Deck 11: Current Liabilities and Payroll Accounting

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

All expected future payments are liabilities.

Question 5

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 6

Debt guarantees are not usually disclosed as a contingent liability.

Question 7

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

Question 8

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

Question 9

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

Question 10

Sales taxes payable is credited and cash is debited when companies send sales taxes collected from customers to the government.

Question 11

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

Question 12

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

Question 13

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

Question 14

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 .4.

Question 15

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

Question 16

Unearned revenues are liabilities.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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 25

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.

Question 26

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 27

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 28

Known liabilities:

A) Include accounts payable, notes payable, and payroll.
B) Are obligations set by agreements, contracts, or laws.
C) Are measurable.
D) Are definitely determinable.
E) All of these.

Question 29

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

Question 30

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 31

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 32

Salary expense represents net pay which is pay after deductions for contributions and other deductions.

Question 33

Since income tax expense is created by earning income, a liability is incurred when income is earned.

Question 34

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

A) Liabilities can involve uncertainty in whom to pay.
B) A company can create a known amount when issuing a note even though 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.
E) A company can be aware of an obligation but not know how much will be required to settle it.

Question 35

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 36

A contingent liability:

A) Is always of a specific amount.
B) Is a potential obligation that depends on a future event arising from 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 37

Unearned revenues are:

A) Also called deferred revenues.
B) Amounts received in advance from customers for future delivery of products or services.
C) Also called collections in advance.
D) Also called prepayments.
E) All of these.

Question 38

Obligations due 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 39

All of the following statements regarding liabilities are except:

A) A liability is a probable future payment of assets or services.
B) Unearned 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) All of these are True.

Question 40

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 41

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

Question 42

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 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 43

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 44

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 45

On December 1, Martin Company signed a 90-day, 6% note payable, with a face value of $5,000. What amount of interest expense is accrued at December 31 on the note?

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

Question 46

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 47

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 48

On November 1, Carter Company signed a 120-day, 10% note payable, with a face value of $9,000. What is the maturity value of the note on March 1?

A) $9,000
B) $9,100
C) $9,150
D) $9,200
E) $9,300

Question 49

Fixed expenses:

A) Create risk.
B) Can be an advantage when a company is growing.
C) Include interest expense.
D) Do not fluctuate with changes in sales.
E) All of these.

Question 50

Uncertainties such as natural disasters:

A) Are not contingent liabilities because they are future events not arising from 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 51

On November 1, Carter Company signed a 120-day, 10% note payable, with a face value of $9,000. What is the adjusting entry for the accrued interest at December 31 on the note?

A) Debit interest expense, $0; credit interest payable, $0.
B) Debit interest expense, $100; credit interest payable, $100.
C) Debit interest expense, $150; credit interest payable, $150.
D) Debit interest expense, $200; credit interest payable, $200.
E) Debit interest expense, $300; credit interest payable, $300.

Question 52

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:

A) 0.40
B) 2.50
C) 1:2.5
D) 2.5:1
E) 0.50

Question 53

On November 1, Carter Company signed a 120-day, 10% note payable, with a face value of $9,000. Carter 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?

A) Debit Notes Payable $9,000; debit Interest Payable $150; credit Cash $9,150.
B) Debit Cash $9,300; credit Notes Payable $9,300.
C) Debit Notes Payable $9,300; credit Interest Payable $150; credit Interest Expense $150; credit Cash $9,000.
D) Debit Notes Payable $9,000; debit Interest Payable $150; debit Interest Expense $150; credit Cash $9,300.
E) Debit Notes Payable $9,000; debit Interest Expense $300; credit Cash $9,300.

Question 54

Debt guarantees:

A) Are never disclosed in the financial statements.
B) Are considered to be a contingent liability.
C) Are a bad business practice.
D) Are recorded as a liability even though it is highly unlikely that the original debtor will default.
E) All of these.

Question 55

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

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

Question 56

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 possible.
D) The amount owed cannot be reasonably estimated.
E) All of these.

Question 57

Short-term notes payable:

A) Can replace an account payable.
B) Can be issued in return for money borrowed from a bank.
C) Are negotiable.
D) Are an unconditional promise to pay.
E) All of these.

Question 58

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 59

Contingent liabilities can be:

A) Probable.
B) Remote.
C) Possible.
D) Estimable.
E) All of these.

Question 60

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 3.0, the company is likely carrying too much debt.

