Deck 9: Accounting for Current Liabilities and Payroll

Question 1

Issuing a note payable is a(n):

A) Claims exchange transaction
B) Asset source transaction
C) Asset use transaction
D) Asset exchange transaction

Answer 1

Asset source transaction

Question 2

How does the going concern assumption affect accounting for notes payable?

A) It dictates that notes payable be reported at their face value.
B) It dictates that interest expense be accrued at the end of the accounting period.
C) It dictates that notes payable be reported at their net realizable value.
D) It dictates that interest expense be paid when the note matures.

Answer 2

It dictates that notes payable be reported at their face value.

Question 3

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's burgers.Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote.What should Burger Barn do as a result of the information that is available?

A) Disclose the lawsuit in the notes to the financial statements
B) Recognize a $5 million liability on its balance sheet for the contingency
C) Ignore the lawsuit in its financial statements
D) Settle with the customer immediately for $5 million to avoid harmful publicity

Answer 3

Ignore the lawsuit in its financial statements

Question 4

Receivables are normally reported on the balance sheet at net realizable value.In contrast,payables are carried at face value.Which accounting principle requires this treatment of payables?

A) Materiality concept
B) Monetary unit assumption
C) Going concern assumption
D) Realizability concept

Question 5

[The following information applies to the questions displayed below.]
Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions.

-Based on this information alone,what are the amounts of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2,respectively?

A) $36,000 and $0
B) $37,890 and $0
C) $37,890 and $38,520
D) $1,890 and $630

Question 6

[The following information applies to the questions displayed below.]
Madison Company issued an interest-bearing note payable with a face value of $24,000 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term.

-Based on this information alone,what is the amount of cash flow from operating activities reported on Madison's Year 1 statement of cash flows?

A) $1,920
B) $800
C) $24,000
D) $-0-

Question 7

[The following information applies to the questions displayed below.]
Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions.

-Based on this information alone,what amount of cash flow from operating activities would appear on the Year 2 statement of cash flows?

A) $770 inflow
B) $1,400 inflow
C) $38,520 outflow
D) $1,120 outflow

Question 8

Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet?

A) The amount can be reasonably estimated.
B) The outcome is probable.
C) The outcome is reasonably possible.
D) The outcome is probable and can be reasonably estimated.

Question 9

Houston Co.borrowed $20,000 from Dallas Co.on March 1,Year 1.Houston issued a note payable that had a one-year term and the annual interest rate is 8%.How will the necessary adjustment,dated December 31,Year 1,affect the elements of the Year 1 financial statements?

A) Increase liabilities and increase expenses
B) Increase assets and increase revenues
C) Increase assets and increase liabilities
D) No effect

Question 10

Which of the following happens as a result of selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%?

A) The cash flow from operating activities increases by $208.
B) Total assets increase by $78.
C) stockholders' equity increases by $70.
D) All of these answer choices are correct.

Question 11

[The following information applies to the questions displayed below.]
Madison Company issued an interest-bearing note payable with a face value of $24,000 and a stated interest rate of 8% to Metropolitan Bank on August 1, Year 1. The note carried a one-year term.

-Based on this information alone,what is the amount of total liabilities appearing on Madison's balance sheet as of December 31,Year 1?

A) $24,720
B) $24,800
C) $25,920
D) $24,000

Question 12

On September 1,Year 1,West Company borrowed $10,000 from Valley Bank.West agreed to pay interest annually at the rate of 6% per year.The note issued by West carried an 18-month term.West Company has a calendar year-end.What is the amount of interest expense that will be reported on West's income statement for Year 1?

A) $-0-
B) $150
C) $60
D) $200

Question 13

Which of the following describes the effect of remitting the sales tax to the tax authority?

A) Decreases liabilities.
B) A claims exchange transaction.
C) Decreases stockholders' equity.
D) All of these answer choices are correct.

Question 14

What is (are)the term(s)used to describe the party who borrows money as evidenced by a note payable?

A) Maker
B) Payee
C) Issuer
D) Issuer and maker

Question 15

[The following information applies to the questions displayed below.]
Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions.

-Based on this information alone,what is the amount of net income (loss)that will be reported on the Year 2 income statement?

A) $770
B) $630
C) $(190)
D) $1,890

Question 16

Which of the following is a claims exchange transaction?

A) Accrual of interest on a note payable
B) Issued a note to purchase equipment
C) Repaid principal on a note payable
D) Paid interest on a note payable

Question 17

[The following information applies to the questions displayed below.]
In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that the warranty obligation relating to this sale is $700. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.

-Which of the following reflects the effect of the year-end adjustment to record estimated warranty expense?

