Deck 9: Accounting for Current Liabilities and Payroll

Question 1

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Ping Company made its remittance to the state sales tax authority.

Answer 1

(D)(D)(N)(N)(N)(N)(D)

Question 2

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Gilliam Co.repaid a note payable on September 30,2016.The 8-month note had been issued on February 1,2016.The $20,800 cash payment included a $20,000 repayment of principal and an $800 payment for interest.

Answer 2

(D)(D)(D)(N)(I)(D)(D)

Question 3

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Allen Co.purchased a $30,000 machine by making a $5,000 cash down payment and issuing a $25,000 note payable for the remaining balance.

Answer 3

(I)(I)(N)(N)(N)(N)(D)

Question 4

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Sierra Mining is the defendant in a $3 million lawsuit involving damage to the environment.Sierra's attorneys have advised the company that the outcome of the lawsuit is reasonably possible,but not probable.

Question 5

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

On December 31,2016,Colefax Co.recognized accrued interest expense in the amount of $1,500.The interest expense was related to a discount note Colefax had issued earlier.

Question 6

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

On October 1,2015,Kramer Co.issued a one-year discount note with a face value of $100,000 and interest of 6% to the North Star Bank and received cash in the amount of $94,000.

Question 7

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Charles Company paid salary expense for employees who are subject to tax withholding.The salaries had not been previously accrued.

Question 8

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Charles Company recorded accrued vacation pay.

Question 9

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Charles Company recognized payroll tax expense for employer portion of FICA tax and federal and state unemployment taxes.

Question 10

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Kelly Co.sells goods to customers with a three-year warranty.During 2015,Kirk sold $800,000 of goods.On December 31,2015,Kelly made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year.During 2016,Kelly paid $4,000 cash to satisfy warranty claims.Show the effects of the 2016 payments to satisfy warranty claims.

Question 11

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Charles Company submitted payment for withheld state and federal employment taxes.

Question 12

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

On December 31,2016,Bates Co.paid $60,000 to the Municipal Bank to pay off the face value of a discount note that Bates had issued a year before.Show the effects of the payment and recognition of 2016 interest on the note.

Question 13

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Kelly Co.sells goods to customers with a three-year warranty.During 2015,Kelly sold $800,000 of goods.On December 31,2015,Kelly made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year.During 2016,Kelly paid $4,000 cash to satisfy warranty claims.Show the effects of the 2015 adjustment to record warranty expense.

Question 14

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Joseph Company issued a one-year,6% note to Community Bank.

Question 15

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

On April 1,2017,Jenkins Company repaid a $20,000,one-year,6% note and interest to Community Bank.Interest on the note had been accrued on December 31,2016.

Question 16

Wiggins Company issued a $66,000,8% note payable,with a one year term on September 1,2015.What amount of interest expense will be recognized on the income statement for 2015? 2016?

Question 17

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Charles Company paid Jason Hewitt for work he performed as an independent contractor.The work had not been previously accrued.

Question 18

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Sierra Mining is the defendant in a $3 million lawsuit involving damage to the environment.Sierra's attorneys have advised the company that the outcome of the lawsuit is probable,and the likely settlement will be $750 thousand.

Question 19

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

Pearl Company sold merchandise to a customer for $800 cash in a state where the sales tax rate is 5%.(Ignore the effect of cost of goods sold. )

Question 20

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element.

On December 31,2016,Warren Co.accrued $625 of interest on a $25,000 note it had issued from the National Bank on July 1,2016.The principal and interest on the note are to be repaid on June 30,2017.How would Warrens's year-end adjustment to accrue the interest on the loan affect its financial statements for 2016?

Question 21

Issuing a note payable is a(n)

A)claims exchange transaction.
B)asset source transaction.
C)asset use transaction.
D)asset exchange transaction.

Question 22

The amount of cash flow from operating activities on the 2016 statement of cash flows would be:

A)$1,920.
B)$800.
C)$24,000.
D)zero.

