Deck 9: Reporting and Analyzing Current Liabilities

Question 1

A liability does not exist if there is any uncertainty about whom to pay,when to pay,or how much to pay.

Answer 1

False

Question 2

The Orlando Magic received $6 million cash in advance season ticket sales.Prior to the beginning of the basketball season,these sales are recorded as a credit to unearned season ticket revenue.

Answer 2

True

Question 3

Unearned revenues are listed on the balance sheet under liabilities.

Answer 3

True

Question 4

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

Question 5

Current liabilities are obligations not due within one year or the company's operating cycle,whichever is longer.

Question 6

When there is little uncertainty surrounding current liabilities,both GAAP and IFRS require companies to record them in a similar manner.

Question 7

Uncertainties from the development of new competing products are contingent liabilities.

Question 8

A company can have a liability even if the amount of the obligation is unknown.

Question 9

Payroll taxes are considered to be contingent liabilities.

Question 10

When companies pay the government collected sales tax,sales taxes payable is credited and cash is debited.

Question 11

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

Question 12

Debt guarantees are not disclosed because the guarantor is not the primary debtor.

Question 13

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.

Question 14

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

Question 15

Known liabilities are obligations set by agreements,contracts,or laws and are measurable and definitely determinable.

Question 16

A single liability can be divided between current and noncurrent liabilities.

Question 17

A lawsuit is an example of a contingent liability for the defendant.

Question 18

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

Question 19

All expected future payments are liabilities.

Question 20

Unearned revenue is another name for sales.

Question 21

A high merit rating means that an employer has high employee turnover or seasonal hiring.

Question 22

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 longer.

Question 23

Employers must pay FICA taxes that are equal to the amount being withheld from their employees.

Question 24

Promissory notes are nonnegotiable,which means they cannot be transferred from party to party.

Question 25

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

Question 26

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

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 equal to .4.

Question 28

Social security payments are made up of Social Security taxes and Medicare taxes.

Question 29

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

Question 30

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

Question 31

Gross pay is also called take-home pay.

Question 32

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

Question 33

FUTA requires employers to pay a federal unemployment tax on the first $7,000 in salary or wages paid to each employee.

Question 34

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

Question 35

Times interest earned can be calculated by multiplying income by the interest rate on a company's debt.

Question 36

When the times interest earned ratio declines,the likelihood of default on liabilities increases.

Question 37

FUTA is the abbreviation for social security taxes.

Question 38

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

Question 39

The amount of federal income tax withheld is based on the employee's annual earnings rate plus the number of withholding allowances claimed by the employee.

Question 40

An estimated liability is a known obligation of an uncertain amount that can at least be reasonably estimated.

Question 41

Payments of FUTA are made quarterly to a federal depository bank if the total amount due exceeds $1,000.

Question 42

A corporation has a $42,000 credit balance in the Income Tax Payable account.Period-end information shows that the actual liability is $50,000.The company should record an entry to debit Income Tax Expense for $8,000 and credit Income Taxes Payable for $8,000.

Question 43

Payroll is usually paid with a check or with the use of an electronic funds transfer.

Question 44

Employers must keep certain payroll records,including individual earnings reports for each employee.

Question 45

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

Question 46

Federal depository banks are authorized to accept deposits of amounts payable to the federal government.

Question 47

Vacation benefits are a form of estimated liabilities for an employer.

Question 48

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 49

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

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

Question 50

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

Question 51

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

Question 52

Obligations due to be paid within one year or within 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 53

A company performed warranty repair work for a customer that cost $1,000.The journal entry to record the work should be a debit of $1,000 to Warranty Expense and a credit of $1,000 to Estimated Warranty Liability.

Question 54

When the number of withholding allowances increases,the amount of income tax withheld increases.

Question 55

A payroll register is a cumulative record of an employee's hours worked,gross earnings,deductions,and net pay.

Question 56

A payroll register usually shows the pay period dates,hours worked,gross pay,deductions,and net pay of each employee for every pay period.

Question 57

Accounts payable:

A)Are amounts owed to suppliers for products and/or services purchased on credit.
B)Are long-term liabilities.
C)Are estimated liabilities.
D)Do not include specific due dates.
E)Must be paid within 30 days.

