Deck 11: Current Liabilities and Payroll Accounting

Question 1

Unearned revenues are current liabilities.

Answer 1

True

Question 2

Debt guarantees are usually disclosed as a contingent liability.

Answer 2

True

Question 3

Vacation benefits is an example of a known liability.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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 10

All expected future payments are liabilities.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Employers must keep individual earnings reports for each employee.

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

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

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 37

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

Question 38

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 39

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

Question 40

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 41

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) May depend on some future event occurring.
D) Are definitely determinable.
E) Are measurable.

Question 42

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 43

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

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

Question 44

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

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

Question 45

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 Cash, credit Unearned Revenue.
B) Debit Sales, credit Unearned Revenue.
C) Debit Unearned Revenue, credit Sales.
D) Debit Cash, credit Ticket sales payable.
E) Debit Unearned Revenue, credit Cash.

Question 46

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

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

Question 47

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

Question 48

Accounts payable are:

A) Amounts owed to suppliers for products and/or services purchased on credit.
B) Always payable within 30 days.
C) Long-term liabilities.
D) Estimated liabilities.
E) Not usually due on specific dates.

Question 49

All of the following statements regarding liabilities are true except:

A) Unearned future wages to be paid to employees should be recorded as liabilities.
B) 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.
C) Information about liabilities is more useful when the balance sheet identifies them as either current or long term.
D) Liabilities can involve uncertainty in whom to pay.
E) A liability is a probable future payment of assets or services.

Question 50

In order to be reported, liabilities must:

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

Question 51

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 52

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

Question 53

Debt guarantees are:

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

Question 54

Contingent liabilities are recorded or disclosed unless they are:

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

Question 55

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

Question 56

Contingent liabilities must be recorded if:

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

Question 57

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 be aware of an obligation but not know how much will be required to settle it.
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 can create a liability with a known amount even when the holder of the note may not be known until the maturity date.
E) A company only records liabilities when it knows whom to pay, when to pay, and how much to pay.

Question 58

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

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

Question 59

Which of the following do not apply to unearned revenues?

A) Also called collections in advance.
B) Amounts received in advance from customers for future delivery of products or services.
C) Also called prepayments.
D) Also called deferred revenues.
E) Amounts to be received in the future from customers for delivery of products or services in the current period.

Question 60

A contingent liability is:

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

Question 61

Gross pay is:

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

Question 62

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

Question 63

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) $300
C) $225
D) $75
E) $900

Question 64

Short-term notes payable:

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

Question 65

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

Question 66

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) Debit Interest Payable, $240; credit Interest Expense, $240.
B) Debit Interest Expense, $720; credit Interest Payable, $720.
C) Debit Interest Expense, $120; credit Interest Payable, $120.
D) Debit interest payable, $120; credit interest expense, $120.
E) No adjusting entry is required.

Question 67

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

Question 68

The employer should record deductions from employee pay as:

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

Question 69

The times interest earned ratio reflects:

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

Question 70

Interest expense is not:

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

Question 71

Uncertainties such as natural disasters are:

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

Question 72

Employers' responsibilities for payroll do not include:

A) Recording an expense for the employee Federal Income Tax withholding.
B) Filing Form 941, the Employer's Quarterly Federal Tax Return.
C) 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.
D) Maintaining individual earnings records for each employee.
E) Filing Form 940, the Annual Federal Unemployment Tax Return.

Question 73

Times interest earned is calculated by:

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

Question 74

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

Question 75

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? (Use 360 days a year.)

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

Question 76

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) Accounts Payable.
D) Cash.
E) Face Value.

Question 77

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) 3.33.
C) 0.30.
D) 4.0.
E) 0.83.

Question 78

A short-term note payable:

A) Is a contingent liability.
B) 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.
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 79

If the times interest earned ratio:

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

Question 80

In the accounting records of a defendant, lawsuits:

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