Question 23

The amount of total liabilities that would appear on Riley's December 31 balance sheets for 2016 and 2017 would be
2016 2017

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

Question 24

What is the effect of the recognition of warranty expense on the statement of cash flows?

Question 25

The party who borrows money in a note payable is known as the

A)Maker.
B)Payee.
C)Issuer.
D)Both A and C

Question 26

West Company borrowed $10,000 on September 1,2016 from the 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.Based on this information the amount of interest expense appearing on West's 2016 income statement would be

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

Question 27

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1,2016.The note carried a one-year term and a 12% rate of interest.The adjusting entry on Franklin's books to record accrued interest expense on December 31,2016 will

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 28

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.

Question 29

Which of the following is a claims exchange transaction?

A)Accrued 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 30

The amount of net income on the 2017 income statement would be:

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

Question 31

When a warranty repair job is completed,what is the effect on the accounting equation?

Question 32

Based on this information alone,the amount of total liabilities appearing on Madison's 2016 balance sheet would be:

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

Question 33

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)Matching concept.

Question 34

When is warranty expense usually recognized?

Question 35

Why does the recording of a taxable sale increase a company's liabilities?

Question 36

Under what conditions should a pending lawsuit be recognized in a company's financial statements? Under what conditions should the lawsuit be disclosed in the notes to the financial statements?

Question 37

What accounting concept requires a company to accrue interest expense on a note payable?

Question 38

Houston Co.borrowed $20,000 from Dallas Co.on March 1,2016.Houston is to repay the principal and interest on March 1,2017.The interest rate is 8%.If the year-end adjustment is properly recorded,what will be the effects of the accrual on Houston's 2016 financial statements?

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

Question 39

The amount of cash flow from operating activities that would appear on the 2017 statement of cash flows would be:

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

Question 40

How do the issuance of a note payable,accrual of interest,and repayment of the note's principal and interest each affect a company's Statement of Cash Flows?

Question 41

Use the following to answer questions
The following information is taken from the balance sheet of Menendez Company on January 1,2016:


-On January 2,2016,the company recorded the following transaction:
Recording this transaction will:

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

Question 42

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 43

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000.The company's current ratio is closest to:

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

Question 44

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 45

Benitez Co.had sales of $800,000 in 2016.The company expects to incur warranty expenses amounting to 3% of sales.There were $13,000 of warranty obligations paid in cash during 2016.Based on this information:

A)Warranty expenses would decrease net earnings by $24,000 in 2016.
B)Cash would decrease by $13,000 as a result of the accounting events associated with warranties in 2016.
C)The warranties payable account would increase by $11,000 in 2016.
D)All of these answer choices are correct.

Question 46

Selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%:

A)Increases cash flow from operating activities by $208.
B)Increases total assets by $78.
C)Increases equity by $70.
D)All of these answer choices are correct.

Question 47

Monthly remittance of sales tax:

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

Question 48

Use the following to answer questions
In December 2016,Lucas Corporation sold merchandise for $10,000 cash.Lucas estimated that $700 of warranty claims might be filed in regard to these sales.On February 12,2017,warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory).
53.Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of 2016 on the financial statements of Lucas?
A.
B.
C.
D.
Answer: D
Learning Objective: 09-04
Topic Area: Warranty obligations
AACSB: Analytical Thinking
AACSB: Knowledge Application
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: The entry to estimate future warranty costs related to 2016 sales increases expenses (warranty expense),which decreases net income and equity,and increases liabilities (warranties payable).

-Which of the following answers indicates the effect of the February 12,2017 entry on the financial statements of Lucas Corporation?

Question 49

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)Wages Payable.
C)Accounts Payable.
D)Bonds Payable.

Question 50

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 french fries.Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote.As a result of the lawsuit,Burger Barn should:

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.

Question 51

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 52

Use the following to answer questions
In December 2016,Lucas Corporation sold merchandise for $10,000 cash.Lucas estimated that $700 of warranty claims might be filed in regard to these sales.On February 12,2017,warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory).
53.Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of 2016 on the financial statements of Lucas?
A.
B.
C.
D.
Answer: D
Learning Objective: 09-04
Topic Area: Warranty obligations
AACSB: Analytical Thinking
AACSB: Knowledge Application
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: The entry to estimate future warranty costs related to 2016 sales increases expenses (warranty expense),which decreases net income and equity,and increases liabilities (warranties payable).

