Deck 9: Accounting for Current Liabilities

Question 1

A liability may exist even if there is uncertainty about whom to pay, when to pay, or how much to pay.

Answer 1

True

Question 2

Trade accounts payable are amounts owed to suppliers for products or services purchased on credit.

Answer 2

True

Question 3

Accounting for contingent liabilities covers three possibilities: (1) The future event is probable and the amount cannot be reasonably estimated; (2) The future event is remote or unlikely to recur; (3) The likelihood of the liability to occur is impossible.

Answer 3

False

Question 4

A potential lawsuit claim is disclosed when the claim can be reasonably estimated and it is reasonably possible.

Question 5

The full disclosure principle requires the reporting of contingent liabilities that are reasonably possible.

Question 6

A contingent liability is a potential obligation that depends on a future event arising from a past transaction or event.

Question 7

A high value for the times interest earned ratio means that a company is a lower risk borrower.

Question 8

Obligations not due within one year or the company's operating cycle, whichever is longer, are reported as current liabilities.

Question 9

All expected future payments are liabilities.

Question 10

Unearned revenues are current liabilities.

Question 11

Sales taxes payable is debited and cash is credited when companies send sales taxes collected from customers to the government.

Question 12

Uncertainties from the development of new competing products are not contingent liabilities.

Question 13

Debt guarantees are usually disclosed as a contingent liability.

Question 14

A single liability cannot be divided between current and noncurrent liabilities.

Question 15

Experience shows that the default rate on liabilities increases sharply when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods.

Question 16

Payroll is an example of a contingent liability for the employer.

Question 17

The times interest earned ratio is calculated by dividing interest expense by income before interest expense and income taxes.

Question 18

Vacation benefits is an example of a known liability.

Question 19

A company cannot have a liability if the amount of the obligation is unknown.

Question 20

A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.

Question 21

A corporation has a $40,000 credit balance in the Income Tax Payable account. Period end information shows that the actual liability is $47,000. The company should record an entry to debit Income Tax Expense for $7,000 and credit Income Taxes Payable for $7,000.

Question 22

A note payable can be used to extend the payment due on an account payable.

Question 23

Accrued vacation benefits are a form of estimated liability for an employer.

Question 24

Even if the end of an accounting period occurs between the signing of a note payable and its maturity date, the matching principle requires that interest expense not be accrued on a note payable until the note is paid.

Question 25

Promissory notes cannot be transferred from party to party because they are nonnegotiable.

Question 26

A high merit rating for state unemployment taxes means that an employer has high employee turnover or seasonal hiring.

Question 27

A company's income before interest expense and taxes is $250,000 and its interest expense is $100,000. Its times interest earned ratio is 2.5.
Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense
Times Interest Earned Ratio = $250,000/$100,000 = 2.5

Question 28

A short-term note payable is a written promise to pay a specified amount on a definite future date within one year or the operating cycle, whichever is shorter.

Question 29

FUTA requires employers to pay a federal unemployment tax on all salary or wages paid to each employee.

Question 30

Employers can use a wage bracket withholding table to compute federal income taxes withheld from each employee's gross pay.

Question 31

Employers must keep individual earnings reports for each employee.

Question 32

The amount of federal income tax withheld from employee pay depends on the employee's annual earnings rate and the number of withholding allowances claimed by the employee.

Question 33

The Form W-2 must be given to employees before January 31 following the year covered by the Form W-2.

Question 34

The state unemployment tax rates applied to an employer are adjusted according to an employer's merit rating.

Question 35

Deposits of amounts payable to the federal government may be paid through federal depository banks.

Question 36

Payments of FUTA are made quarterly to a federal depository bank if the total amount due exceeds $500.

Question 37

Required payroll deductions include income taxes, Social Security taxes, pension and health contributions, union dues, and charitable giving.

Question 38

A known obligation of an uncertain amount that can at least be reasonably estimated is reported as an estimated liability.

Question 39

A liability is incurred when income is earned because income tax expense is created by earning income.

Question 40

Employers must pay FICA taxes twice the amount of the FICA taxes withheld from their employees.

Question 41

Interest expense is not:

A)Incurred on current liabilities.
B)Likely to stay the same when sales change.
C)A fixed expense.
D)Likely to fluctuate when sales change.
E)A factor in determining a company's borrowing risk.

Question 42

A contingent liability is:

A)Always of a specific amount.
B)A potential obligation that depends on a future event arising from a past transaction or event.
C)An obligation not requiring future payment.
D)An obligation arising from the purchase of goods or services on credit.
E)An obligation arising from a future event.

Question 43

Amounts received in advance from customers for future products or services:

A)Are revenues.
B)Increase income.
C)Are liabilities.
D)Are not allowed under GAAP.
E)Require an outlay of cash in the future.

