Deck 8: Current Liabilities

Question 1

A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork.

Answer 1

True

Question 2

In a classified balance sheet,we categorize all liabilities as current.

Answer 2

False

Question 3

Commonly,current liabilities are payable within one year,and long-term liabilities are payable more than one year from now.

Answer 3

True

Question 4

We record interest expense in the period in which we pay it,rather than in the period we incur it.

Question 5

Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit.

Question 6

American,Delta,and United Airlines have all,at one time,filed for bankruptcy.

Question 7

Given a choice,most companies would prefer to report a liability as current rather than long-term,because doing so may cause the firm to appear less risky.

Question 8

Airlines do not record revenue when a ticket is sold,but wait to record revenue until the actual flight occurs.

Question 9

All states impose a general state sales tax,and many areas include an additional local sales tax.

Question 10

Additional employee benefits paid for by the employer are often referred to as fringe benefits.

Question 11

If a company borrows from another company rather than from a bank,the note is referred to as commercial paper.

Question 12

FICA taxes are paid only by the employee.

Question 13

Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan.

Question 14

When a company receives cash in advance,it debits Cash and credits a revenue account called Unearned Revenue.

Question 15

The employer is required to match the amount of FICA taxes withheld for each employee,effectively doubling the amount paid into Social Security.

Question 16

All states impose a state income tax.

Question 17

Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes,FICA taxes,and the employee portion of insurance and retirement contributions.

Question 18

Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government.

Question 19

The employer records amounts deducted from employee payroll as liabilities until it pays them to the appropriate organizations.

Question 20

When a company borrows cash from a bank promising to repay the amount borrowed plus interest,the borrower reports its liability as notes payable.

Question 21

The current ratio is calculated by dividing current liabilities by current assets.

Question 22

Quick assets include only cash,short-term investments,and accounts receivable.

Question 23

We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount can be reasonably estimated.

Question 24

A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis.

Question 25

Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments.

Question 26

A contingent liability is recorded only if a loss is at least reasonably possible and the amount can be reasonably estimated.

Question 27

Long-term obligations such as notes,mortgages,and bonds are reported as long-term liabilities when they become payable within the upcoming year.

Question 28

A company is said to be liquid if it has sufficient cash to pay currently maturing debts.

Question 29

When a company collects sales taxes,the debit is to Cash and the credit is to Sales Tax Payable.

Question 30

The balance in the Warranty Liability account is always equal to Warranty Expense.

Question 31

Given a choice,most managers would choose to record an obligation as long-term rather than current.

Question 32

We record gain contingencies when the gain is probable and can be reasonably estimated.

Question 33

The acid-test ratio,or quick ratio,is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities.

Question 34

Sales taxes collected from customers by the seller are not an expense,instead they represent current liabilities payable to the government.

Question 35

If the likelihood of a loss is reasonably possible rather than probable,we record no entry,but make full disclosure in a footnote to the financial statements to describe the contingency.

Question 36

A gain contingency is an existing uncertain situation that might result in a gain,which often is the flip side of loss contingencies.

Question 37

The journal entry to record a contingent liability requires a debit to a loss (or expense)account and a credit to a liability.

Question 38

If the likelihood of loss is remote,disclosure usually is not required.

Question 39

Regarding a contingent liability,when no amount within a range of potential losses appears more likely than others,we record the maximum amount in the range.

Question 40

A contingent liability is an existing,uncertain situation that might result in a loss.

Question 41

On November 1,2015,The Bagel Factory signed a $100,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2016.The Bagel Factory should report interest payable at December 31,2015,in the amount of:

A)$0.
B)$1,000.
C)$2,000.
D)$3,000.

Question 42

On December 1,2015,Old World Deli signed a $300,000,5%,six-month note payable with the amount borrowed plus accrued interest due six months later on June 1,2016.Old World Deli should record which of the following adjusting entries at December 31,2015?

A)Debit Interest Expense and credit Interest Payable,$7,500.
B)Debit Interest Expense and credit Cash,$7,500.
C)Debit Interest Expense and credit Interest Payable,$1,250.
D)Debit Interest Expense and credit Cash,$1,250.

Question 43

The Pita Pit borrowed $100,000 on November 1,2015,and signed a six-month note bearing interest at 12%.Principal and interest are payable in full at maturity on May 1,2016.In connection with this note,The Pita Pit should report interest expense in 2016 for the amount of:

A)$0.
B)$4,000.
C)$2,000.
D)$6,000.

Question 44

The Pita Pit borrowed $100,000 on November 1,2015,and signed a six-month note bearing interest at 12%.Principal and interest are payable in full at maturity on May 1,2016.In connection with this note,The Pita Pit should report interest expense at December 31,2015,in the amount of:

A)$0.
B)$1,000.
C)$2,000.
D)$6,000.

Question 45

Given a choice,most companies would prefer to report a liability as long-term rather than current because:

A)It may cause the firm to appear less risky to investors and creditors.
B)It may reduce interest rates on borrowing.
C)It may cause the company to appear more stable commanding a higher stock price for new stock listings.
D)All of the other answers are true.

