Deck 11: Current Liabilities and Payroll Accounting

Question 1

A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.

Answer 1

True

Question 2

Sales taxes payable is credited and cash is debited when companies send sales taxes collected from customers to the government.

Answer 2

False

Question 3

Debt guarantees are not usually disclosed as a contingent liability.

Answer 3

False

Question 4

A single liability can be divided between current and noncurrent liabilities.

Question 5

Experience shows that when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods,the default rate on liabilities increases sharply.

Question 6

A high value for the times interest earned ratio means that a company is a higher risk borrower.

Question 7

Accounting for contingent liabilities covers three possibilities:
(1)The future event is probable and the amount cannot be reasonably estimated; (2)The future event is remote or unlikely to recur; (3)The likelihood of the liability to occur is impossible.

Question 8

The times interest earned ratio is calculated by dividing income before interest expense and income taxes by interest expense.

Question 9

Uncertainties from the development of new competing products are contingent liabilities.

Question 10

Known liabilities are obligations set by agreements,contracts,or laws,and are measurable and definitely determinable.

Question 11

A contingent liability is a potential obligation that depends on a future event arising from a future transaction or event.

Question 12

A potential lawsuit claim is recorded when the claim can be reasonably estimated and it is reasonably possible.

Question 13

A company can have a liability even if the amount of the obligation is unknown.

Question 14

Unearned revenues are liabilities.

Question 15

Obligations not due within one year or the company's operating cycle,whichever is longer,are reported as current liabilities.

Question 16

The full disclosure principle requires the reporting of contingent liabilities that are reasonably possible.

Question 17

All expected future payments are liabilities.

Question 18

A lawsuit is an example of a contingent liability for the defendant.

Question 19

Trade accounts payable are amounts owed to suppliers for products or services purchased on credit.

Question 20

A liability does not exist if there is any uncertainty about whom to pay,when to pay,or how much to pay.

Question 21

An estimated liability is a known obligation of an uncertain amount that can at least be reasonably estimated.

Question 22

Each employee records the number of withholding allowances claimed on form W-4,which is the withholding allowance certificate that is filed with the employer.

Question 23

A short-term note payable is a written promise to pay a specified amount on a definite future date within one year or the operating cycle,whichever is longer.

Question 24

FUTA requires employers to pay a federal unemployment tax on the first $7,000 in salary or wages paid to each employee.

Question 25

Employers must pay FICA taxes equal in amount to the FICA taxes withheld from their employees.

Question 26

A high merit rating means that an employer has high employee turnover or seasonal hiring.

Question 27

Employers must keep certain payroll records,including individual earnings reports for each employee.

Question 28

The amount of federal income tax withheld depends on the employee's annual earnings rate and the number of withholding allowances claimed by the employee.

Question 29

The state unemployment tax rates applied to an employer are adjusted according to an employer's merit rating.

Question 30

The Form W-2 must be given to employees before January 31 following the year covered by the Form W-2.

Question 31

Employers can use a wage bracket withholding table to compute federal income taxes withheld from each employee's gross pay.

Question 32

Payments of FUTA are made quarterly to a federal depository bank if the total amount due exceeds $500.

Question 33

Since income tax expense is created by earning income,a liability is incurred when income is earned.

Question 34

Required payroll deductions result from laws and include income taxes,Social Security taxes,pension and health contributions,union dues,and charitable giving.

Question 35

A note payable can be used to extend the payment due on an account payable.

Question 36

The matching principle requires that interest expense not be accrued on a note payable until the note is paid,even if the end of an accounting period occurs between the signing of a note payable and its maturity date.

Question 37

A company's income before interest expense and taxes is $250,000 and its interest expense is $100,000.Its times interest earned ratio is .4.

Question 38

A corporation has a $42,000 credit balance in the Income Tax Payable account.Period end information shows that the actual liability is $50,000.The company should record an entry to debit Income Tax Expense for $8,000 and credit Income Taxes Payable for $8,000.

Question 39

Federal depository banks are authorized to accept deposits of amounts payable to the federal government.

Question 40

Promissory notes are nonnegotiable meaning that they cannot be transferred from party to party.

Question 41

Companies with many employees often use a special payroll bank account to pay employees.

Question 42

Obligations not expected to be paid within the longer of one year or the company's operating cycle are reported as:

A)Current assets.
B)Current liabilities.
C)Long-term liabilities.
D)Operating cycle liabilities.
E)Bills.

Question 43

Known liabilities:

A)Include accounts payable, notes payable, and payroll.
B)Are obligations set by agreements, contracts, or laws.
C)Are measurable.
D)Are definitely determinable.
E)All of the choices are correct.

Question 44

Accounts payable:

A)Are amounts owed to suppliers for products and/or services purchased on credit.
B)Are long-term liabilities.
C)Are estimated liabilities.
D)Do not include specific due dates.
E)Must be paid within 30 days.

