24. Which of the following is false?
A. Current liabilities are those that will be satisfied within one year or the operating cycle,
whichever is longer.
B. Liquidity is the ability of the company to meet its total obligations.
C. Current liabilities impact a company's liquidity.
D. Working capital is equal to current assets minus current liabilities.

AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 1

25. The current ratio is computed as follows
A. current assets divided by total assets.
B. current assets divided by current liabilities.
C. current liabilities divided by total assets.
D. current liabilities divided by current assets.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

26. A company has a current ratio of 1.9 before paying off a large current liability with cash.
Following this payment, the current ratio will be
A. greater than 1.9.
B. less than 1.9.
C. equal to 1.9.
D. greater than 1.9 or less than 1.9 depending upon the dollar amount involved.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

9-7
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Chapter 009: Reporting and Interpreting Liabilities

27. The following is a partial list of account balances from the books of Probst Enterprise at
the end of 2009:

Based solely upon these balances, the amount of current liabilities appearing on Probst
Enterprise's 2009 year-end balance sheet should be
A. $24,900.
B. $24,100.
C. $23,700.
D. $20,500.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

28. In 2009, General Tech reported a current ratio of 2.75 and in 2008 it was 3.10. Which of
the following is a potential cause of a fall in this ratio?
A. An increase in accounts payable.

B. A decrease in inventories.
C. A decrease in short-term borrowings.
D. Both an increase in accounts payable and a decrease in inventories could cause the ratio to
fall.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

9-8
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Chapter 009: Reporting and Interpreting Liabilities

29. If a current ratio has been increasing over the past several years, which of the following
would cause the ratio to rise?

A. An increase in accounts payable.
B. An increase in inventories.
C. An increase in short-term borrowings.
D. A decrease in prepaid rent.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

30. In 2009, The Western Air Freight Company reported current assets of $12,094 million,
total assets of $31,327 million, current liabilities of $10,971 million, and total liabilities of
$15,392 million. What was their current ratio for 2009?
A. 1.63
B. 1.10
C. 2.12
D. 1.89

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 2

31. Chavez Chocolates had a current ratio of 1.74 in 2008. Which of the following would
cause the ratio to decrease in 2009?
A. A decrease in cash and equivalents and short-term investments.
B. An increase in cash and equivalents and short-term investments.
C. An increase in current assets that exceeded the increase in current liabilities.
D. Current assets as a percentage of total assets increased while current liabilities as a
percentage of total liabilities and stockholders' equity decreased.

AACSB Tag: Relative Thinking

Difficulty: Hard
L.O.: 2

9-9
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Chapter 009: Reporting and Interpreting Liabilities

32. Which of the following would most likely cause an increase in the current ratio?
A. A short-term borrowing of $100.
B. A purchase of $100 of inventory for cash.
C. A $100 payment to suppliers thereby reducing accounts payable
D. A $100 receipt of cash from a customer's accounts receivable.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 2

33. Which of the following is always a current liability?
A. Pension obligations
B. Estimated warranty liability
C. Accounts payable
D. Bonds payable

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

34. Which of the following usually is not a current liability?
A. Wages payable.
B. Rent revenue collected in advance.
C. Dividends payable.
D. Pension obligations.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

9-10
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Chapter 009: Reporting and Interpreting Liabilities

35. Which of the following is true?
A. Social Security tax is employer paid only.
B. The pay period always ends in conjunction with the company's fiscal year end.
C. Many fringe benefits such as sick and vacation leave benefits should be recognized when
the employee earns the benefit not when they take the leave.
D. Medical insurance benefits are always paid by the employee and not by the employer.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

36. An accrued liability results from an expense that is
A. incurred and paid.
B. incurred but not yet paid.
C. paid but not yet incurred.
D. neither incurred nor paid.

AACSB Tag: Relative Thinking
Difficulty: Easy

L.O.: 3

37. Which of the following statements is false relating to payroll taxes?
A. When recording the payroll entry, the credit to cash is usually more than the debit to
compensation expense.
B. FICA (social security) tax is a "matching" tax with the employer.
C. Income taxes withheld from employees' paychecks are liabilities of the employer.
D. None of the other answers is false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

9-11
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Chapter 009: Reporting and Interpreting Liabilities

38. Gross wages of $20,000 accrued but not paid to employees at the end of 2010 should be
recorded by the employer in a journal entry that includes a
A. debit of $20,000 to Compensation payable.
B. credit of $20,000 to Cash.
C. debit of $20,000 to Compensation expense.
D. debit of $20,000 to Cash.