Question 46

On December 1,2015,Old World Deli signed a $300,000,5%,six-month note payable with the amount borrowed plus accrued interest due six months later on June 1,2016.Old World Deli records the appropriate adjusting entry for the note on December 31,2015.What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1,2016?

A)$300,000.
B)$301,250.
C)$306,250.
D)$307,500.

Question 47

On September 1,2015,Daylight Donuts signed a $100,000,9%,six-month note payable with the amount borrowed plus accrued interest due six months later on March 1,2016.Daylight Donuts records the appropriate adjusting entry for the note on December 31,2015.In recording the payment of the note plus accrued interest at maturity on March 1,2016,Daylight Donuts would

A)Debit Interest Expense,$3,000.
B)Debit Interest Expense,$1,500.
C)Debit Interest Payable,$1,500.
D)Debit Interest Expense,$4,500.

Question 48

On November 1,2015,New Morning Bakery signed a $200,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2016.New Morning Bakery records the appropriate adjusting entry for the note on December 31,2015.What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1,2016?

A)$200,000.
B)$202,000.
C)$204,000.
D)$206,000.

Question 49

Which of the following is not a liability?

A)Notes payable
B)Current portion of long-term debt.
C)An unused line of credit.
D)Unearned revenue.

Question 50

Universal Travel,Inc.borrowed $500,000 on November 1,2015,and signed a twelve-month note bearing interest at 6%.Principal and interest are payable in full at maturity on October 31,2016.In connection with this note,Universal Travel,Inc.should record interest expense in 2016 in the amount of:

A)$8,000.
B)$30,000.
C)$5,000.
D)$25,000.

Question 51

Which of the following is not a current liability?

A)Accounts payable.
B)A note payable due in 2 years.
C)Current portion of long-term debt.
D)Sales tax payable.

Question 52

Which of the following is not withheld from an employee's salary?

A)FICA taxes.
B)Federal and state unemployment taxes.
C)Federal and state income taxes.
D)Employee portion of health insurance.

Question 53

On November 1,2015,New Morning Bakery signed a $200,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2016.New Morning Bakery should record which of the following adjusting entries at December 31,2015?

A)Debit Interest Expense and credit Interest Payable,$2,000.
B)Debit Interest Expense and credit Cash,$2,000.
C)Debit Interest Expense and credit Interest Payable,$6,000.
D)Debit Interest Expense and credit Cash,$6,000.

Question 54

Universal Travel,Inc.borrowed $500,000 on November 1,2015,and signed a twelve-month note bearing interest at 6%.Principal and interest are payable in full at maturity on October 31,2016.In connection with this note,Universal Travel,Inc.should report interest payable at December 31,2015,in the amount of:

A)$8,000.
B)$30,000.
C)$5,000.
D)$25,000.

Question 55

Which of the following is not an employer payroll cost?

A)FICA taxes.
B)Federal and state unemployment taxes.
C)Federal and state income taxes.
D)Employer contributions to a retirement plan.

Question 56

Large,highly-rated firms sometimes sell commercial paper:

A)To borrow funds at a lower rate than through a bank.
B)To borrow funds when they cannot obtain a loan from a bank.
C)Because they can't borrow anywhere else.
D)To improve their credit rating.

Question 57

On November 1,2015,The Bagel Factory signed a $100,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2016.The Bagel Factory records the appropriate adjusting entry for the note on December 31,2015.In recording the payment of the note plus accrued interest at maturity on May 1,2016,The Bagel Factory would

A)Debit Interest Expense,$2,000.
B)Debit Interest Expense,$1,000.
C)Debit Interest Payable,$2,000.
D)Debit Interest Expense,$3,000.

Question 58

Which of the following is not a characteristic of a liability?

A)It represents a probable,future sacrifice of economic benefits.
B)It must be payable in cash.
C)It arises from present obligations to other entities.
D)It results from past transactions or events.

Question 59

On September 1,2015,Daylight Donuts signed a $100,000,9%,six-month note payable with the amount borrowed plus accrued interest due six months later on March 1,2016.Daylight Donuts should report interest payable at December 31,2015,in the amount of:

A)$0.
B)$1,500.
C)$3,000.
D)$4,500.

Question 60

Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current?

A)It may cause the firm to appear less risky to investors and creditors.
B)It may increase interest rates on borrowing.
C)It may cause the company to appear more stable commanding a higher stock price for new stock listings.
D)It may reduce interest rates on borrowing.

Question 61

Union Apparel has sales including sales taxes for the month of $551,200.If the sales tax rate is 6%,what are Union Apparel's sales for the month?

A)$500,000.
B)$518,128.
C)$520,000.
D)$551,200.

Question 62

If management can estimate the amount of loss that will occur due to litigation against the company,and the likelihood of the loss is probable,a contingent liability should be

A)Disclosed,but not reported as a liability.
B)Disclosed and reported as a liability.
C)Neither disclosed nor reported as a liability.
D)Reported as a liability,but not disclosed.

