Deck 8: Liabilities and Stockholders Equity

Question 1

The prices of bonds are quoted on bond exchanges as a percentage of the bonds' face value.

Answer 1

True

Question 2

When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture.

Answer 2

True

Question 3

Most employers are required to withhold federal unemployment taxes from employee earnings.

Answer 3

False

Question 4

Medicare taxes are withheld from an employee's pay only till the employee has earned a specific amount each year.

Question 5

A bond is simply a form of an interest-bearing note.

Question 6

The total earnings of an employee for a payroll period is referred to as gross pay.

Question 7

If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $75,200, earnings subject to social security tax are $106,800, and the tax rate is 7.5%, the employer's social security tax on the $800 gross earnings paid on the last day of the year is $60.

Question 8

For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits.

Question 9

Medicare taxes are paid only by employee.

Question 10

FICA tax is a payroll tax that is paid only by employers.

Question 11

Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs.

Question 12

The total earnings of an employee for a payroll period is referred to as the net pay.

Question 13

Liabilities that are due and payable beyond one year or paid out of noncurrent assets are termed long-term liabilities.

Question 14

FICA tax becomes a liability to the federal government at the time the employees are paid.

Question 15

Federal unemployment compensation tax becomes an employer's liability at the time the employees are paid.

Question 16

FICA tax is a payroll tax that is paid by both the employee and the employer.

Question 17

Earnings per common share is one factor that influences the decision to use debt financing or equity financing.

Question 18

During the first year of operations, employees earned vacation pay of $50,000.The vacations will be taken during the second year.The vacation pay expense should be recorded in the first year of operations.

Question 19

Federal unemployment compensation tax is a tax that is paid only by employers.

Question 20

Most employers are required to withhold a portion of the earnings of each employee for FICA tax.

Question 21

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Question 22

Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.

Question 23

If the market rate of interest is 6% and a corporation's bonds bear interest at 7%, the bonds will sell at a discount.

Question 24

If the market rate of interest is 9% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Question 25

When the market rate of interest is more than the contract rate of a bond, the bond will sell for a discount.

Question 26

Obligations that depend on future events and are based on past transactions are contingent liabilities.

Question 27

The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business.

Question 28

Paid-in capital and retained earnings are the two major categories of stockholders' equity for a corporation.

Question 29

In order to record a contingent liability, the liability must be probable and reasonably estimated.

Question 30

If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 35,000.

Question 31

Obligations that depend on past events and that are based on future transactions are contingent liabilities.

Question 32

The par value of common stock is rarely equal to its market value on the date the stock is issued.

Question 33

The main source of paid-in capital is from issuing stock.

Question 34

The issuance of common stock affects both paid-in capital and retained earnings.

Question 35

When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture.

Question 36

During the first year of operations, a company granted warranties on its products.The estimated cost of the product warranty liability at the end of the year is $12,750.The product warranty expense of $12,750 should be recorded in the year the related product sale is made.

Question 37

If the market rate of interest is 7% and a corporation's bonds bear interest at 8%, the bonds will sell at a premium.

Question 38

For accounting purposes, stated value is treated the same way as par value.

Question 39

The amount of capital paid-in by the stockholders of the corporation is called legal capital.

Question 40

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

Question 41

Cash dividends are not paid on shares of treasury stock.

Question 42

If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $13,500.

Question 43

If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 33,000.

Question 44

A corporation has 10,000 shares of $100 par value stock outstanding.If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 2,000.

Question 45

The declaration of a cash dividend decreases a corporation's stockholders' equity and decreases its assets.

Question 46

Treasury stock is a contra-equity account.

Question 47

A 10% stock dividend will increase the book value per share.

Question 48

Before a stock dividend can be declared or paid, there must be sufficient cash.

Question 49

A corporation has 10,000 shares of $100 par value stock outstanding.If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be 40,000.

Question 50

One of the conditions for paying a cash dividend is sufficient retained earnings.

Question 51

A corporation has 10,000 shares of $100 par value stock outstanding that has a current market value of $160.If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $32.

Question 52

The declaration of a stock dividend decreases a corporation's stockholders' equity and decreases its liabilities.

Question 53

If 50,000 shares are authorized, 35,000 shares are issued, and 1,000 shares are reacquired, the number of outstanding shares is 36,000.

Question 54

The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split.

Question 55

A corporation has 10,000 shares outstanding of $25 par value and a current market value of $100 per share.If the corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20.

Question 56

The declaration of a cash dividend decreases a corporation's stockholders' equity and increases its liabilities.

Question 57

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

Question 58

The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares.