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 3

39. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year
6%, interest-bearing note payable. Assuming no adjusting entries have been made during the
year, the required adjusting entry at the end of the accounting period, December 31, 2010,
would be
A.

B.

C.

D.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

9-12

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Chapter 009: Reporting and Interpreting Liabilities

40. The federal government requires
A. only the employer to pay FICA taxes.
B. only the employee to pay FICA taxes.
C. both the employer and the employee to pay FICA taxes.
D. neither the employer nor the employee to pay FICA taxes.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

41. The amount of federal income tax that is withheld from employees' paychecks by the
employer should

A. be recorded on the employer's books as a current liability.
B. be recorded on the employer's books as an asset.
C. be recorded on the employer's books as revenue.
D. not be recorded on the employer's books.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

42. Deferred revenue is another term for
A. Prepaid expenses.
B. Sales revenue.
C. Trade payables.
D. Unearned revenue.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

9-13
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Chapter 009: Reporting and Interpreting Liabilities

43. Landseeker's Restaurants reported cost of goods sold of $322 million and accounts
payable of $83 million for 2008. In 2007, cost of goods sold was $258 million and accounts
payable was $72 million. What was Landseeker's accounts payable turnover ratio in 2008?
A. 4.23
B. 4.15
C. 4.04
D. 3.91

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

44. In 2008, StarHotels reported an accounts payable turnover ratio of 11.0 and a current ratio
of 1.52. Their statement of cash flows shows good cash flow from operations. Which of the
following interpretations of these ratios is most likely?
A. Since the two ratios are fairly high, it indicates StarHotels has little difficulty paying its
bills in a timely manner.
B. Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors
in a timely manner.
C. StarHotels practices aggressive cash management strategies including investing excess
cash in operations and using vendors to finance operations by making slow payment to them.
D. StarHotels must be carrying a low amount of current liabilities in comparison to its total

liabilities.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

9-14
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Chapter 009: Reporting and Interpreting Liabilities

45. General Tech and AmericanBio are both in the biotechnology industry. In 2009, General
Tech reported a payable turnover of 8.2 and in 2009; AmericanBio reported a ratio of 4.2.
Which of the following is an incorrect reason for the difference in ratios?
A. AmericanBio has a higher average accounts payable in comparison to their cost of goods
sold.

B. AmericanBio is taking longer to pay vendors.
C. AmericanBio has a lower average accounts payable in comparison to their cost of goods
sold.
D. General Tech has a better payment record in terms of timely payment to vendors.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

46. On September 1, 2009, Donna Equipment signed a one-year, 8% interest-bearing note
payable for $50,000. Assuming that Donna Equipment maintains its books on a calendar year
basis, the amount of interest expense that should be reported in the 2010 income statement for
this note (rounded to the nearest dollar) would be
A. $2,667.
B. $4,000.
C. $1,333.
D. $3,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

47. Phipps Company borrowed $25,000 cash on October 1, 2009, and signed a six-month, 8%
interest-bearing note payable with interest payable at maturity. Assuming that no adjusting
entries have been made during the year, the amount of accrued interest payable that should be
shown on the 2009 balance sheet for the year ended December 31, 2009 is
A. $250.
B. $300.
C. $500.
D. $750.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

9-15
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Chapter 009: Reporting and Interpreting Liabilities

48. Failure to make a necessary adjusting entry for accrued interest on a note payable would
cause
A. an understatement of liabilities and stockholders' equity.
B. net income to be overstated and assets to be understated.
C. net income to be understated and liabilities to be understated.
D. an overstatement of net income, an understatement of liabilities, and an overstatement of

stockholders' equity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

49. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. The journal entry required on the company's books to record
the note payable on July 1, 2009 would include a
A. credit to notes payable for $30,000.
B. credit to notes payable for $33,000.
C. debit to cash for $27,000.
D. debit to interest expense for $3,500.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

50. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. Assuming no adjusting entries have been made during the year,
the journal entry required on the company's books to record the interest accrued on December
31, 2009, would include a
A. debit to Interest Expense for $1,500.
B. credit to Interest Expense for $1,500.
C. credit to Cash for $1,500.
D. debit to Notes Payable for $1,500.

AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4

9-16
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Chapter 009: Reporting and Interpreting Liabilities

51. On July 1, 2009, Prism, Inc. borrowed $30,000 from First Bank on a one year, 10% note
payable. Interest is payable on June 30, 2010, the due date of the note. Prism's accounting
year ends December 31, 2009. On the company's December 31, 2009 year-end balance sheet,
the notes payable account should be reported as a
A. $31,500 long-term liability.
B. $31,500 current liability.
C. $30,000 long-term liability.
D. $30,000 current liability.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

52. On January 2, 2009, Hill Company borrowed $10,000 from Bank Three. The loan was to
be repaid in equal principal installments of $2,000, payable on December 31 of each year,
beginning on December 31, 2009. Disregarding interest, the amount of the $10,000 loan that
should be considered a current liability on the company's balance sheet for the year ended
December 31, 2009 would be
A. $8,000.
B. $6,000.
C. $4,000.
D. $2,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

53. Which of the following statements is false?
A. The currently maturing portion of long-term debt must be classified as a current liability.
B. The non-current portion of long-term debt will remain disclosed as a long-term liability.
C. When a company plans to refinance the currently maturing debt, it must still disclose the
currently maturing portion as a current liability.
D. Only current liabilities affect liquidity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

9-17
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Chapter 009: Reporting and Interpreting Liabilities

54. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2009 and
repayments of the principle are payable annually in $2 million dollar installments. Purdum
Farms makes the first payment December 31, 2009 and then prepares its balance sheet. What
amount will be reported as current and long-term liabilities respectively in connection with
the note at December 31, 2009?
A. $2 million in current liabilities and $8 million in long-term liabilities.
B. $2 million in current liabilities and $6 million in long-term liabilities.
C. Zero in current liabilities and $8 million in long-term liabilities.
D. Zero in current liabilities and $10 million in long-term liabilities.

AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4

55. Which of the following is usually not considered to be a long-term liability?
A. Bonds payable.
B. Mortgages payable.
C. Accrued post-retirement benefits.
D. FICA taxes payable.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 4

56. A potential future liability arising from an event that has already happened, usually is
called
A. an accrued liability.
B. a contingent liability.
C. a deferred liability.
D. an estimated liability.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

9-18
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Chapter 009: Reporting and Interpreting Liabilities

57. A contingent liability that is "reasonably possible" but "cannot reasonably be estimated"
A. must be recorded and reported as a liability.
B. does not need to be recorded or reported as a liability.
C. must only be disclosed as a note to the financial statements.
D. must be reported as a liability, but not recorded.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

58. Young Company is involved in a lawsuit. The liability which could arise as a result of this
lawsuit should be recorded on the books if the probability of Young Company owing money
as a result of the lawsuit is
A. remote and the amount can be reasonably estimated.
B. probable and the amount can be reasonably estimated.
C. reasonably possible and the amount can be reasonably estimated.
D. probable and the amount cannot be reasonably estimated.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

59. Houston Company is involved in a lawsuit. Footnote disclosure of the contingent liability
which could arise does not have to be presented if the probability of Houston Company owing
money as a result of the lawsuit is
A. reasonably possible and the amount cannot be reasonably estimated.
B. probable and the amount cannot be reasonably estimated.
C. reasonably possible and the amount can be reasonably estimated.
D. remote and the amount can be reasonably estimated.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

9-19
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Chapter 009: Reporting and Interpreting Liabilities

60. Ogden Motors, Inc. is involved in a lawsuit. It is probable that the jury will find in favor
of the plaintiff and Ogden Motors will owe ten million dollars. Even though the lawsuit is not
yet settled, Ogden Motors should record a liability in the balance sheet and
A. a prepaid expense.
B. a loss.
C. deferred revenue.
D. a contra-asset.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

61. When inventory increases from last year to the current year and accounts payable
decreases during the period, the following are the effects on cash flow from operating
activities:
A. Cash is decreased for both the increase in inventory and decrease in accounts payable.
B. Cash is decreased for the increase in inventory but increased for the decrease in accounts
payable.
C. Cash is increased for both the increase in inventory and the decrease in accounts payable.
D. Cash is increased for the increase in inventory but decreased for the decrease in accounts
payable.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 6