Question 63

At times,businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided.These customer advances represent:

A)Liabilities until the product or service is provided.
B)A component of stockholders' equity.
C)Long-term assets until the product or service is provided. d Revenue upon receipt of the advance payment.

Question 64

Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month).Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum.Assuming the FICA maximum base amount is $113,700,through what month will Social Security be withheld?

A)Social Security will be withheld only in January.
B)Social Security will be withheld through the entire year.
C)Social Security will be withheld through the month of March.
D)Social Security will be withheld through the month of June.

Question 65

Region Jet has a $50 million liability at December 31,2015,of which $10 million is payable in 2016.In its December 31,2015 balance sheet,the company reports the $50 million debt as

A)A $50 million current liability on the balance sheet.
B)A $50 million long-term liability on the balance sheet.
C)A $10 million current liability and a $40 million long-term liability on the balance sheet.
D)A $40 million current liability and a $10 million long-term liability on the balance sheet.

Question 66

Which of the following are not included in an employer's payroll tax expense?

A)Employer portion of FICA taxes.
B)Federal unemployment taxes.
C)State unemployment taxes.
D)State income taxes.

Question 67

Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month).Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum.Assuming the FICA maximum base amount is $113,700,how much will be withheld during the year for the coach's Social Security and Medicare.

A)$34,800.
B)$41,849.
C)$148,800.
D)None of these amounts is correct.

Question 68

Action Travel has 10 employees each working 40 hours per week and earning $20 an hour.Federal income taxes are withheld at 15% and state income taxes at 6%.FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee.What is the total payroll tax expense for the first week of January?

A)$612.
B)$1,224.
C)$916.
D)$304.

Question 69

If management can estimate the amount of loss that will occur due to litigation against the company,and the likelihood of the loss is reasonably possible,a contingent liability should be

A)Disclosed,but not reported as a liability.
B)Disclosed and reported as a liability.
C)Neither disclosed nor reported as a liability.
D)Reported as a liability,but not disclosed.

Question 70

When a company collects sales tax from a customer,the event is recorded by:

A)A debit to Sales Tax Expense and a credit to Sales Tax Payable.
B)A debit to Cash and a credit to Sales Tax Payable.
C)A debit to Sales Tax Payable and a credit to Sales Tax Expense.
D)A debit to Sales Tax Payable and a credit to Cash.

Question 71

Suppose you buy dinner for $23.75 that includes an 8% sales tax.How much did the restaurant charge you for the dinner (excluding any tax)and how much do they owe for sales tax?

A)$23.75 for dinner and $1.90 for sales tax.
B)$23.75 for dinner and no sales tax.
C)$21.85 for dinner and $1.90 for sales tax.
D)$21.99 for dinner and $1.76 for sales tax.

Question 72

Suppose you buy lunch for $8.39 that includes a 5% sales tax.How much did the restaurant charge you for the lunch (excluding any tax)and how much do they owe for sales tax?

A)$8.39 for lunch and $0.42 for sales tax.
B)$8.39 for lunch and no sales tax.
C)$8.81 for lunch and $0.42 for sales tax.
D)$7.99 for lunch and $0.40 for sales tax.

Question 73

Action Travel has 10 employees each working 40 hours per week and earning $20 an hour.Federal income taxes are withheld at 15% and state income taxes at 6%.FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee.What is the actual direct deposit of payroll for the first week of January?

A)$5,404.
B)$5,708.
C)$4,792.
D)$8,000.

Question 74

The current portion of long-term debt should be

A)Reported as a current liability on the balance sheet.
B)Reported as a long-term liability on the balance sheet.
C)Combined with the rest of the long-term debt on the balance sheet.
D)Paid immediately.

Question 75

The sale of gift cards by a company is a direct example of:

A)Unearned revenues.
B)Sales tax payable.
C)Current portion of long-term debt. d Contingencies.

Question 76

When a company delivers a product or service for which a customer has previously paid,the company records the following:

A)A debit to a revenue account and a credit to a liability account.
B)A debit to a revenue account and a credit to an asset account.
C)A debit to an asset account and a credit to a revenue account.
D)A debit to a liability account and a credit to a revenue account.

Question 77

Which of the following is true regarding FICA taxes?

A)FICA taxes are paid only by the employee.
B)FICA taxes are paid only by the employer.
C)FICA taxes are paid in equal amounts by the employee and the employer.
D)FICA taxes are paid in different amounts by the employee and the employer.

Question 78

Sales taxes collected by a company on behalf of the state and local government are recorded by:

A)A debit to an expense account.
B)A credit to a revenue account.
C)A debit to a revenue account.
D)A credit to a liability account.

Question 79

United Supply has a $5 million liability at December 31,2015,of which $1 million is payable in each of the next five years.United Supply reports the liability on the balance sheet as:

A)A $5 million current liability.
B)A $5 million long-term liability.
C)A $1 million current liability and a $4 million long-term liability.
D)A $4 million current liability and a $1 million long-term liability.

Question 80

Which of the following are included in an employer's payroll tax expense?

A)Employer portion of FICA taxes.
B)Federal unemployment taxes.
C)State unemployment taxes.
D)All of the other answers are correct.