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

Question 53

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 54

Which of the following items is not classified as a current asset?

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

Question 55

Greer Company pays Jamal Perry a salary of $3,000 per week.How much FICA tax must Greer pay on Jamal's behalf,including both the employee and employer portions?

A)$225.
B)$360.
C)$0.00 Jamal is responsible for making his own payments.
D)$450.

Question 56

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 57

Use the following to answer questions
The following information is taken from the balance sheet of Menendez Company on January 1,2016:


-Use the information on January 1,2016 to determine the effect of the following entry on the current ratio of Menendez Company:
This transaction will

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

Question 58

The following information is taken from the balance sheet of Atlanta Company:
Atlanta Company's current ratio is:

A)2.5 to 1
B)1.6 to 1
C)1.76 to 1
D).66 to 1

Question 59

When do the effects of product warranties appear on 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 60

Which of the following represents the correct journal entry to record a taxable cash sale of $400 if the sales tax rate is 5%?

A)A debit to cash for $420,a debit to sales tax expense for $20,and a credit to sales revenue for $400.
B)A debit to cash for $400,a credit to sales tax payable for $20,and a credit to sales revenue for $380.
C)A debit to cash for $420,a credit to sales tax payable for $20,and a credit to sales revenue for $400.
D)None of these answer choices are correct.

Question 61

Craig Company experienced an accounting event that is recorded in the following T-accounts:
Which of the following choices accurately reflects how this event would affect Craig's financial statements.

Question 62

Indicate whether each of the following is true or false.Perez Company borrowed money from its bank in July 2016.The accrual of interest on the loan at the end of 2016:
_____ a)reduces cash flows.
_____ b)involves recognition of interest expense.
_____ c)does not affect income for 2016.
_____ d)involves recognition of a liability.
_____ e)records a cash payment for interest.

Question 63

The current ratio is a measure of:

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

Question 64

Which of the following accounts appear in the liabilities section of the balance sheet?

A)Accounts payable,notes payable,allowance for doubtful accounts.
B)Warranties payable,discount on notes payable,accounts payable.
C)Notes payable,discount on notes payable,credit card receivables.
D)Accounts payable,allowance for doubtful accounts,warranties payable.

Question 65

The Clarion Company provides a one-year warranty on all merchandise it sells.In 2016,the company recorded sales of $500,000.It estimated that the warranty costs on these sales would amount to $2,000.In July 2017,Clarion paid $250 to satisfy a warranty claim.Indicate whether each of the following statements is true or false.
_____ a)Clarion's adjusting entry recording the warranty at the end of 2016 reduced total assets and total equity.
_____ b)Clarion's adjusting entry recording the warranties at the end of 2016 increased Clarion's total liabilities.
_____ c)The July 2017 entry reduced total assets and net income for 2017.
_____ d)The July 2017 entry reduced Clarion's total liabilities.
_____ e)The adjusting entry recorded at the end of 2016 did not affect Clarion's revenue for the year.

Question 66

Use the following to answer questions
The Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1,2016.The note carried a 5% discount rate and a one-year term to maturity.

-How would the adjusting entry to record interest expense on December 31,2016 affect the financial statements?

Question 67

Fisher Company has been named as the defendant in a class action lawsuit.Indicate whether each of the following statements regarding the lawsuit is true or false.
_____ a)If the outcome is likely,a liability should be recognized on the balance sheet for the full amount of the suit,even if the company's attorneys estimate the outcome to be much lower.
_____ b)If the outcome is likely,but cannot be reasonably estimated,the contingency should be disclosed in the notes to the financial statements.
_____ c)If the outcome is reasonably possible,the contingency should be disclosed in the notes to the financial statements.
_____ d)Every lawsuit,regardless how frivolous,should be disclosed in the notes to the financial statements.
_____ e)If an active hurricane season has been predicted for the Florida gulf coast,businesses in that region should not disclose contingencies for catastrophic loss in the notes to their financial statements.

