Deck 8: Completing the Operating Cycle

Question 1

Which of the following taxes must be paid by both the employee and the employer?

A) Social security tax (FICA)
B) State unemployment tax
C) State withholding tax
D) Federal unemployment tax

Answer 1

A

Question 2

The gross pay for all employees is debited to

A) Salaries Payable
B) Salaries Expense
C) Payroll Tax Expense
D) Cash

Answer 2

B

Question 3

When recording the costs associated with a postemployment benefit of a employer that was just laid off in the current period, a debit will be made to

A) Salaries expense for the total estimated cost of the postemployment benefit
B) Salaries expense for the current period cost of the unemployment benefit
C) Benefits payable for the total estimated cost of the postemployment benefit
D) Benefits payable for the current period cost of the unemployment benefit

Answer 3

A

Question 4

To properly recognize the expense associated with compensated absences, a company should

A) Expense these obligations in the period the employee is absent
B) Estimate and expense these obligations when a new employee is hired
C) Estimate and expense these obligations in the period that the employee earns those days
D) Not recognize any expense for compensated absences

Question 5

Which of the following is the proper method used to account for employee stock options?

A) Fair value
B) Intrinsic value
C) Book value
D) Realizable value

Question 6

When the right to purchase stock in the future is used as a substitute for a cash bonus, the company is granting

A) Post-retirement benefits
B) Compensated absences
C) Stock options
D) Post-employment benefits

Question 7

During the month of July, Joel Mayer earned $2,000. Joel has been on the payroll all year at a salary of $2,000 per month. Salaries are paid at the end of each month. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Joel has voluntary withholdings of $75 (in addition to taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What is the employer's payroll tax expense for the month of July, assuming that Joel Mayer is the only employee?

A) $58
B) $211
C) $75
D) $611

Question 8

A severance package would best be termed a

A) Post-retirement benefit
B) Compensated absence
C) Stock option
D) Post-employment benefit

Question 9

During the month of July, Joel Mayer earned $2,000. Joel has been on the payroll all year at a salary of $2,000 per month. Salaries are paid at the end of each month. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Joel has voluntary withholdings of $75 (in addition to taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What amount is the check, net of all deductions, that Joel received for his July pay?

A) $1,372
B) $1,256
C) $1,314
D) $1,525

Question 10

Which accounting principle requires that the expense associated with compensated absences be accounted for in the period in which it is earned by the employee?

A) Revenue recognition principle
B) Expense recognition principle
C) Matching principle
D) Economic entity principle

Question 11

Which of the following taxes is NOT included in the payroll tax expense of the employer?

A) State unemployment taxes
B) Federal unemployment taxes
C) FICA taxes
D) Federal income taxes

Question 12

Which of the following is NOT true regarding taxes deducted from an employee's earnings?

A) These items are expenses to the employer
B) These items are liabilities that must be paid to federal and state governments
C) These items are credited within the entry to record wage or salary expense
D) The employer serves as an agent for the governments for collecting these taxes

Question 13

The entry to record sick days taken by an employee would include a

A) Credit to Salaries Expense
B) Debit to Cash
C) Credit to Sick Days Payable
D) Debit to Sick Days Payable

Question 14

When managers are compensated based on the achievement of certain objectives, the company is said to be paying a(n)

A) Incentive
B) Bonus
C) Salary
D) Post-retirement benefit

Question 15

During the first week of January, Nathan Mills earned $800. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Nathan has voluntary withholdings of $40 (in addition to taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What is the employer's payroll tax expense for the week, assuming that Nathan Mills is the only employee?

A) $46.40
B) $107.60
C) $40.00
D) $101.20

Question 16

The entry to recognize the estimated expense related to sick days would include a

A) Credit to Salaries Expense
B) Credit to Cash
C) Credit to Sick Days Payable
D) Debit to Sick Days Payable

Question 17

Bernal Company laid off 10 employees during the month of May. Bernal has determined that the postemployment cost of laying off these 10 employees will be a total of $120,000. What journal entry should Bernal make to record the termination of these employees?

