Unit 3 of 5
Study guide for CLEP CLEP Financial Accounting — Unit 3: Liabilities and Equity. Practice questions, key concepts, and exam tips.
114
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A company has $100,000 in assets, $40,000 in liabilities, and $60,000 in equity. What is the correct relationship between these accounts?
Answer: A — The correct answer is A because the accounting equation states that Assets = Liabilities + Equity. This equation reflects the fact that a company's assets are financed by either liabilities (debts) or equity (investments by owners). The other options are incorrect because they do not accurately represent the accounting equation. Option B is incorrect because subtracting equity from liabilities would not equal assets. Option C is incorrect because subtracting liabilities from equity would not equal assets. Option D is incorrect because dividing liabilities by equity would not equal assets.
Mason Company has a 6-month note payable with a face value of $10,000 and an interest rate of 8%. The note was issued on January 1. As of June 30, what amount should Mason Company report as current liabilities related to this note?
Answer: D — Mason Company should report the face value of the note plus the interest accrued from January 1 to June 30. The interest is calculated as $10,000 * 8% * 6/12 = $400, and the total amount is $10,000 + $400 = $10,400 for the note and interest. However, since the note is exactly at the 6-month mark, it will be due, and the interest for the next 6 months will also be a liability. Therefore, the total amount is $10,000 + $800 = $10,800. Options B, C, and D are incorrect because they do not accurately reflect the total amount of the liability as of June 30.
Mason Inc. is a retail company that operates in several states. The company has a total debt of $1 million, consisting of a $600,000 long-term loan and a $400,000 short-term loan. The company's total equity is $2 million. What is the correct classification of the $400,000 short-term loan on the balance sheet?
Answer: B — The correct answer is D) Current liability. The $400,000 short-term loan is a current liability because it is due to be paid within one year or within the company's operating cycle, whichever is longer. A) Long-term liability is incorrect because the loan is short-term. B) Equity is incorrect because the loan is a liability, not an ownership interest. C) Asset is incorrect because the loan is a debt obligation, not an asset.
Mason Inc. is a company that operates in the retail industry. The company has a total debt of $1 million, which includes a $300,000 long-term note payable due in 5 years and a $700,000 short-term loan due in 6 months. If the company's management decides to refinance the short-term loan by issuing a new long-term note payable, what would be the effect on the company's current ratio?
Answer: D — The correct answer is A because refinancing the short-term loan by issuing a new long-term note payable would reclassify the short-term loan as a long-term liability, which would decrease the company's current liabilities and increase the current ratio. The other options are incorrect because refinancing the short-term loan would not decrease the current ratio (B), would not leave the current ratio unchanged (C), and would not increase the company's current assets (D).
Mackenzie Inc. is a retail company that operates in several states. The company has a total of $100,000 in accounts payable and $50,000 in notes payable due within the next year. In addition, the company has a long-term mortgage of $200,000 with 10 years remaining. What is the total amount of Mackenzie Inc.'s current liabilities?
Answer: A — The correct answer is A) $150,000 because current liabilities are those that are due within one year or within the company's operating cycle, whichever is longer. In this case, the accounts payable and notes payable are both due within the next year, so they are considered current liabilities. The long-term mortgage is not due within the next year, so it is not a current liability. The other options are incorrect because they include the long-term mortgage, which is not a current liability.
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