Question 59

One of the conditions for paying a cash dividend is formal action by the board of directors.

Question 60

If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are reacquired, the number of outstanding shares is 19,500.

Question 61

Liabilities due beyond one year are classified as _____.

A) current liabilities
B) long-term liabilities
C) contingent liabilities
D) fixed liabilities

Question 62

The debt ratio measures the percent of the company's assets financed by debt.

Question 63

Bonds payable due in 2020 are reported on the balance sheet as long-term liabilities.

Question 64

The following information is available for Amanda Co.for the current year. $$\begin{array} { l r } \text { Common shares outstanding } & 150,000 \\\text { Preferred stock dividend declared and paid } & \$ 90,000 \\\text { Net income } & \$ 300,000\end{array}$$ ? Calculate the company's earnings per share.

A) $1.10
B) $2.60
C) $2.00
D) $1.40

Question 65

Prior to the last weekly payroll period of the calendar year, the cumulative earnings of employees A and B are $106,150 and $91,000, respectively.Their earnings for the last completed payroll period of the year are $850 each.Social security tax rate is 6% on maximum of $106,800.All earnings are subject to Medicare tax of 1.5%.Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period on the two salary amounts of $850 each?

A) $127.50
B) $115.50
C) $76.50
D) $63.75

Question 66

If paid-in capital in excess of par--preferred stock is $80,000, preferred stock is $500,000, paid-in capital in excess of par-common stock is $50,000, common stock is $1,000,000, and retained earnings is $230,000, the total stockholders' equity is $1,860,000.

Question 67

Which of the following transactions decreases the profitability of a company?

A) Issuing a note payable
B) Purchasing treasury stock
C) Declaring cash dividend
D) Recording payroll tax expense

Question 68

An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during a week.Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings.What is the net pay for the employee?

A) $798.85
B) $873.77
C) $953.16
D) $1,223.77

Question 69

An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week.Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $300; cumulative earnings for year prior to current week, $90,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings.What is the net pay for the employee?

A) $1,147.95
B) $1,059.75
C) $1,470.00
D) $1,359.75

Question 70

As interest is recorded on an interest-bearing note, the Interest Expense account is:

A) decreased; the Interest Payable account is increased.
B) increased; the Interest Payable account is increased.
C) increased; the Notes Payable account is decreased.
D) increased; the Notes Payable account is increased.

Question 71

Joe Co.paid a notes payable of $6,000 with interest.As a result of this transaction, the company's:

A) earnings per share increases.
B) earnings per share decreases.
C) net assets do not change.
D) net assets increase.

Question 72

An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during a week.Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings.What is the gross pay for the employee?

A) $798.85
B) $873.77
C) $1,242.00
D) $1,323.00

Question 73

Current liabilities are:

A) due but not receivable for more than one year.
B) due but not payable for more than one year.
C) due and receivable within one year.
D) due and payable within one year.

Question 74

ABC Co.has a gross payroll of $18,000.The FICA tax rate is 7.65% of the gross payroll, and the federal and state withholding are $1,600 and $963 respectively.On recording the payroll tax liability, net assets of the company:

A) increase by $13,940.
B) decrease by $14,060.
C) increase by $21,940.
D) decrease by $5,485.

Question 75

Where is interest expense listed on the income statement?

A) Other expense section
B) Cost of merchandise sold
C) Operating expenses
D) Interest expense is listed on the balance sheet, not the income statement.

Question 76

For the year that just ended, a company reports net income of $1,500,000.There are 500,000 shares authorized, 300,000 shares issued, and 250,000 shares of common stock outstanding.What is the earnings per share?

A) $5.00
B) $2.50
C) $6.00
D) $3.00

Question 77

Which of the following will be classified as a current liability?

A) Two-year notes payable
B) Bonds payable
C) Mortgage loan
D) Unearned rent

Question 78

On March 15, Silver Co.issued a $80,000, 5%, 90-day note payable to Gold Co.How much will Silver Co.have to pay at maturity? (Assume 360 days in a year)

A) $84,000
B) $79,000
C) $80,000
D) $81,000

Question 79

The FICA tax withheld from employees contributes to:

A) federal and state unemployment compensation.
B) Social Security and federal unemployment compensation.
C) Social Security and Medicare.
D) Medicare only

Question 80

Rico Inc.issues a 90-day, 4%, $3,000 note on account.This transaction:

A) increases net assets and earnings per share of the company.
B) decreases net assets and increases earnings per share of the company.
C) has no effect on net assets and earnings per share of the company.
D) decreases net assets and earnings per share of the company.