A) Salaries expense $120,000 Benefits payable $120,000
B) Benefits payable $120,000 Salaries expense $120,000
C) Salaries payable $120,000 Benefits expense $120,000
D) No journal entry should be made

Question 18

During the first week of January, Nathan Mills earned $800. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Nathan has voluntary withholdings of $40 (in addition to taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What amount is the check, net of all deductions, that Nathan received for the week's pay?

A) $602.80
B) $566.80
C) $560.40
D) $620.80

Question 19

Which of the following would probably be classified as a current liability?

A) Accumulated depreciation on equipment
B) Payroll taxes payable
C) Lease obligation
D) Pension liability

Question 20

Which of the following is NOT true about an earnings-based bonus plan?

A) Managers are encouraged to work harder and smarter to improve the performance of the company with an earnings-based bonus plan.
B) An earnings-based bonus plan is most often restricted to top management.
C) An earnings-based bonus plan gives managers incentive to manipulate reported earnings.
D) Auditors do not consider a company with an earnings-based bonus plan to be at a higher risk of financial statement fraud.

Question 21

Which of the following is the liability that represents a company's promise to make defined benefit pension payments to employees?

A) Pension fund
B) Pension obligation
C) Net pension asset or liability
D) Pension-related interest cost

Question 22

Unger Sporting Goods Company sold a pair of skis for cash. It recorded the sale as: Given this entry, what would be the nature of Account C?

A) Account C is a current liability
B) Account C is a long-term liability
C) Account C is a revenue
D) Account C is an asset

Question 23

Prepaid Property Taxes would typically appear on the balance sheet as a(n)

A) Deferred liability
B) Liability
C) Asset
D) Long-term asset

Question 24

A large investment fund of stocks and bonds that is used to pay pension benefits to employees is a

A) Pension fund
B) Pension obligation
C) Net pension asset or liability
D) Pension-related interest cost

Question 25

Which of the following is NOT a component of pension expense?

A) Interest cost
B) Pension payment
C) Service cost
D) Return on pension fund assets

Question 26

Property taxes are usually assessed by county or city governments based on a company's

A) Owners' equity
B) Cash-basis net income
C) Accrual-basis net income
D) Land, buildings, and other assets

Question 27

The following information relates to the defined benefit pension plan of Wendy Corporation for the year ending December 31, 2012: What is the net pension asset or liability for Wendy corporation in 2012?

A) $435,000 pension asset
B) $435,000 pension liability
C) $425,000 pension asset
D) $425,000 pension liability

Question 28

Which of the following is NOT true about a defined contribution plan?

A) No balance sheet liability is reported in connection with the defined contribution plan.
B) Upon retirement, the employee will receive all the money contributed to the pension fund along with the earnings of those contributions
C) The amount distributed in the defined contribution plan is dependent upon various factors such as salary increases, employee turnover, and employee life span.
D) Each year a company reports a pension expense of the amount contributed to the employees' pensions.

Question 29

The period covered by the assessment of property taxes usually covers a

A) Calendar year
B) Fiscal year
C) Budgeted year
D) Taxable year

Question 30

The earnings from assets in a company's pension fund that are used to offset the cost of the pension plan is the

A) Pension-related interest cost
B) Pension payment
C) Service cost
D) Return on pension fund assets

Question 31

A pension fund is "under-funded" when the

A) Market value of the pension fund assets is greater than the estimated pension liability
B) The pension expense is greater than the annual payment to the pension fund
C) The pension expense is less than the annual payment to the pension fund
D) Market value of the pension fund assets is less than the estimated pension liability

Question 32

Which type of pension plan requires a company to place a certain amount of money into a pension fund each year on behalf of the employees?

A) Defined benefit plan
B) Defined payment plan
C) Defined contribution plan
D) Defined employee plan

Question 33

Which of the following is NOT a legal liability?

