Deck 9: Accounting for Current Liabilities and Payroll

Question 1

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)Stockholder's equity increases by $70.
D)All of these answer choices are correct.

Answer 1

All of these answer choices are correct.

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

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

Answer 3

Increase liabilities and increase expenses

Question 4

[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 5

[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 6

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 7

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 8

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 9

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

Question 10

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 11

[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 12

[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 13

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 14

[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 15

Issuing a note payable is a(n):

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

Question 16

[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 17

[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 18

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 adjusting entry,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 19

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 20

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 21

The following information is taken from the balance sheet of Menendez Company on January 1,Year 1:


-On January 2,Year 1,the company recorded the following transaction:

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 22

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 23

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

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 25

What is the current ratio used to evaluate?

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

Question 26

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 27

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

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

Question 28

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 29

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 recorded the following entries:

After the two journal entries were 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 30

On October 1,Year 1,Hartford Company issued a $20,000 face value discount note.The note had a 6% discount rate and a one-year term to maturity.Which of the following would be included in the adjusting entry,dated December 31,Year 1,to recognize interest accrued since the issuance date?

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

Question 31

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 credit balance of $11,000 at the end of Year 1.
D)All of these answer choices are correct.

Question 32

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 33

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 34

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 35

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 36

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).66 to 1

Question 37

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 38

Use the information on January 1,Year 1 to determine the effect of the following entry on the current ratio of Menendez Company:

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 39

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 40

[The following information applies to the questions displayed below.]

Seattle Company issued a $90,000 face value discount note payable to First Federal Bank on September 1, Year 1. The note had a 4% discount rate and a one-year term.


-What is the amount of interest expense appearing on the Year 1 income statement?

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

Question 41

Indicate whether each of the following statements is true or false.
________ a)The amount of warranty expense is an estimate that is based on the amount of merchandise sold.
________ b)A warranty obligation only occurs if a buyer purchases an extended warranty.
________ c)When a warranty claim is settled,the seller's equity decreases.
________ d)When a warranty claim is settled,the seller's liabilities increase.
________ e)Product warranties usually represent legal liabilities that must be reported in the financial statements.

Question 42

What is the effect of the accrual of interest expense on the elements of the financial statements?

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 43

Fisher Company has been named as the defendant in a class action lawsuit.In addition,the company is located in a region that normally has an active hurricane season.Indicate whether each of the following statements is true or false.
________ a)If the likelihood of a future obligation is probable and can be reasonably estimated,a liability should be recognized on the balance sheet.
________ b)If the outcome is probable,but cannot be reasonably estimated,the contingency should be disclosed in the notes to the financial statements.
________ c)If the outcome is reasonably possible but not likely,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)Since it is located in a region for which an active hurricane season has been predicted,the company must disclose the contingent liability,which is the potential for catastrophic loss,in the notes to their financial statements.

Question 44

Which of the following statements is true regarding discount notes?

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

Question 45

[The following information applies to the questions displayed below.]

Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1, Year 1. The note had a 5% discount rate and a one-year term to maturity.


-After accruing all interest expense due as of April 1,Year 1,Baltimore Company made the cash payment for the full amount due (i.e. ,principal and interest)to Bank of the Chesapeake.How does the cash payment affect the elements of Baltimore's financial statements?

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

Question 46

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 47

The Clarion Company provides a one-year warranty on all merchandise it sells.In Year 1,the company recorded sales of $500,000.It estimated that the warranty costs on these sales would amount to $2,000.In July of Year 2,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 Year 1 decreased total assets and total stockholders' equity.
________ b)Clarion's adjusting entry recording the warranties at the end of Year 1 increased Clarion's total liabilities.
________ c)The entries,dated in July of Year 2,decreased total assets and net income for Year 2.
________ d)The entries,dated in July of Year 2,decreased Clarion's total liabilities.
________ e)The adjusting entry recorded at the end of Year 1 did not affect Clarion's revenue for the year.

Question 48

[The following information applies to the questions displayed below.]

Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1, Year 1. The note had a 5% discount rate and a one-year term to maturity.


-How would the adjusting entry to record interest expense on December 31,Year 1 affect the elements of the financial statements?

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

Question 49

Craig Company experienced an accounting event that is recorded in the T-accounts as follows:



How does this event affect the elements of Craig's financial statements?

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

Question 50

Indicate whether each of the following statements is true or false.
________ a)The extension of a warranty on goods sold normally represents a legal obligation to the seller of the goods.
________ b)The entry to recognize the warranty obligation increases the Warranties Payable account and decreases a revenue account.
________ c)The entry to record the payment of cash to settle a warranty claim increases expenses (Warranties Expense)and decreases liabilities (Warranties Payable).
________ d)Net income is not affected by the entry to record the payment of cash to settle a warranty claim.
________ e)Total assets are not affected by the adjusting entry to record the warranty obligation.

Question 51

During Year 1,Bradley Corporation issued a $20,000 face value discount note to Fidelity Bank.The note had a 6% discount rate and a one-year term to maturity.On December 31,Year 1,Bradley failed to make the adjusting entry to accrue the related interest.Which of the following summarizes the effect of this error?

A)Net income for Year 1 is overstated and liabilities for Year 1 are overstated
B)Net income for Year 1 is understated and net income for Year 2 is overstated
C)Net income for Year 1 is understated and liabilities for Year 1 are overstated
D)Net income for Year 2 is understated and liabilities for Year 1 are understated

Question 52

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

Question 53

What is the carrying value of the liability appearing on the December 31,Year 1 balance sheet?

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

Question 54

Indicate whether each of the following is true or false.Perez Company borrowed money from its bank in July Year 1.The accrual of interest on the loan at the end of Year 1:
________ a)reduces cash flows.
________ b)involves recognition of interest expense.
________ c)does not affect income for Year 1.
________ d)involves recognition of a liability.
________ e)records a cash payment for interest.

Question 55

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 56

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 57

Indicate whether each of the following statements is true or false.
________ a)The amount of federal tax withheld from an employee's salary depends on the employee's gross pay and the number of withholding allowances the employee claims.
________ b)Withheld taxes are recorded in the payroll tax expense account.
________ c)An employer will submit $8,250 in FICA taxes for an employee who earns $55,000 annually.(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. )
________ d)A voluntary deduction,such as a charitable contribution,creates a liability when it is withheld from employee pay.
________ e)If an employer records gross pay of $2,400 and withholds $700 of that amount,then the employer will recognize $1,700 in salary expense.

Question 58

Indicate whether each of the following statements is true or false.
________ a)Operating cycles for most businesses are less than one year.
________ b)If a business does not plan to use any of its current assets to repay a debt,then that debt is listed as long term even if it is due within a year.
________ c)The current ratio is computed by dividing current assets by net income.
________ d)The current ratio is a useful measure of a company's liquidity.
________ e)Liquidity is the ability of a business to repay liabilities in the long run.

Question 59

What type of account is Discount on Notes Payable?

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

Question 60

How does the amortization of the discount on a note payable affect the elements of 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 61

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

Question 62

At the end of Year 1,Durango Company recorded an adjusting entry 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

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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 71

Recording an adjusting entry for product warranties is a claims exchange transaction.

Question 72

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 73

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 74

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

Question 75

Vacation pay is considered a contingent liability.

Question 76

Employers must withhold unemployment taxes from employee salaries.

Question 77

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 78

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 79

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

Question 80

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.