Deck 9: Reporting and Analyzing Current Liabilities

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Unearned revenue is another name for sales.

Question 5

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

Question 6

All expected future payments are liabilities.

Question 7

Payroll taxes are considered to be contingent liabilities.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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.

Question 13

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

Question 14

Accounting for contingent liabilities covers three categories.(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 15

Unearned revenues are the same as liabilities.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

FUTA is the abbreviation for social security taxes.

Question 23

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

Question 24

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

Question 25

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 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

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 28

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

Question 29

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 30

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

Question 31

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

Question 32

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 33

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

Question 34

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

Question 35

Gross pay is also called take-home pay.

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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

Question 43

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

Question 44

Income tax liabilities are the same whether calculated by tax accounting methods or by financial accounting methods.

Question 45

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

Question 46

Employers are required to pay local,state and federal payroll taxes.

Question 47

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

Question 48

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

Question 49

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 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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 56

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

Question 57

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 58

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 59

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 60

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 61

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 62

Uncertainties such as natural disasters:

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 63

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 64

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 even if sales decline
C)A company's profitability
D)The relation between income and debt
E)The relation between assets and liabilities

Question 65

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

Question 66

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 67

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 68

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 69

Most employees and employers are required to pay:

A)Local payroll taxes
B)State payroll taxes
C)Federal payroll taxes
D)Both B and C only
E)Local,state and federal payroll taxes

Question 70

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 71

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 72

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 73

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 74

Which of the following is a true statement?

A)GAAP and IFRS treat accounts payable,sales taxes payable and unearned revenues in a similar manner as estimated liabilities
B)GAAP treats accounts payable,sales taxes payable and unearned revenues as estimated liabilities while IFRS treats them as contingent liabilities.
C)IFRS treats accounts payable,sales taxes payable and unearned revenues as estimated liabilities while GAAP treats them as contingent liabilities.
D)GAAP and IFRS treat accounts payable,sales taxes payable and unearned revenues in a similar manner as determinable liabilities
E)None of the statements above are true statements

Question 75

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 76

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 equals to

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

Question 77

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 78

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 79

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 80

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