A) Accounts Payable
B) Pension Benefit Obligation
C) Sales Tax Payable
D) Deferred Tax Liability

Question 34

Deferred income taxes arise from

A) Differences between accounting standards and IRS rules
B) The postponement of tax payments due to cash shortage
C) A special tax created by the IRS
D) A net loss

Question 35

The following information relates to the defined benefit pension plan of Williams Corporation for the year ending December 31, 2012: What is the net pension expense for Williams Corporation in 2012?

A) $1,145,000
B) $605,000
C) $900,000
D) $655,000

Question 36

Which type of pension plan promises employees a certain monthly cash amount after they retire?

A) Defined benefit plan
B) Defined payment plan
C) Defined contribution plan
D) Defined employee plan

Question 37

Sales Taxes Payable is normally classified as a(n)

A) Current liability
B) Long-term liability
C) Asset
D) Expense

Question 38

A cash compensation received by an employee after that employee has retired is a(n)

A) Stock option
B) Severance package
C) Employee bonus
D) Pension

Question 39

Income taxes shown on the income statement are based on

A) Net income
B) Gross margin
C) Income before taxes
D) Sales

Question 40

The yearly increase in the pension obligation associated with work done during the year is the

A) Pension-related interest cost
B) Pension payment
C) Service cost
D) Return on pension fund assets

Question 41

On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had increased to $5,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income tax rate on this investment will be 25%, the journal entry to record the income tax expense is

A) Deferred income tax asset $1,200 Income tax expense $1,200
B) Deferred income tax asset $300 Income tax expense $300
C) Income tax expense $1,200 Deferred income tax liability $1,200
D) Income tax expense $300 Deferred income tax liability $300

Question 42

Which of the following types of contingencies would NOT be disclosed on the financial statements until it has been resolved?

A) A lawsuit against our company and it is probable that we will lose
B) A lawsuit against our company and it is reasonably possible we will lose
C) A lawsuit we have filed against a competitor and it is probable that we will win
D) All of these must be disclosed on the financial statements

Question 43

The accounting term for an uncertain circumstance involving a potential gain or loss that will NOT be resolved until the future is a(n)

A) Extraordinary item
B) Contingency
C) Pension
D) Deferred liability

Question 44

The required recording of research and development expenditures has which of the following effects on the financial statements?

A) Understatement of research and development expense
B) Understatement of research and development assets
C) Overstatement of research and development assets
D) None of these are correct

Question 45

Which of the following is the required treatment of research and development costs under FASB?

A) Research and development costs are expensed as incurred
B) Research and development costs are capitalized
C) Research costs are expensed and development costs are capitalized
D) Research costs are capitalized and development costs are expensed

Question 46

Which of the following types of advertising is typically capitalized?

A) Specialty catalogs
B) Radio
C) Television
D) Newspaper

Question 47

Which of the following expenditures should be expensed in the year incurred?

A) Equipment
B) Targeted advertising
C) Prepaid rent
D) Research and development

Question 48

Eldora, Inc. paid property taxes of $16,500 on June 30, 2012, for the period July 1, 2012, to June 30, 2013, and debited prepaid property tax expense. Eldora, Inc. uses a fiscal year end of September 30 for financial purposes. What is the adjusting entry Eldora, Inc. should make on September 30, 2012?

A) Prepaid property taxes $16,500 Property tax expense $16,500
B) Property tax expense $16,500 Prepaid property taxes $16,500
C) Property tax expense $4,125 Prepaid property taxes $4,125
D) Property tax expense $12,375 Prepaid property taxes $12,375

Question 49

What makes environmental liabilities unique among contingent liabilities?

