Deck 9: Accounting for Current Liabilities

Question 1

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

Answer 1

True

Question 2

A potential lawsuit claim is disclosed in the notes when the claim cannot be reasonably estimated and it is reasonably possible.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Unearned revenues are amounts received in advance from customers for future products or services.

Question 6

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

Question 7

Sales Taxes Payable is debited and Cash is credited when companies send sales taxes collected from customers to the government.

Question 8

All expected future payments are liabilities.

Question 9

Contingent liabilities that are reasonably possible are disclosed in the notes.

Question 10

The risk of a company not being able to pay its 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 11

A contingent liability is a potential obligation that is based on uncertainties surrounding future technologies and natural disasters.

Question 12

Debt guarantees are usually disclosed in the financial statement notes as a contingent liability.

Question 13

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

Question 14

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

Question 15

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

Question 16

Vacation benefits is an example of a known liability.

Question 17

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

Question 18

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

Question 19

A liability cannot be divided between current and noncurrent liabilities.

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

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

Question 22

FUTA requires employers to pay a federal unemployment tax on the first $1 million in salary or wages paid to each employee.

Question 23

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 24

A short-term note payable is a written promise to pay a specified amount on a stated future date within five years or the operating cycle,whichever is more reasonable.

Question 25

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

Question 26

Employers keep employee earnings reports which include a cumulative record of an employee's hours worked,gross earnings,deductions,and net pay.

Question 27

Required payroll deductions include pension and health contributions,union dues,and charitable giving.

Question 28

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

Question 29

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

Question 30

A company can replace an overdue account payable with a note payable.

Question 31

The amount of FICA tax that employers must pay is exactly twice the amount of the FICA taxes withheld from their employees.

Question 32

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.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

A note payable cannot be sold or transferred under any circumstance.

Question 38

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

Question 39

If the end of an accounting period occurs between the signing of a note payable and its maturity date,interest expense should not be accrued until the note is paid.

Question 40

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

Question 41

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 42

Contingent liabilities must be recorded if:

A)The future event is probable and the amount owed can be reasonably estimated.
B)The future event is remote.
C)The future event is reasonably possible but not estimable.
D)The amount owed cannot be reasonably estimated.
E)The future event is probable but not estimable.

Question 43

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

Question 44

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 45

All of the following are true of known liabilities except:

A)Include accounts payable,notes payable,and payroll.
B)Can arise from agreements or contracts.
C)Are measurable.
D)Can arise form laws.
E)May depend on some future event occurring.

Question 46

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

Question 47

Contingent liabilities are recorded or disclosed unless they are:

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

Question 48

Which of the following do not apply to unearned revenues?

A)May also be called deferred revenues.
B)Amounts received in advance from customers for future delivery of products or services.
C)Gift cards are an example.
D)Result from prepayments for concert tickets.
E)Amounts to be received in the future from customers for delivery of products or services in the current period.

Question 49

All of the following statements regarding liabilities are true except:

A)A liability is a probable future payment of assets or services.
B)Potential 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 50

All of the following statements regarding uncertainty in liabilities are true except:

A)Liabilities can involve uncertainty in whom to pay.
B)A company can create a liability with a known amount even when the holder of the note may not be known until the maturity date.
C)A company can have an obligation of a known amount to a known creditor but not know when it must be paid.
D)A company only records liabilities when it knows whom to pay,when to pay,and how much to pay.Without all three,a liability cannot be recorded.
E)A company can be aware of an obligation but not know how much will be required to settle it.

Question 51

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 52

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 an unearned revenue.

Question 53

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 54

Accounts payable are:

A)Amounts owed to suppliers for products and/or services purchased on credit.
B)Amounts received in advance from customers for future services.
C)Estimated liabilities.
D)Not usually due on specific dates.
E)Always payable within 30 days.

Question 55

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 56

Sales taxes payable is reported as a(n):

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

Question 57

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 58

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

Question 59

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 Ticket sales payable.

Question 60

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 61

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 62

Times interest earned is calculated by:

A)Multiplying interest expense by income.
B)Dividing interest expense by income before depreciation and 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 63

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

A)Interest.
B)Principal.
C)Face Value.
D)Cash.
E)Accounts Payable.

Question 64

On November 1,Alan Company signed a 120-day,8% note payable,with a face value of $9,000.What is the maturity value (principal plus interest)of the note on March 1? (Use 360 days a year.)

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

Question 65

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 expense.
C)A company's profitability.
D)The relation between income and assets.
E)The relation between assets and liabilities.

Question 66

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 67

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 68

A short-term note payable:

A)Is a written promise to pay a specified amount on a stated 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 69

The correct 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

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 71

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 the employee Federal Income Tax withholding as a debit to the Federal Income Tax Expense account.

Question 72

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? (Use 360 days a year.)

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

Question 73

On November 1,Alan Company signed a 120-day,8% note payable,with a face value of $9,000.Alan made the appropriate year-end accrual.What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.)

A)Debit Notes Payable $9,000; debit Interest Payable $120; credit Cash $9,120.
B)Debit Cash $9,240; credit Notes Payable $9,240.
C)Debit Notes Payable $9,240; credit Interest Payable $120; credit Interest Expense $120; credit Cash $9,000.
D)Debit Notes Payable $9,000; debit Interest Payable $120; debit Interest Expense $120; credit Cash $9,240.
E)Debit Notes Payable $9,000; debit Interest Expense $240; credit Cash $9,240.

Question 74

Interest expense is not:

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

Question 75

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? (Use 360 days a year.)

A)No adjusting entry is required.
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 76

A company's 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 77

Uncertainties such as natural disasters are:

A)Not contingent liabilities because they are future events not arising from past transactions or events.
B)Contingent liabilities because they are future events arising from past transactions or events.
C)Disclosed because of their usefulness to financial statements.
D)Estimated liabilities because the amounts are uncertain.
E)Reported in the same way as debt guarantees.

Question 78

In the accounting records of a defendant,lawsuits:

A)Are known 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 79

A company had interest expense of $5,000,income before interest expense and income taxes of $17,000,and net income of $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.

Question 80

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