Question 44

If a company has advance ticket sales totaling $2,000,000 for the upcoming football season, the receipt of cash would be journalized as:

A)Debit Sales, credit Unearned Revenue.
B)Debit Unearned Revenue, credit Sales.
C)Debit Cash, credit Unearned Revenue.
D)Debit Unearned Revenue, credit Cash.
E)Debit Cash, credit Revenue.

Question 45

All of the following statements regarding liabilities are true except:

A)A liability is a probable future payment of assets or services.
B)Unearned future wages to be paid to employees should be recorded as liabilities.
C)For a liability to be reported, it must be a present obligation that results from a past transaction or event, and requires a future payment of assets or services.
D)Information about liabilities is more useful when the balance sheet identifies them as either current or long term.
E)Liabilities can involve uncertainty in whom to pay.

Question 46

Times interest earned is calculated by:

A)Multiplying interest expense by income.
B)Dividing interest expense by income before interest expense.
C)Dividing income before interest expense and income taxes by interest expense.
D)Multiplying interest expense by income before interest expense.
E)Dividing income before interest expense by interest expense and income taxes.

Question 47

Obligations to be paid within one year or the company's operating cycle, whichever is longer, are:

A)Current assets.
B)Current liabilities.
C)Earned revenues.
D)Operating cycle liabilities.
E)Bills.

Question 48

Debt guarantees are:

A)Never disclosed in the financial statements.
B)Considered to be contingent liabilities.
C)A bad business practice.
D)Recorded as liabilities even though it is highly unlikely that the original debtor will default.
E)Considered to be current liabilities.

Question 49

When the number of withholding allowances claimed on Form W-4 increases, the amount of income tax withheld decreases.

Question 50

In order to be reported, liabilities must:

A)Be certain.
B)Sometimes be estimated.
C)Be for a specific amount.
D)Always have a definite date for payment.
E)Involve an outflow of cash.

Question 51

Companies with many employees rarely use a special payroll bank account from which to pay employees.

Question 52

Contingent liabilities are recorded or disclosed unless they are:

A)Probable and estimable.
B)Remote.
C)Reasonably possible.
D)Probable and not estimable.
E)Possible and estimable.

Question 53

All of the following are true of known liabilities except:

A)Include accounts payable, notes payable, and payroll.
B)Are obligations set by agreements, contracts, or laws.
C)Are measurable.
D)Are definitely determinable.
E)May depend on some future event occurring.

Question 54

When a company is obligated for sales taxes payable, it is reported as a(n):

A)Estimated liability.
B)Contingent liability.
C)Current liability.
D)Business expense.
E)Long-term liability.

Question 55

Obligations not expected to be paid within the longer of one year or the company's operating cycle are reported as:

A)Current assets.
B)Current liabilities.
C)Long-term liabilities.
D)Operating cycle liabilities.
E)Bills.

Question 56

In the accounting records of a defendant, lawsuits:

A)Are estimated liabilities.
B)Should always be recorded.
C)Should always be disclosed.
D)Should be recorded if payment for damages is probable and the amount can be reasonably estimated.
E)Should never be recorded.

Question 57

An employee earnings report is a cumulative record of each employee's hours worked, gross earnings, deductions, and net pay.

Question 58

The report that shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for every pay period is the payroll register.

Question 59

Each employee records the number of withholding allowances claimed on the withholding allowance certificate that is filed with the employer, which is the form W-4.

Question 60

The times interest earned ratio reflects:

A)A company's ability to pay its operating expenses on time.
B)A company's ability to pay interest even if sales decline.
C)A company's profitability.
D)The relation between income and debt.
E)The relation between assets and liabilities.

Question 61

Recording employee payroll deductions may involve:

A)Liabilities to the employer.
B)Liabilities to federal and state governments.
C)Expenses for state unemployment.
D)Expenses for the gross wages and salaries.
E)Expenses for the employer portion of any medical insurance.

Question 62

On November 1, Alan Company signed a 120-day, 8% note payable, with a face value of $9,000. What is the adjusting entry for the accrued interest at December 31 on the note?

A)Debit interest expense, $0; credit interest payable, $0.
B)Debit interest payable, $120; credit interest expense, $120.
C)Debit interest expense, $120; credit interest payable, $120.
D)Debit interest expense, $720; credit interest payable, $720.
E)Debit interest payable, $240; credit interest expense, $240.

Question 63

A bank that is authorized to accept deposits of amounts payable to the federal government is a:

A)Credit union.
B)FDIC insured bank.
C)Federal depository bank.
D)National bank.
E)Federal Reserve Bank.