Question 68

Indicate whether each of the following statements is true or false.
_____ a)An eight-month,6% note for $10,000 will require the issuer to pay $600 in interest.
_____ b)Interest expense is considered an operating expense on the income statement.
_____ c)Payment of interest is considered an operating activity on the statement of cash flows.
_____ d)Payment of interest on a one-year note due on March 1 will include a reduction in liabilities.
_____ e)The adjusting entry to recognize interest expense is an asset use transaction.

Question 69

The term used to describe the ability to generate short-term cash flows is:

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

Question 70

Use the following to answer questions
Seattle Company issued a $90,000 face value discount note payable to the First Federal Bank on September 1,2016.The note carried a one-year term and a 4% discount rate.

-The amount of interest expense appearing on the 2016 income statement would be:

A)$1,200.
B)$3,600.
C)$2,400.
D)$7,200.

Question 71

The current ratio is computed as follows:

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 72

Use the following to answer questions
The Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1,2016.The note carried a 5% discount rate and a one-year term to maturity.

-After accruing all interest expense due as of April 1,2016,Baltimore Company made the cash payment for the full amount due (i.e. ,principal and interest)to Bank of the Chesapeake.Select the answer that shows how the cash payment will affect Baltimore's financial statements.

Question 73

What type of account is Discount on Notes Payable?

A)Contra liability.
B)Liability.
C)Contra asset.
D)Expense.

Question 74

Hartford Company borrowed $20,000 on October 1,2016.Hartford issued a one year 6% discount note payable.The adjusting entry necessary to record accrued interest on December 31,2016 would include a:

A)debit to Discount on Notes Payable of $300.
B)debit to Interest Expense for $300.
C)credit to Interest Payable for $300.
D)none of these answer choices are correct.

Question 75

Choose the correct answer to complete the following: Discount notes....

A)are recorded in the account "notes payable" at more than face value on the day of issue.
B)are recorded in the account "notes payable" at face value on the day of issue.
C)are recorded in the account "notes payable" at less than face value on the day of issue.
D)are not recorded until the maturity date.

Question 76

Use the following to answer questions
Seattle Company issued a $90,000 face value discount note payable to the First Federal Bank on September 1,2016.The note carried a one-year term and a 4% discount rate.

-As a result of the recognition of interest expense on December 31,2016,

A)liabilities will increase and retained earnings will decrease.
B)assets and liabilities will decrease.
C)assets will increase and retained earnings will increase.
D)liabilities will increase and assets will decrease.

Question 77

Use the following to answer questions
Seattle Company issued a $90,000 face value discount note payable to the First Federal Bank on September 1,2016.The note carried a one-year term and a 4% discount rate.

-The carrying value of the liability appearing on the December 31,2016 balance sheet will amount to:

A)$80,400
B)$87,600
C)$90,000
D)$88,800

Question 78

The amortization of the discount on a note payable has what effect on a company's financial statements?

A)Decreases interest expense and decreases liabilities.
B)Decreases interest expense and increases liabilities.
C)Increases interest expense and decreases liabilities.
D)Increases interest expense and increases liabilities.

Question 79

The December 31,2016 balance sheet of Rowan Company shows current assets of $32,000 and current liabilities of $20,000.On January 1,2017 the company recorded the following entries:
After the two journal entries were recorded,the company current ratio is:

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

Question 80

During Year 1,Bradley Corporation borrowed $20,000 from Fidelity Bank by signing a one-year,6% discount note.On December 31,Year 2 Bradley failed to make the adjusting entry to accrue the related interest.This error will cause:

A)Net income for Year 1 to be overstated and liabilities for Year 1 to be overstated.
B)Net income for Year 1 to be understated and net income for Year 2 to be overstated.
C)Net income for Year 1 to be understated and liabilities for Year 1 to be overstated.
D)Net income for Year 2 to be understated and liabilities for Year 1 to be understated.