Deck 8: Liabilities and Stockholders Equity

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

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 6

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

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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 19

Medicare taxes are paid by both the employee and the employer.

Question 20

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

Question 21

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 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

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 40

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

Question 41

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

Question 42

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 43

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

Question 44

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 45

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

Question 46

Treasury stock is a contra-equity account.

Question 47

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

Question 48

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 49

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

Question 50

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 51

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 52

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

Question 53

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

Question 54

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 55

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 56

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

Question 57

Cash dividends are not paid on shares of treasury stock.

Question 58

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

Question 59

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 60

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 61

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 62

Income tax based on taxable income may differ from the income tax based on "Income before Taxes" on the income statement. Which of the following could be a reason for this difference?

A) A business may use MACRS depreciation for tax reporting and straight-line for financial reporting purposes.
B) Tax payments may not equal the tax due.
C) Taxable income is based on Generally Accepted Accounting Principles.
D) All of these could be reasons for the difference.

Question 63

The total earnings of an employee during a payroll period, including bonuses and overtime pay, is referred to as:

A) take-home pay.
B) pay net of taxes.
C) net pay.
D) gross pay.

Question 64

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 65

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 66

What options does a business have while financing its operations?

A) Debt financing
B) Equity financing
C) Asset financing
D) Both debt financing and equity financing

Question 67

Gross earnings for a payroll period less payroll deductions are referred to as:

A) overtime pay.
B) bonus pay.
C) gross pay.
D) net pay.

Question 68

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 69

What are current liabilities?

A) Liabilities that are due and payable within two years.
B) Liabilities that are due and to be paid out of current assets within one year.
C) Liabilities that are due but not payable for more than one year.
D) Liabilities that are payable if a possible subsequent event occurs.

Question 70

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

Question 71

A current liability is a debt that is reasonably expected to be paid:

A) between 6 months and 18 months.
B) out of currently recognized revenues.
C) within one year.
D) out of cash currently on hand.

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 net pay for the employee?

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

Question 73

The cost of a product warranty should be included as an expense in the:

A) period the cash is collected for a product sold on account.
B) future period when the cost of repairing the product is paid.
C) period of the sale of the product.
D) future period when the product is repaired or replaced.

Question 74

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 75

On June 5, Glover Co. issued a $60,000, 6%, 120-day note payable to Jones Co. How much will Glover Co. have to pay at maturity? (Assume 360 days in a year)

A) $63,600
B) $58,800
C) $60,000
D) $61,200

Question 76

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 77

Which of the following is a characteristic of deferred income tax payable?

A) Deferred income tax payable is often generated due to timing differences.
B) Deferred income tax payable may be either a current or long-term liability
C) Deferred income tax payable represents the deferred payment of taxes to later years through tax planning techniques.
D) All of these are characteristics of deferred income tax payable.

Question 78

When are contingent liabilities required to be recorded?

A) When the liability is probable
B) When the amount is reasonably estimable
C) When the liability becomes legally enforceable
D) When the liability is probable reasonably estimable.

Question 79

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 80

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