Question 64

A company's fixed interest expense is $8,000, its income before interest expense and income taxes is $32,000. Its net income is $9,600. The company's times interest earned ratio equals:

A)0.25.
B)0.30.
C)0.83.
D)3.33.
E)4.0.

Question 65

Portia Grant is an employee who is paid monthly. For the month of January of the current year, she earned a total of $8,260. The FICA tax for social security is 6.2% and the FICA tax rate for Medicare is 1.45%. The FUTA tax rate of 0.6% and the SUTA tax rate of 5.4% are applied to the first $7,000 of an employee's pay. The amount of federal income tax withheld from her earnings was $1,325.17. What is the total amount of taxes withheld from the Portia's earnings?

A)$3,097.17
B)$2,443.21
C)$1,957.06
D)$1,722.00
E)$1,495.

Question 66

The Federal Insurance Contributions Act (FICA) requires that each employer file a:

A)W-4.
B)Form 941.
C)Form 1040.
D)Form 1099.
E)W-2.

Question 67

On December 1, Victoria Company signed a 90-day, 6% note payable, with a face value of $15,000. What amount of interest expense is accrued at December 31 on the note?

A)$0
B)$75
C)$900
D)$225
E)$300

Question 68

Trey Morgan is an employee who is paid monthly. For the month of January of the current year, he earned a total of $4,538. The FICA tax for social security is 6.2% and the FICA tax rate for Medicare is 1.45% for both the employee and the employer. The amount of federal income tax withheld from his earnings was $680.70. What is the total amount of taxes withheld from the Trey's earnings?

A)$1,375.02
B)$746.50
C)$962.06
D)$1,027.86
E)$680.

Question 69

Employers' responsibilities for payroll do not include:

A)Providing each employee with an annual report of his or her wages subject to FICA and federal income taxes along with the amount of these taxes withheld.
B)Filing Form 941, the Employer's Quarterly Federal Tax Return.
C)Filing Form 940, the Annual Federal Unemployment Tax Return.
D)Maintaining individual earnings records for each employee.
E)Recording an expense for the employee Federal Income Tax withholding.

Question 70

Portia Grant is an employee who is paid monthly. For the month of January of the current year, she earned a total of $8,260. The FICA tax for social security is 6.2% and the FICA tax rate for Medicare is 1.45%. The FUTA tax rate of .6% and the SUTA tax rate of 5.4% are applied to the first $7,000 of an employee's pay. The amount of federal income tax withheld from her earnings was $1,325.17. Her net pay for the month is:

A)$6,422.71
B)$6,246.94
C)$6,302.94
D)$5,868.94
E)$7,194.

Question 71

The employer should record deductions from employee pay as:

A)Employee receivables.
B)Payroll taxes.
C)Current liabilities.
D)Wages payable.
E)Employee payables.

Question 72

On November 1, Alan Company signed a 120-day, 8% note payable, with a face value of $9,000. What is the maturity value of the note on March 1?

A)$9,000
B)$720
C)$9,120
D)$9,720
E)$9,240

Question 73

A company's income before interest expense and income taxes is $350,000 and its interest expense is $100,000. Its times interest earned ratio is:

A)0.29
B)3.50
C)2.50
D)1.75
E)0.50

Question 74

If the times interest earned ratio:

A)Increases, then risk increases.
B)Increases, then risk decreases.
C)Is greater than 1.5, the company is in default.
D)Is less than 1.5, the company is carrying too little debt.
E)Is greater than 3.0, the company is likely carrying too much debt.

Question 75

Short-term notes payable:

A)Cannot replace an account payable.
B)Can be issued in return for money borrowed from a bank.
C)Are not negotiable.
D)Are a conditional promise to pay.
E)Rarely involve interest charges.

Question 76

An employee earned $37,000 during the year working for an employer when the maximum limit for Social Security was $117,000. The FICA tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The employee's annual FICA taxes amount is:

A)$2,294.00.
B)$536.50.
C)$2,830.50.
D)$1,757.50.
E)$8,950.50.

Question 77

Gross pay is:

A)Take-home pay.
B)Total compensation earned by an employee before any deductions.
C)Salaries after taxes are deducted.
D)Deductions withheld by an employer.
E)The amount of the paycheck.

Question 78

The Wage and Tax Statement given to each employee annually is:

A)Form 940.
B)Form 941.
C)Form 1040.
D)Form W-2.
E)Form W-4.

Question 79

The rate that a state assigns reflecting a company's stability or instability in employing workers is the:

A)FICA rate.
B)Tax withholding rate.
C)Pay rate.
D)Credit rating.
E)Merit rating.

Question 80

A company's had fixed interest expense of $5,000, its income before interest expense and income taxes is $17,000, and its net income is $9,400. The company's times interest earned ratio equals:

A)0.5.
B)1.8.
C)1.9.
D)3.4.
E)0.3.