Deck 9: Accounting for Current Liabilities and Payroll

Question 1

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

Answer 1

False
Explanation: Independent contractors can be self-employed.

Question 2

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

Answer 2

True
Explanation: Remittance of sales tax is a reduction of the liability sales tax payable, and does not impact the income statement. It is reported as a cash outflow for operating activities (and collection of sales tax is reported as a cash inflow for operating activities).

Question 3

If a company is located in an area where floods or earthquakes are deemed to be possible, the company should record a contingent liability.

Answer 3

False
Explanation: Contingent liabilities are only reported for future costs that are the result of past events, such as lawsuits that have already been filed. They are not reported for natural disasters, regardless of their probability.

Question 4

Vincent 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 $7,500.

Question 5

At the end of 2012, Durango Company recorded an adjusting entry for its obligation under product warranties. During 2013, it replaced products to its customers under the terms of the warranties. The 2013 warranty settlements should be recorded as asset use transactions.

Question 6

In September of 2013, Houston Company issued a note payable to borrow money from its bank. Principal and interest on the note would come due in June 2014. The matching principle requires that interest expense on this note be accrued at the end of 2013 for the period from issuance of the note to the last day of the accounting period.

Question 7

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

Question 8

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

Question 9

Vacation pay is considered a contingent liability to the extent that the obligation exists due to work already performed.

Question 10

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 11

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

Question 12

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

Question 13

Jackson Company is preparing to repay a one-year note on May 1, 2013. The first step in this process is to accrue eight months of interest expense.

Question 14

Employers must withhold unemployment taxes from employee salaries.

Question 15

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

Question 16

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

Question 17

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

Question 18

Fern's Flower Market sells eight potted petunias to a customer for $60.00, plus 5% sales tax. Fern's will recognize $63.00 in sales revenue.

Question 19

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

Question 20

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

Question 21

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)Going concern assumption.
C)Monetary unit assumption.
D)Matching concept.

Question 22

On October 1, 2012, Haywood Company borrowed money by issuing a $12,000 face value discount note to its bank. The note had an 8% discount rate and had a term of 1 year. The amount of cash that Haywood received on that date was $12,000.

Question 23

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

Question 24

Hamm Co. borrowed $10,000 from Townsend Co. on March 1, 2013. Hamm is to repay the principal and interest on March 1, 2014. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Hamm's 2013 financial statements?

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

Question 25

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

Question 26

On October 1, 2012, Haywood Company borrowed money by issuing a $12,000 face value discount note to its bank. The note had an 8% discount rate and had a term of 1 year. On December 31, 2012, Haywood should accrue interest expense in the amount of $240.

Question 27

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

Question 28

The amount of cash flow from operating activities that would appear on the 2014 statement of cash flows would be:

A)$385 inflow
B)$700 inflow
C)$560 outflow
D)$18,245 outflow

Question 29

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

A)It dictates that interest expense be accrued at the end of the accounting period.
B)It dictates that notes payable be reported at their face value.
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 30

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

Question 31

Based on this information alone, the amount of total liabilities appearing on Munson's 2013 balance sheet would be:

A)$6,180
B)$6,200
C)$6,480
D)$6,000

Question 32

Fallon Company issued a $20,000 note to the Capital Bank on August 1, 2013. The note carried a one-year term and a 12% rate of interest. The adjusting entry on Fallon's books to record accrued interest expense on December 31, 2013 will

A)Decrease assets and decrease retained earnings by $1,000.
B)Increase liabilities and decrease equity by $800.
C)Increase liabilities and decrease equity by $1,000.
D)Decrease equity and increase liabilities by $2,400.

Question 33

The amount of total liabilities that would appear on Ramon's December 31 balance sheets for 2013 and 2014 would be

A)$18,945; $0.
B)$18,000; $0.
C)$18,945; $19,260.
D)$945; $315.

Question 34

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

Question 35

On October 1, 2012, Haywood Company borrowed money by issuing a $12,000 face value discount note to its bank. The note had an 8% discount rate and had a term of 1 year. On that date, Haywood recorded a Discount on Notes Payable in the amount of $960.

Question 36

The amount of net income on the 2014 income statement would be:

A)$315.
B)$385.
C)$(95).
D)$945.

Question 37

The amount of cash flow from operating activities on the 2013 statement of cash flows would be:

A)$480.
B)$200.
C)$6,000.
D)zero.

Question 38

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

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

Question 39

Issuing a note payable is a(n)

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

Question 40

Warren Company borrowed $20,000 on September 1, 2013 from the National Bank. Warren agreed to pay interest annually at the rate of 6% per year. The note issued by Warren carried an 18-month term. Based on this information the amount of interest expense appearing on Warren's 2013 income statement would be

A)$-0-.
B)$400.
C)$120.
D)$300.

Question 41

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

A)To allow an employee to lessen the amount of federal tax withheld due to withholding allowances.
B)To notify the federal government when a new employee is hired.
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.Allowances can be declared for dependents, which lessen an employee's income tax liability.

Question 42

Monthly remittance of sales tax:

A)Reduces stockholders' equity.
B)Is a claims exchange transaction.
C)Reduces liabilities.
D)All of the above.

Question 43

Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of 2013 on the financial statements of Lucky?

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

Question 44

Gilson Company pays Matt Sawyer a salary of $2,000 per week. How much FICA tax must Gilson pay on Matt's behalf, including both the employee and employer portions?

A)$150.00.
B)$300.00.
C)$0.00 Matt is responsible for making his own payments.
D)$240.

Question 45

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)product and period costs.
C)current and non-current assets.
D)none of these.