Question 45

Liabilities:

A)Must be certain.
B)Must sometimes be estimated.
C)Must be for a specific amount.
D)Must always have a definite date for payment.
E)Must involve an outflow of cash.

Question 46

When the number of withholding allowances claimed on Form W-4 increases,the amount of income tax withheld increases.

Question 47

Debt guarantees:

A)Are never disclosed in the financial statements.
B)Are considered to be a contingent liability.
C)Are a bad business practice.
D)Are recorded as a liability even though it is highly unlikely that the original debtor will default.
E)All of the choices are correct.

Question 48

All of the following statements regarding liabilities are true except:

A)A liability is a probable future payment of assets or services.
B)Unearned future wages to be paid to employees should be recorded as liabilities.
C)For a liability to be reported, it must be a present obligation that results from a past transaction or event, and requires a future payment of assets or services.
D)Information about liabilities is more useful when the balance sheet identifies them as either current or long term.
E)All of the responses are correct.

Question 49

Unearned revenues are:

A)Also called deferred revenues.
B)Amounts received in advance from customers for future delivery of products or services.
C)Also called collections in advance.
D)Also called prepayments.
E)All of the choices are correct.

Question 50

Sales taxes payable:

A)Is an estimated liability.
B)Is a contingent liability.
C)Is a current liability for retailers.
D)Is a business expense.
E)Is a long-term liability.

Question 51

A payroll register is a cumulative record of an employee's hours worked,gross earnings,deductions,and net pay.

Question 52

Contingent liabilities must be recorded if:

A)The future event is probable and the amount owed can be reasonably estimated.
B)The future event is remote.
C)The future event is reasonably possible.
D)The amount owed cannot be reasonably estimated.
E)All of the choices are correct.

Question 53

Contingent liabilities can be:

A)Probable.
B)Remote.
C)Reasonably possible.
D)Estimable.
E)All of the choices are correct.

Question 54

In the accounting records of a defendant,lawsuits:

A)Are estimated liabilities.
B)Should always be recorded.
C)Should always be disclosed.
D)Should be recorded if payment for damages is probable and the amount can be reasonably estimated.
E)Should never be recorded.

Question 55

Amounts received in advance from customers for future products or services:

A)Are revenues.
B)Increase income.
C)Are liabilities.
D)Are not allowed under GAAP.
E)Require an outlay of cash in the future.

Question 56

All of the following statements regarding uncertainty in liabilities are true except:

A)Liabilities can involve uncertainty in whom to pay.
B)A company can create a known amount when issuing a note even though the holder of the not may not be known until the maturity date.
C)A company can have an obligation of a known amount to a known creditor but not know when it must be paid.
D)A company only records liabilities when it knows whom to pay, when to pay, and how much to pay.
E)A company can be aware of an obligation but not know how much will be required to settle it.

Question 57

A payroll register usually shows the pay period dates,hours worked,gross pay,deductions,and net pay of each employee for every pay period.

Question 58

A contingent liability:

A)Is always of a specific amount.
B)Is a potential obligation that depends on a future event arising from a past transaction or event.
C)Is an obligation not requiring future payment.
D)Is an obligation arising from the purchase of goods or services on credit.
E)Is an obligation arising from a future event.

Question 59

Obligations due to be paid within one year or the company's operating cycle,whichever is longer,are:

A)Current assets.
B)Current liabilities.
C)Earned revenues.
D)Operating cycle liabilities.
E)Bills.

Question 60

Advance ticket sales totaling $6,000,000 cash would be recognized as follows:

A)Debit Sales, credit Unearned Revenue.
B)Debit Unearned Revenue, credit Sales.
C)Debit Cash, credit Unearned Revenue.
D)Debit Unearned Revenue, credit Cash.
E)Debit Cash, credit Revenue.

Question 61

Uncertainties such as natural disasters:

A)Are not contingent liabilities because they are future events not arising from past transactions or events.
B)Are contingent liabilities because they are future events arising from past transactions or events.
C)Should be disclosed because of their usefulness to financial statements.
D)Are estimated liabilities because the amounts are uncertain.
E)Arise out of transactions such as debt guarantees.

Question 62

Short-term notes payable:

A)Can replace an account payable.
B)Can be issued in return for money borrowed from a bank.
C)Are negotiable.
D)Are an unconditional promise to pay.
E)All of the choices are correct.

Question 63

On November 1,Carter Company signed a 120-day,10% note payable,with a face value of $9,000.What is the maturity value of the note on March 1?

A)$9,000
B)$9,100
C)$9,150
D)$9,200
E)$9,300

Question 64

On November 1,Carter Company signed a 120-day,10% note payable,with a face value of $9,000.What is the adjusting entry for the accrued interest at December 31 on the note?