A) Option A
B) Option B
C) Option C
D) Option D

Question 18

[The following information applies to the questions displayed below.]
In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that the warranty obligation relating to this sale is $700. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.

-Which of the following summarizes the effect of the payment of cash to settle the warranty claim in Year 2 on the elements of the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 19

[The following information applies to the questions displayed below.]
In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that the warranty obligation relating to this sale is $700. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.

-Which of the following summarizes the effect of the recognition of the warranty obligation to the customer who purchased this merchandise on the elements of the Year 1 financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 20

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1,Year 1.The note carried a one-year term and a 12% rate of interest.How will the adjustment,dated December 31,Year 1,to record accrued interest expense impact the elements of the financial statements?

A) Decrease assets and decrease retained earnings by $2,000
B) Increase liabilities and decrease equity by $2,000
C) Increase liabilities and decrease equity by $1,600
D) Decrease equity and increase liabilities by $4,800

Question 21

What factor distinguishes an employee from an independent contractor?

A) The amount of the pay
B) Whether or not the company supervises and controls the work
C) Whether or not the work is performed on company property
D) Whether the individual chooses to be treated as an independent contractor

Question 24

[The following information applies to the questions displayed below.]
The following information is taken from the balance sheet of Menendez Company on January 1, Year 1:


-On January 2,Year 1,the company earned revenue on account of $8,000.
How will this transaction affect the current ratio?

A) It will decrease the current ratio to 1:1.
B) It will increase the current ratio to 3:1.
C) It will increase the current ratio to 5:1.
D) It will have no effect on the current ratio.

Question 26

The December 31,Year 1,balance sheet of Rowan Company shows current assets of $32,000 and current liabilities of $20,000.On January 1,Year 2,the company had the following two transactions:
1)Issued common stock for $10,000 cash
"2)Received a $6,000 cash payment for its accounts receivable
After the two transactions are recorded,what is the company's current ratio?"

A) 2 to 1
B) 1.6 to 1
C) 2.4 to 1
D) 2.1 to 1

Question 27

What is the purpose of the Federal W-4 form?

A) To notify the federal government when a new employee is hired
B) To allow an employee to choose the number of withholding allowances for calculating federal withholding tax
C) To remit monthly payments for FICA to the federal government
D) To notify the employee at year-end of the amount of federal tax withheld

Question 28

During Year 1,its first year of operations,Benitez Co.reported sales of $800,000.At the end of Year 1,the company estimated its warranty obligation at 3% of sales.During Year 1,the company paid $13,000 cash to settle warranty claims.Which of the following statements is true?

A) Warranty expenses would decrease net earnings by $24,000 in Year 1.
B) Cash decreased by $13,000 as a result of the accounting events associated with warranties in Year 1.
C) The warranties payable account has a balance of $11,000 at the end of Year 1.
D) All of these answer choices are correct.

Question 29

Which of the following is not an item deducted from salary expense to arrive at net pay?

A) FICA tax for Social Security
B) FICA tax for Medicare
C) Federal unemployment tax
D) These answer choices are all deducted from salary expense to arrive at net pay

Question 30

When do the effects of warranty obligations affect the statement of cash flows?

A) When the sale of merchandise is made.
B) When the warranty obligation is recognized.
C) When there is a settlement of a warranty claim made by a customer.
D) None of these answer choices are correct.

Question 31

What is the current ratio used to evaluate?

A) Solvency
B) Liquidity
C) Equity
D) Profitability

Question 32

[The following information applies to the questions displayed below.]
The following information is taken from the balance sheet of Menendez Company on January 1, Year 1:


-On January 1,Year 1 Menendez Company paid $2,000 cash to reduce its accounts payable.
How will this transaction affect the current ratio?

A) It have no effect on the current ratio.
B) It will cause the current ratio to increase.
C) It will cause the current ratio to decrease.
D) It will potentially affect the current ratio, but the direction of the change cannot be determined without more information.

Question 33

How is the current ratio calculated?

A) Current assets divided by total assets
B) Current assets minus current liabilities
C) Current assets divided by current liabilities
D) Retained earnings divided by current liabilities

Question 34

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

A) Interest payable
B) Salaries payable
C) Accounts payable
D) All of these answer choices are correct.

Question 35

The following information is taken from the balance sheet of Atlanta Company:

What is Atlanta Company's current ratio?

A) 2.5 to 1
B) 1.6 to 1
C) 1.76 to 1
D) 0.66 to 1

Question 36

On a classified balance sheet,the financial statement user will be able to distinguish between:

A) cash flow from operations and cash flow from investing activities.
B) current and noncurrent assets.
C) product and period costs.
D) none of these answer choices are correct.