A) It is more difficult to estimate the costs
B) It is more difficult to estimate the likelihood of a loss
C) A company need not disclose environmental liabilities
D) All of these are true of environmental liabilities

Question 50

On December 31, the trial balance of Cubico Company included the following accounts with debit balances: If it is determined that the cost of advertising applicable to future periods is $3,300, the correct adjusting entry would

A) Debit Advertising Expense $3,300; credit Prepaid Advertising $3,300
B) Debit Prepaid Advertising $1,800; credit Advertising Expense $1,800
C) Debit Advertising Expense $1,800; credit Prepaid Advertising $1,800
D) Debit Prepaid Advertising $3,300; credit Advertising Expense $3,300

Question 51

Eldora, Inc. paid property taxes of $16,500 on June 30, 2012, for the period July 1, 2012, to June 30, 2013, and debited prepaid property tax expense. Eldora, Inc. uses a fiscal year end of September 30 for financial purposes. What journal entry should be made to recognize property tax expense for the period October 1, 2012, to June 30, 2013?

A) Prepaid property taxes $16,500 Property tax expense $16,500
B) Property tax expense $16,500 Prepaid property taxes $16,500
C) Property tax expense $4,125 Prepaid property taxes $4,125
D) Property tax expense $12,375 Prepaid property taxes $12,375

Question 52

Marino, Inc. makes a sale and collects a total of $378, which includes an 8 percent sales tax. The amount credited to Sales Revenue is

A) $378
B) $348
C) $400
D) $350

Question 53

A footnote disclosure only is required if the likelihood of a loss due to a contingency is

A) Remote
B) Reasonably possible
C) Probable
D) Negligible

Question 54

Which of the following is the appropriate disclosure in the financial statements for a contingent gain?

A) Estimate the amount of the gain and make the appropriate journal entry
B) Provide detailed disclosure of the gain in the notes
C) No disclosure until the future event resolves itself
D) None of these are correct

Question 55

On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had decreased to $3,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income tax rate on this investment will be 35%, the journal entry to record the income tax expense is

A) Deferred income tax asset $800 Income tax expense $800
B) Deferred income tax asset $280 Income tax expense $280
C) Income tax expense $280 Deferred income tax liability $280
D) Income tax expense $800 Deferred income tax liability $800

Question 56

Which of the following is the required treatment of research and development costs under international accounting rules?

A) Research and development costs are expensed as incurred
B) Research and development costs are capitalized
C) Research costs are expensed and development costs are capitalized
D) Research costs are capitalized and development costs are expensed

Question 57

No disclosure is required for contingent liabilities that are

A) Probable
B) Remote
C) Possible
D) Reasonably possible

Question 58

A contingent liability is recorded by making the appropriate journal entry if the likelihood of a loss from a contingency is

A) Remote
B) Reasonably possible
C) Probable
D) Negligible

Question 59

Marino, Inc. makes a sale and collects a total of $378, which includes an 8 percent sales tax. The amount credited to Sales Tax Payable is

A) $28
B) $30
C) $32
D) None of these are correct

Question 60

The general rule for advertising costs is

A) Advertising costs should be expensed because of the uncertainty of future events
B) Advertising costs should be capitalized because of the uncertainty of future events
C) Advertising costs should be capitalized except for target advertising which should be expensed.
D) None of these are correct

Question 61

Under which of the following conditions would hurricane damage be considered an extraordinary item for financial reporting purposes?

A) Under any circumstance, hurricane damage should be classified as an extraordinary item
B) Only if hurricanes are unusual in nature and infrequent in occurrence in the geographic area
C) Only if hurricanes are normal in the geographic area but do not occur frequently
D) Only if hurricanes occur frequently in the geographic area but have been insured against

Question 62

During the year, Perez Company earned revenues of $113,625 and incurred $98,000 for various operating expenses. There are 1,250 shares of stock outstanding. Earnings per share is

A) $12.50
B) $12.80
C) $8.80
D) $8.50

Question 63

Assante Corporation reported the following data for the period: earnings per share, $4.80; retained earnings, $54,000; revenues, $150,000; capital stock, $30,000; expenses, $126,000. Given the above information, how many shares of stock are outstanding?

