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Unformatted text preview: Chapter Ten Questions 1. Define the term current liabilities. Current liabilities are sources of resources that must be paid within a year. 2. Give three examples of current liabilities. Notes payable, accounts payable, taxes payable, and the current portion of long-term debt. 3. What are notes payable? Notes payable are written promises to pay known dollar amounts, on specific dates, to the owners of the notes. 4. When notes payable are paid off, what two dollar amounts must be paid? The dollar amounts to be paid include the amounts borrowed (principal) and interest. 5. State the formula for calculating interest on a note payable. Interest = principal x rate x time. 6. If part of the formula used to calculate interest on a note payable contained the fraction 60/365, what would the 365 represent and why is it needed? The 365 in the interest formula represents the number of days in a year . It is needed because it is common for interest rates to be stated on an annual (or 365-day) basis. 7. On which financial statement and in which section of the statement is interest expense reported? Interest expense in reported on the income statement in the other revenues and expenses section. 8. What are accounts payable? Accounts payable are dollar amounts owed to suppliers for products or services purchased from them . Accounts payable are current liabilities because they commonly must be paid within 30 days. 9. What is the primary cause of accounts payable for merchandising companies? Purchases of merchandise inventory on account. 10. What is the major difference between notes payable and accounts payable? Notes payable and accounts payable are both current liabilities . The major difference between them relates to interest . If notes payable are paid on time, interest is part of the required payment . If accounts payable are paid on time, no interest payment is required. 11. What is a purchases discount? A purchases discount is a reduction in the amount that has to be paid to a supplier, resulting from prompt payment . Purchases discounts are often stated in the form 2/10, n/30, meaning a 2% discount will be allowed if payment is made within 10 days of the purchase . Full payment is required within 30 days of the purchase. 12. What are sales taxes payable? Sales taxes payable are dollar amounts owed to state governments for certain products or services sold to customers. 13. When a company charges its customers sales taxes and later pays the sales taxes to the state, why doesn’t the company record a sales taxes expense? Sales taxes are collected from customers and paid to state governments . Thus, sales taxes are expenses to the customers, not to the companies selling the products . Such companies are merely acting as collection agents for the state governments....
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