Question 37

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000.What is the company's current ratio?

A) 0.69 to 1
B) 1.44 to 1
C) 1.16 to 1
D) 3.26 to 1

Question 38

Which of the following terms describes the ability to generate short-term cash flows?

A) Profitability
B) Solvency
C) Stockholder's Equity
D) Liquidity

Question 39

Which of the following items would most likely not be classified as a current asset?

A) Office equipment
B) Merchandise inventory
C) Office supplies
D) Prepaid rent

Question 40

Greer Company pays Jamal Perry a salary of $3,000 per week.How much FICA tax must Greer pay with regards to this employee (including both the employee and employer portions)? (Assume a Social Security rate of 6 percent on the first $110,000 of income and a Medicare rate of 1.5 percent on all earnings.)

A) $225
B) $360
C) $-0-
D) $450

Question 41

If a company offers a warranty on the products it sells,the company records the warranty expense at the time that service is provided to customers under the terms of the warranty.

Question 43

Vogel Company purchased $8,000 of equipment by making a $500 down payment and issuing a note for the remainder.As a result of this event,assets increased by $8,000.

Question 44

Sales tax is reported as revenue when it is collected,and reported as an expense when it is paid.

Question 47

If a company is in a region in which floods or earthquakes are deemed to be possible,the company should record a contingent liability.

Question 48

Monthly remittance of sales tax due has no effect on the income statement,but reduces cash flow from operating activities.

Question 50

All lawsuits in which a company has been named a defendant should be either disclosed in the company's notes to the financial statements,or recognized as a liability on its balance sheet.

Question 51

Contingent liabilities are only recognized if they arise from past events.

Question 52

Flora's Flower Market sells eight potted petunias to a customer for $50.00,plus 5% sales tax.Flora's will recognize $52.50 in sales revenue.

Question 53

Recording an adjustment for product warranties is a claims exchange transaction.

Question 54

In September of Year 1,Hansen Company issued a note payable to borrow money from its bank.Principal and interest on the note would come due in June Year 2.Interest expense on this note must be accrued at the end of Year 1 for the period from issuance of the note to the last day of the accounting period.

Question 55

Joseph Company is preparing to repay a one-year note on May 1,Year 2.The first step in this process is to accrue eight months of interest expense.

Question 56

Payment of interest on a note payable is considered a financing activity on the statement of cash flows.

Question 57

The issuer of a note payable is also known as the maker.

Question 58

Vacation pay is considered a contingent liability.

Question 59

When calculating interest expense on a 6-month note,multiply the principal by the interest rate,and then multiply by (6 ÷ 12).

Question 61

Independent contractors must be individuals who are employed by another company.

Question 62

At the end of Year 1,Durango Company recorded an adjustment for its obligation under product warranties.During Year 2,it paid cash to settle warranty claims from its customers.The Year 2 warranty settlements are asset use transactions.

Question 63

A company with a high current ratio should be concerned that it is not maximizing its earnings potential.

Question 64

The current ratio is a measure of a company's liquidity.

Question 65

A classified balance sheet is necessary for calculating a company's current ratio.

Question 66

Employers must withhold unemployment taxes from employee salaries.

Question 67

FICA taxes are recorded both as salary expense and as payroll tax expense.

Question 68

On October 1,Year 1,Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank.The note had an 8% discount rate and had a one-year term to maturity.The amount of cash that Harrison received on that date was $22,080.

Question 69

On October 1,Year 1,Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank.The note had an 8% discount rate and had a one-year term to maturity.On that date,Harrison recorded a Discount on Notes Payable in the amount of $1,920.

Question 70

The Wage and Tax Statement,Form W-2,is sent to the employee annually to report earnings and withheld taxes.

Question 71

A classified balance sheet is one that distinguishes between operating and non-operating assets.

Question 72

The current ratio is calculated as total current assets divided by total assets.

Question 73

On October 1,Year 1,Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank.The note had an 8% discount rate and had a one-year term to maturity.On December 31,Year 1,Harrison should accrue interest expense in the amount of $1,920.

Question 74

Indicate whether each of the following statements is true or false.

-Product warranties usually represent legal liabilities that must be reported in the financial statements.

Question 75

Indicate whether each of the following statements is true or false.

-When a warranty claim is settled,the seller's liabilities increase.

Question 76

Indicate whether each of the following statements is true or false.

-When a warranty claim is settled,the seller's equity decreases.

Question 77

Indicate whether each of the following statements is true or false.

-A warranty obligation only occurs if a buyer purchases an extended warranty.