Question 46

When do the effects of product warranties appear on the statement of cash flow?

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

Question 47

Bacchus Co. had sales of $400,000 in 2013. The company expects to incur warranty expenses amounting to 3% of sales. There were $6,500 of warranty obligations paid in cash during 2013. Based on this information:

A)Warranty expenses would decrease net earnings by $12,000 in 2013.
B)Assets would decrease by $6,500 as a result of the accounting events associated with warranties in 2013.
C)Total warranty obligations would increase by $5,500 in 2013.
D)All of these.

Question 48

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 49

Which of the following represents the correct journal entry to record a taxable cash sale of $800 if the sales tax rate is 5%?

A)A debit to cash for $840, a debit to sales tax expense for $40, and a credit to sales revenue for $800.
B)A debit to cash for $840, a credit to sales tax payable for $40, and a credit to sales revenue for $800.
C)A debit to cash for $800, a credit to sales tax payable for $40, and a credit to sales revenue for $760.
D)None of the above.

Question 50

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

A)Bonds Payable.
B)Wages Payable.
C)Accounts Payable.
D)Interest Payable.

Question 51

Which of the following is a claims exchange transaction?

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

Question 52

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

A)Accounts Receivable.
B)Merchandise Inventory.
C)Office Equipment.
D)Prepaid Rent.

Question 53

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

A)Disclose the lawsuit in the footnotes 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 54

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

A)The outcome is reasonably possible.
B)The outcome is probable.
C)The amount can be reasonably estimated.
D)Both the outcome is probable and the amount can be reasonably estimateD.A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If it is considered only reasonably possible, it is only disclosed in the footnotes.

Question 55

Selling $65 of merchandise to a customer for $100 in a state where the sales tax rate is 4%:

A)Increases cash flow from operating activities by $104.
B)Increases total assets by $39.
C)Increases equity by $35.
D)All of the above.

Question 56

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

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

Question 57

What factor distinguishes an employee from an independent contractor?

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

Question 58

On January 2, 2013, the company recorded the following transaction: Recording this transaction will:

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

Question 59

Which of the following answers indicates the effect of the February 12, 2014 entry on the financial statements of Lucky Corporation?

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

Question 60

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

A)FICA tax for Social Security.
B)Federal unemployment tax.
C)FICA tax for Medicare.
D)None of the above. They are all deducted from salary expense to arrive at net pay.

Question 61

On December 31, 2013, Dover Co. accrued $1,000 of interest on a $20,000 note it had issued from the Friendly Bank on July 1, 2013. The principal and interest on the note are to be repaid on June 30, 2014 How would Dover's year-end adjustment to accrue the interest on the loan affect its financial statements for 2013?

Question 62

Use the information on January 1, 2013 to determine the effect of the following entry on the current ratio of Minerva Company: This transaction will

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

Question 63

As a result of the recognition of interest expense on 12/31/12,

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

Question 64

Carnegie 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 Carnegie's financial statements.

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

Question 65

The amount of interest expense appearing on the 2012 income statement would be:

A)$1,200.
B)$400.
C)$800.
D)$2,400.

Question 66

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 67

The carrying value of the liability appearing on the 12/31/12 balance sheet will amount to:

A)$26,800
B)$29,200
C)$30,000
D)$29,600

Question 68

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

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

Question 69

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

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

Question 70

Charles Co. repaid a note payable on September 30, 2013. The 8-month note had been issued on February 1, 2013. The $10,400 cash payment included a $10,000 repayment of principal and a $400 payment for interest.

Question 71

The current ratio is a measure of:

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

Question 72

On October 1, 2013, Beacon Corporation borrowed $10,000 from First Bank by signing a one-year, 6% note. On December 31, 2013 Beacon failed to make the adjusting entry to accrue the related interest. This error will cause:

A)Net income for 2013 to be overstated and liabilities for 2013 to be overstated.
B)Net income for 2013 to be understated and net income for 2014 to be overstated.
C)Net income for 2014 to be understated and liabilities for 2013 to be understated.
D)Net income for 2013 to be understated and liabilities for 2013 to be overstateD.The entry that should have been made would have increased interest expense (decreasing net income) and increased interest payable (increasing liabilities) in 2013. Neglecting to make that entry would understate 2013 liabilities and overstate 2013 net income. It would also cause Beacon to recognize all 12 months of interest expense in 2014 instead of just 9 months, which would cause 2014 net income to be understated.

Question 73

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

A)are recorded in the account "notes payable" at face value on the day of issue.
B)are recorded in the account "notes payable" at more than 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 74

The December 31, 2013 balance sheet of Rollins Company shows current assets of $16,000 and current liabilities of $10,000. On January 1, 2014 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 75

The following information is taken from the balance sheet of Alberta Company: Alberta 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 76

What type of account is Discount on Notes Payable?

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

Question 77

After accruing all interest expense due as of April 1, 2013, Bowers Company made the cash payment for the full amount due (i.e., principal and interest) to Mid-Rivers Bank. Select the answer that shows how the cash payment will affect Bowers' financial statements.

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

Question 78

How would the adjusting entry to record interest expense on December 31, 2013 affect the financial statements?

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

Question 79

The current ratio is computed as follows:

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

Question 80

Harding Company borrowed $10,000 on October 1, 2013. Harding issued a one year 6% discount note payable. The adjusting entry necessary to record accrued interest on December 31, 2013 would include a:

A)debit to Discount on Notes Payable of $150.
B)credit to Interest Payable for $150.
C)debit to Interest Expense for $150.
D)none of these.