A) 9,000
B) 5,000
C) 4,000
D) 3,500

Question 64

The following information was taken from the records of Elton Corporation for the period ending December 31, 2012: Assuming that 6,000 shares of stock are outstanding, earnings per share is approximately

A) $1.40
B) $0.40
C) $0.27
D) $0.23

Question 65

Items incurred or earned from activities peripheral to normal operations are classified as

A) Extraordinary gains and losses
B) Other revenues and expenses
C) Discontinued operations
D) Operating gains and losses

Question 66

Which of the following are reported on the income statement along with their tax effects?

A) Other revenues
B) Extraordinary items
C) Operating expenses
D) Other expenses

Question 67

Earnings per share is NOT calculated on which of the following amounts?

A) Net income
B) Extraordinary items
C) Other revenue and gains
D) Income before extraordinary items

Question 68

Romulus Corporation incurred the following losses during 2012: Assuming that Romulus has a 40% income tax rate, what amount of net loss should Romulus report as extraordinary on its annual income statement?

A) $96,000
B) $144,000
C) $259,200
D) $499,200

Question 69

The following information is from Everly Corp.'s records at December 31, 2012: If Everly has 4,000 shares of stock outstanding, earnings per share is approximately

A) $34.62
B) $22.56
C) $16.94
D) $15.59

Question 70

Diluted earnings per share includes stock transactions that might occur in the future such as

A) Sale of additional shares of stock
B) Exercise of stock options
C) Declaration of dividends
D) All of these are correct

Question 71

Earnings per share is equal to

A) Total revenues divided by total shares of capital stock
B) Net income divided by total shares of capital stock
C) Total expenses divided by total shares of capital stock
D) Net income divided by retained earnings

Question 72

Which of the following events would be considered an extraordinary item?

A) An airline experienced a significant loss due to a strike by employees of the company who provide its aircraft maintenance.
B) A food cannery was faced with a large loss of inventory of canned soups due to government condemnation because of possible botulism contamination; the company had never experienced a similar situation in its history.
C) A company, located on an island which has experienced severe flooding three times in the past 25 years, was subjected to a heavy loss of physical plant due to flooding.
D) A medical corporation was required to pay a patient damages equal to three times its average net income. The corporation had experienced suits of this nature in the past, but the amount of the losses had never exceeded 5 percent of the corporation's average net income.

Question 73

On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of $425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the future. As of December 31, none of these stock options had been exercised. What is basic earnings per share for Johnson Corporation?

A) $106.25
B) $85
C) $81.25
D) $75

Question 74

Which of the following items would NOT be classified in the "Other Revenues and Expenses" section of the income statement?

A) Dividends on investments
B) Gain on sale of buildings
C) Interest expense
D) Property tax expense

Question 75

Which of the following items would be classified in the "Other Revenues and Expenses" section of the income statement?

A) Loss due to hurricane in a location where hurricanes are very unlikely
B) Loss on sale of land
C) Administrative salaries expense
D) Income tax expense

Question 76

What effect does an extraordinary item have on the taxes of a company?

A) Taxes are increased with an extraordinary gain or loss
B) Taxes are decreased with an extraordinary gain or loss
C) Taxes are increased with an extraordinary loss and decreased with an extraordinary gain
D) Taxes are increased with an extraordinary gain and decreased with an extraordinary loss

Question 77

Which type of income shows how much a company earns from carrying on its normal operations?

A) Income before extraordinary items
B) Net income after taxes
C) Operating income
D) Income after extraordinary items

Question 78

Dike Corporation incurred the following losses during 2012: Ignoring income taxes, what amount of loss should Dike report as extraordinary on its annual income statement?

A) $320,000
B) $480,000
C) $864,000
D) $1,664,000

Question 79

Which of the following is NOT a criterion for qualifying as an extraordinary item?

A) Material in amount
B) Infrequent in occurrence
C) Unusual in nature
D) Peripheral to normal operations

Question 80

Which of the following items should be reported as an extraordinary item?

A) Gains or losses from major foreign currency revaluations
B) The effects of a strike
C) Earthquake damage
D) Gain or loss on disposal of a business segment