Question 58

Liabilities:

A)Must be certain.
B)Must sometimes be estimated.
C)Must be for a specific amount.
D)Must always have a definite date for payment.
E)Must involve an outflow of cash.

Question 59

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

Question 60

Employers are required to pay state and federal payroll taxes.

Question 61

The employer should record payroll deductions as:

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

Question 62

Which of the following is a true statement regarding the treatment of accounts payable,sales tax payable,and unearned revenues?

A)Both GAAP and IFRS treat these accounts as estimated liabilities.
B)GAAP treats them as estimated liabilities,while IFRS treats these accounts as contingent liabilities.
C)IFRS treats them as estimated liabilities,while GAAP treats theses accounts as contingent liabilities.
D)Both GAAP and IFRS treat these accounts as known liabilities.
E)IFRS treats them as known liabilities,while GAAP treats these accounts as contingent liabilities.

Question 63

Advance ticket sales totaling $6,000,000 cash would be recognized as follows:

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 Payable.

Question 64

Unearned revenue is initially recognized with a:

A)Credit to unearned revenue.
B)Credit to revenue.
C)Debit to revenue payable.
D)Debit to revenue.
E)Debit to unearned revenue.

Question 65

A short-term note payable:

A)Is a written promise to pay a specified amount on a definite future date within one year or the company's operating cycle,whichever is longer.
B)Is a contingent liability.
C)Is an estimated liability.
D)Is not a liability until the due date.
E)Cannot be used to extend the payment period for an account payable.

Question 66

The difference between the amount received from issuing a note payable and the amount repaid is referred to as:

A)Interest
B)Principle
C)Face value
D)Cash
E)Accounts payable

Question 67

On December 1,Martin Company signed a $5,000,3-month,6% note payable,with the principle plus interest due on March 1 of the following year.What amount of interest expense is accrued at December 31 on the note?

A)$0
B)$25
C)$50
D)$75
E)$300

Question 68

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 69

The times interest earned computation is:

A)(Net income + Interest expense + Income taxes)/Interest expense.
B)(Net income + Interest expense - Income taxes)/Interest expense.
C)(Net income - Interest expense - Income taxes)/Interest expense.
D)(Net income - Interest expense + Income taxes)/Interest expense.
E)Interest expense/(Net income + Interest expense + Income taxes expense).

Question 70

Miller Company has a times interest earned ratio of 5.Sales and variable expenses were $57,290 and $40,105 respectively.Compute the company's fixed interest expense.

A)$17,185
B)$3,437
C)$11,458
D)$8,021
E)$85,925

Question 71

A company had a fixed interest expense of $6,000,its income before interest expense and any income taxes was $18,000 and its net income was $8,400.The company's times interest earned ratio is equal to

A)0.33
B)0.71
C)1.40
D)3.00
E)12,000

Question 72

The times interest earned ratio is a measure of:

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

Question 73

A contingent liability:

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

Question 74

Times interest earned is calculated by:

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

Question 75

If the times interest ratio:

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

Question 76

Sales taxes payable:

A)Is an estimated liability.
B)Is a contingent liability.
C)Is a current liability for retailers.
D)Is a business expense.
E)Is a long-term liability.

Question 77

Uncertainties such as natural disasters that could happen in the future:

A)Are not contingent liabilities because they are future events not arising out of past transactions or events.
B)Are contingent liabilities because they are future events arising from past transactions or events.
C)Should be disclosed because of their usefulness to financial statements.
D)Are estimated liabilities because the amounts are uncertain.
E)Arise out of transactions such as debt guarantees.

Question 78

FICA taxes include:

A)Social Security taxes
B)Charitable giving
C)Employee income taxes
D)Unemployment taxes
E)Federal taxes

Question 79

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 80

Tree Frog Company is organized as a LLC and does not pay income taxes.The company has fixed interest expense of $5,750,sales of $253,000,and variable expenses of $189,750.What is the company's times interest earned ratio?

A)44
B)33
C)11
D)10
E)$63,250