A)Debit interest expense, $0; credit interest payable, $0.
B)Debit interest expense, $100; credit interest payable, $100.
C)Debit interest expense, $150; credit interest payable, $150.
D)Debit interest expense, $200; credit interest payable, $200.
E)Debit interest expense, $300; credit interest payable, $300.

Question 65

FICA taxes include:

A)Social Security taxes.
B)Charitable giving.
C)Employee income taxes.
D)Unemployment taxes.
E)All of the choices are correct.

Question 66

Employers' responsibilities for payroll include:

A)Providing each employee with an annual report of his or her wages subject to FICA and federal income taxes along with the amount of these taxes withheld.
B)Filing Form 941, the Employer's Quarterly Federal Tax Return.
C)Filing Form 940, the Annual Federal Unemployment Tax Return.
D)Maintaining individual earnings records for each employee.
E)All of the choices are correct.

Question 67

The employer should record payroll deductions as:

A)Employee receivables.
B)Payroll taxes.
C)Current liabilities.
D)Wages payable.
E)Employee payables.

Question 68

A short-term note payable:

A)Is a written promise to pay a specified amount on a definite future date within one year or the company's operating cycle, whichever is longer.
B)Is a contingent liability.
C)Is an estimated liability.
D)Is not a liability until the due date.
E)Cannot be used to extend the payment period for an account payable.

Question 69

The times interest earned computation is:

A)(Net income + Interest expense + Income taxes)/Interest expense.
B)(Net income + Interest expense - Income taxes)/Interest expense.
C)(Net income - Interest expense - Income taxes)/Interest expense.
D)(Net income - Interest expense + Income taxes)/Interest expense.
E)Interest expense/(Net income + Interest expense + Income taxes expense).

Question 70

A company's income before interest expense and taxes is $250,000 and its interest expense is $100,000.Its times interest earned ratio is:

A)0.40
B)2.50
C)1:2.5
D)2.5:1
E)0.50

Question 71

On November 1,Carter Company signed a 120-day,10% note payable,with a face value of $9,000.Carter made the appropriate year-end accrual.What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made?

A)Debit Notes Payable $9,000; debit Interest Payable $150; credit Cash $9,150.
B)Debit Cash $9,300; credit Notes Payable $9,300.
C)Debit Notes Payable $9,300; credit Interest Payable $150; credit Interest Expense $150; credit Cash $9,000.
D)Debit Notes Payable $9,000; debit Interest Payable $150; debit Interest Expense $150; credit Cash $9,300.
E)Debit Notes Payable $9,000; debit Interest Expense $300; credit Cash $9,300.

Question 72

If the times interest ratio:

A)Increases, then risk increases.
B)Increases, then risk decreases.
C)Is greater than 1.5, then the company is in default.
D)Is less than 1.5, the company is carrying too little debt.
E)Is greater than 3.0, the company is likely carrying too much debt.

Question 73

A company's had fixed interest expense of $6,000,its income before interest expense and any income taxes is $18,000,and its net income is $8,400.The company's times interest earned ratio equals:

A)0.33.
B)0.71.
C)1.40.
D)3.00.
E)12,000.

Question 74

On December 1,Martin Company signed a 90-day,6% note payable,with a face value of $5,000.What amount of interest expense is accrued at December 31 on the note?

A)$0
B)$25
C)$50
D)$75
E)$300

Question 75

The difference between the amount received from issuing a note payable and the amount repaid is referred to as:

A)Interest.
B)Principle.
C)Face Value.
D)Cash.
E)Accounts Payable.

Question 76

Times interest earned is calculated by:

A)Multiplying interest expense times income.
B)Dividing interest expense by income before interest expense.
C)Dividing income before interest expense and income taxes by interest expense.
D)Multiplying interest expense by income before interest expense.
E)Dividing income before interest expense by interest expense and income taxes.

Question 77

Gross pay is:

A)Take-home pay.
B)Total compensation earned by an employee before any deductions.
C)Salaries after taxes are deducted.
D)Deductions withheld by an employer.
E)The amount of the paycheck.

Question 78

A company's fixed interest expense is $8,000,its income before interest expense and income taxes is $32,000.Its net income is $9,600.The company's times interest earned ratio equals:

A)0.25.
B)0.30.
C)0.83.
D)3.33.
E)4.0.

Question 79

Fixed expenses:

A)Create risk.
B)Can be an advantage when a company is growing.
C)Include interest expense.
D)Do not fluctuate with changes in sales.
E)All of the choices are correct.

Question 80

The times interest earned ratio reflects:

A)A company's ability to pay its operating expenses on time.
B)A company's ability to pay interest even if sales decline.
C)A company's profitability.
D)The relation between income and debt.
E)The relation between assets and liabilities.