62. When a company increases accounts payable from one year to the next, the effect on cash
flows from operating activities
A. is a decrease in cash caused by paying down our debt to vendors.
B. is an increase in cash because we have not paid cash for all the inventory and services
purchased on credit during the period.
C. is a decrease to cash because we will have to pay these liabilities in the future.
D. is an increase to cash because we have received cash from vendors.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

9-20
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Chapter 009: Reporting and Interpreting Liabilities

63. Which of the following statements is true?
A. Long-term liabilities are those not expected to be paid in the next year.
B. Long-term liabilities affect liquidity.
C. The income taxes payable account is typically a long-term liability.
D. The salaries payable is typically a long-term liability.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

64. On January 1, 2009, Simko Company acquired a truck that had a purchase price of
$20,000. The seller agreed to allow Simko to pay for the truck over a three-year period at 10%
interest with equal payments due at the end of 2009, 2010 and 2011. The amount of each
annual payment the company must make is (round to the nearest dollar)

A. $6,042
B. $8,042
C. $15,026
D. $15,206

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 8

9-21
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Chapter 009: Reporting and Interpreting Liabilities

65. If the market rate of interest is 10%, a rational person would just as soon receive $1,100
three years from now as what amount today (round to the nearest dollar)?

A. $ 783.
B. $ 826.
C. $1,000.
D. $1,100.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 8

66. Present value can be defined as the
A. future amount of a sum of money held now.

B. value today of future cash inflow(s).
C. maturity value of a debt.
D. sum of cash inflows over a future period of time.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 8

9-22
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Chapter 009: Reporting and Interpreting Liabilities

67. On January 1, 2009, Hopkins Company purchased a machine that had a sticker (list) price
of $22,000. The seller agreed to allow Hopkins Company to pay for the machine over a threeyear period at 10% interest on the unpaid balance and with equal payments of $8,444 due at
the end of 2009, 2010, and 2008. The amount that should be debited to the asset account,

Machinery, on the day the contract was initiated is (rounded to the nearest dollar)

A. $27,865.
B. $25,332.
C. $22,000.
D. $20,999.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 9

9-23
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Chapter 009: Reporting and Interpreting Liabilities

68. On January 1, 2009, Clem Company purchased a machine. The seller agreed that a total of
$9,000 would be paid over a three-year period–$3,000 per year at the end of 2009, 2010, and
2011. At the time the machine was purchased, the market rate of interest was 10%. The
amount that should be debited to the asset account, Machinery, on the date of purchase is
(round to the nearest dollar)

A. $9,000.
B. $9,948.
C. $7,461.
D. $9,016.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 9

69. You have been asked to compute the cash equivalent price of a machine assuming the cost
(including principal and interest) is to be paid in two equal payments after the acquisition
date. The interest concept that best describes this application is
A. present value of a single amount.
B. present value of an annuity.
C. future value of a single amount.
D. future value of an annuity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 9

9-24
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Chapter 009: Reporting and Interpreting Liabilities

70. Straight Industries purchased a large piece of equipment from Curvy Company on January
2, 2009. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the
equipment on December 31, 2011. The market rate of interest for similar notes was 8%. The
present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 2009,
Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit
to notes payable for $317,520. On December 31, 2009, Straight recorded an adjusting entry to
account for interest that had accrued on the note. Assuming no adjusting entries have been
made during the year, the approximate amount of interest expense that would have accrued at
December 31, 2009, would be
A. $25,400.
B. $32,000.
C. $76,200.
D. $96,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 9

71. Straight Industries purchased a large piece of equipment from Curvy Company on January
2, 2009. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the
equipment on December 31, 2011. The market rate of interest for similar notes was 8%. The
present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 2009,
Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes
payable for $317,520. On Straight Industries' balance sheet for the year ended December 31,
2009, the book value of the liability for notes payable related to this purchase would equal
A. $317,520.
B. an amount less than $317,520.
C. an amount more than $317,520.
D. an amount more or less than $317,520 depending upon Straight's income for the year.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 9

9-25
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e