Deck 9: Accounting for Current Liabilities and Payroll

Question 1

If a company is in a region in which floods or earthquakes are deemed to be possible, the company should record a contingent liability.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Recording an adjustment for product warranties is a claims exchange transaction.

Answer 3

True

Question 4

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.

Question 5

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 6

Employers must withhold unemployment taxes from employee salaries.

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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 12

At the end of Year 1, Durango Company recorded an adjustment 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 13

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

Question 14

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

Question 15

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

Question 16

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 17

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

Question 18

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

Question 19

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 20

Vacation pay is considered a contingent liability.

Question 21

On October 1, Year 1, Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank. The note had an 8% discount rate and had a one-year term to maturity. On December 31, Year 1, Harrison should accrue interest expense in the amount of $1,920.

Question 22

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 23

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 24

What is (are)the term(s)used to describe the party who borrows money as evidenced by a note payable?

A)Lender
B)Payee
C)Issuer
D)Issuer and lender

Question 25

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

Question 26

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 27

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 28

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 29

On October 1, Year 1, Harrison Company borrowed money by issuing a $24,000 face value discount note to its bank. The note had an 8% discount rate and had a one-year term to maturity. The amount of cash that Harrison received on that date was $22,080.

Question 30

Houston Company borrowed $20,000 from Dallas Company 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 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

Question 31

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

Question 32

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

Question 33

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 adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements?

A)Decrease assets and decrease retained earnings by $2,000
B)Increase liabilities and decrease stockholders' equity by $2,000
C)Increase liabilities and decrease stockholders' equity by $1,600
D)Decrease stockholders' equity and increase liabilities by $4,800

Question 34

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

Question 35

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 36

Yang Company sold merchandise for $4,000. The event is subject to a state sales tax of 9%. Based on this information, Yang would be required to

A)Recognize sales revenue on $4,360.
B)Recognize sales tax liability of $360.
C)Recognize sales tax expense of $360.
D)Recognize sales revenue of $3,640.

Question 37

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 38

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

Question 39

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 40

Issuing a note payable is a(n):

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

Question 41

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 42

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 43

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 Year 1 financial statements?

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

Question 44

Which of the following shows how remitting (paying)sales tax will affect the financial statements of the company making the payment?

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

Question 45

Which of the following shows how paying off a warranty obligation will affect a company's financial statements?

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

Question 46

Wilson Company earned $4,000 of cash sales. Sales tax is 6%. Which of the following shows how this event would affect the company's financial statements (ignore the effects of cost of goods sold)?

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

Question 47

Yang Company paid $360 cash to settle its sales tax liability. This event will

A)Decrease assets and increase liabilities
B)Increase assets and decrease liabilities
C)Decrease assets and liabilities
D)Increase assets and liabilities

Question 48

Yang Company sold merchandise for $10,000 cash. The event is subject to a state sales tax of 9%. Recognizing the sale will require Yang to

A)increase revenue.
B)increase assets.
C)increase liabilities.
D)All of the answers are correct.

Question 49

Star Company has a contingent liability that has a likelihood of actual occurrence that is classified as probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Star is required to

A)recognize a liability only.
B)recognize an expense only.
C)recognize a liability and an expense in its financial statements.
D)disclose but not recognize the liability or the expense.

Question 50

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 51

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 financial statements?

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

Question 52

During Year 1, its first year of operations, Benitez Company 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 balance of $11,000 at the end of Year 1.
D)All of these answer choices are correct.

Question 53

Taylor Tools has sales of $400,000 in Year 1. Taylor warrants its products and estimates warranty expense to be 4% of sales. Which of the following shows how the year-end adjusting entry would affect the company's assets, liabilities, and cash flow from operating activities?

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

Question 54

The adjusting entry required to recognize warranty expense will cause

A)assets and stockholders' equity to increase.
B)liabilities to decrease and stockholders' equity to increase.
C)assets and liabilities to decrease.
D)liabilities to increase and stockholders' equity to decrease.

Question 55

Extra Supplies had sales of $240,000 in Year 1. Extra warrants its products and estimates warranty expense to be 3% of sales. Which of the following shows how the year-end adjusting entry would affect the company's assets, liabilities, and stockholders' equity?

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

Question 56

Homer Security Systems experienced an event that had the following effects on its financial statements. Which of the following events would have caused these effects?

A)Recognizing a contingent liability that has a remote chance of occurring
B)Recognizing a contingent liability that has a reasonably possible chance of occurring but is not estimable
C)Recognizing a contingent liability that has a probable chance of occurring and is estimable
D)All of the answers describe events that could have caused the effects shown in the financial statements model.

Question 57

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 reflects the effect of the year-end adjustment to record estimated warranty expense?

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

Question 58

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 59

According to GAAP a contingent liability can be classified as

A)probable and estimable.
B)reasonably possible, or probable but not estimable.
C)remote.
D)All of the answers describe classifications of contingent liabilities.

Question 60

GrayCo has initiated a lawsuit against FinCo for a copyright violation. Negotiations between the lawyers representing the two companies suggest that it is probable that GrayCo will win the case and will collect a $2,000,000 settlement fee. Generally Accepted Accounting Principles

A)require FinCo to recognize a $2,000,000 contingent liability but does not permit GrayCo to recognize a $2,000,000 contingent asset.
B)require FinCo to recognize a $2,000,000 contingent liability and GrayCo to recognize a $2,000,000 contingent asset.
C)require only FinCo to disclose the suit but does not require the company to show the amount of the settlement as a liability.
D)require neither FinCo nor GrayCo to disclose this information in their financial statements.

Question 61

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)0.66 to 1

Question 62

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 63

Tom Toys has sales of $250,000 in Year 1. Tom warrants its products and estimates warranty expense to be 2% of sales. Which of the following shows how the year end adjusting entry for warranty expense would affect the company's financial statements?

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

Question 64

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 65

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 66

Mr. Ortega earns a monthly salary of $4,000. Based on Mr. Ortega's Form W-4, the tax tables require withholding $450 per month for income taxes. Mr. Ortega has authorized his employer to deduct $190 per month for medical insurance and $15 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an Unemployment tax rate of 6% on the first $7,000 of income. Based on this information, Mr. Ortega's net pay for January 31, Year 1 is

A)$3,000.
B)$2,805.
C)$4,000.
D)$3,045.

Question 67

Which of the following is responsible for paying unemployment tax?

A)Employee only
B)Employer only
C)Federal government
D)Both employee and employer

Question 68

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 had the following two transactions: 1)Issued common stock for $10,000 cash
2)Received a $6,000 cash payment for its accounts receivable
After the two transactions are 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 69

Which of the following would not likely appear on a classified balance sheet?

A)Current assets
B)Current retained earnings
C)Long-term liabilities
D)Long-term assets

Question 70

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 71

Which of the following items would typically 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 72

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 73

Which of the following is responsible for paying social security (FICA)tax?

A)Employee only
B)Employer only
C)Federal government
D)Both employee and employer

Question 74

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 75

The following information is taken from the balance sheet of Menendez Company on January 1, Year 1: On January 1, Year 1 Menendez Company paid $2,000 cash to reduce its accounts payable.
How will this transaction affect the current ratio?

A)It will 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 76

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 77

The following information is taken from the balance sheet of Menendez Company on January 1, Year 1: On January 2, Year 1, the company earned revenue on account of $8,000.
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 78

Mr. Ortega earns a monthly salary of $4,000. Based on Mr. Ortega's Form W-4, the tax tables require withholding $450 per month for income taxes. Mr. Ortega has authorized his employer to deduct $190 per month for medical insurance and $15 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an Unemployment tax rate of 6% on the first $7,000 of income. Which of the following shows how recognizing the accrued payroll tax expense would affect the employer's financial statements?

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

Question 79

Which of the following would not likely appear in the current liabilities section of a classified balance sheet?

A)Accounts payable
B)Salaries payable
C)Bonds payable
D)Taxes payable

Question 80

Mr. Ortega earns a monthly salary of $4,000. Based on Mr. Ortega's Form W-4, the tax tables require withholding $450 per month for income taxes. Mr. Ortega has authorized his employer to deduct $190 per month for medical insurance and $15 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an Unemployment tax rate of 6% on the first $7,000 of income. Based on this information, the total amount of accrued payroll tax expense incurred by Mr. Ortega's employer for January is

A)$610.
B)$300.
C)$540.
D)$810.