Question 61

The annual Federal Unemployment Tax Return is:

A) Form 940.
B) Form 1099.
C) Form 104.
D) Form W-2.
E) Form W-4.

Question 62

The current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%. Both taxes are applied to the first $7,000 of an employee's pay. Assume that an employee earned $8,900. What is the amount of total unemployment taxes the employer must pay on this employee's wages?

A) $322.00.
B) $434.00.
C) $480.60.
D) $551.80.
E) Zero, since the employee's wages exceed the maximum of $7,000.

Question 63

Employers:

A) Pay FICA taxes equal to the amount of FICA taxes withheld from the employees.
B) Withhold employees' FICA taxes.
C) Pay unemployment taxes to the federal government.
D) Pay unemployment taxes to both the state and federal governments.
E) All of these.

Question 64

The amount of federal income taxes withheld from an employee's paycheck is determined by:

A) The amount of the employee's current earnings for the pay period and number of withholding allowances the employee claims.
B) The employer's merit rating.
C) The amount of social security taxes.
D) Multiplying the gross pay by 6.2%.
E) All of these.

Question 65

Phil Phoenix is paid monthly. For the month of January of the current year, he earned a total of $8,288. The FICA tax rate for social security is 6.2% and the FICA tax rate for Medicare is 1.45%. The FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied to the first $7,000 of an employee's pay. The amount of Federal Income Tax withheld from his earnings was $1,375.17. What is the total amount of taxes withheld from the Phoenix's earnings?

A) $3,097.17
B) $2,443.21
C) $2,009.21
D) $1,722.00
E) $1,495.36

Question 66

The unemployment insurance program:

A) Is a joint federal and state program.
B) Is administered by each state.
C) Provides unemployment benefits to qualified workers.
D) Adjusts rates paid by employers based on their merit rating.
E) All of these.

Question 67

The employer should record payroll deductions as:

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

Question 68

The Federal Insurance Contributions Act (FICA) requires that each employer file a:

A) W-4.
B) Form 941.
C) Form 1040.
D) Form 1099.
E) All of these.

Question 69

An employee earned $62,500 during the year working for an employer. The FICA tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied to the first $7,000 of an employee's pay. What is the amount of total unemployment taxes the employee must pay?

A) $101.50
B) $56.00
C) $378.00
D) $434.00
E) $0.00

Question 70

An employer's federal unemployment taxes (FUTA) are reported:

A) Annually.
B) Semiannually.
C) Quarterly.
D) Monthly.
E) Weekly.

Question 71

An employee earned $47,000 during the year working for an employer. The FICA tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The employee's annual FICA taxes amount is:

A) $681.50.
B) $2,914.00.
C) $3,595.50.
D) $7,191.00.
E) Zero, since the employee's pay exceeds the FICA limit.

Question 72

A bank that is authorized to accept deposits of amounts payable to the federal government is a:

A) Credit union.
B) FDIC insured bank.
C) Federal depository bank.
D) National bank.
E) Federal Reserve Bank.

Question 73

Phil Phoenix is paid monthly. For the month of January of the current year, he earned a total of $8,288. The FICA tax for social security is 6.2% and the FICA tax rate for Medicare is 1.45%. The FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied to the first $7,000 of an employee's pay. The amount of federal income tax withheld from his earnings was $1,375.17. His net pay for the month is:

A) $5,190.83
B) $5,844.79
C) $6,278.79
D) $6,566.00
E) $6,792.64

Question 74

Employer payroll taxes:

A) Are an added expense beyond the wages and salaries earned by employees.
B) Represent the federal taxes withheld from employees.
C) Represent the social security taxes withheld from employees.
D) Are paid by the employee.
E) All of these.

Question 75

FICA taxes include:

A) Social Security taxes.
B) Charitable giving.
C) Employee income taxes.
D) Unemployment taxes.
E) All of these.

Question 76

The Wage and Tax Statement is:

A) Form 940.
B) Form 941.
C) Form 1040.
D) Form W-2.
E) Form W-4.

Question 77

A merit rating:

A) Is assigned by the state.
B) Reflects a company's stability or instability in employing workers.
C) Adjusts the employer's SUTA tax rate.
D) Affects state unemployment taxes paid by an employer.
E) All of these.

Question 78

An employee earned $4,300 working for an employer. The current rate for FICA Social Security is 6.2% and the rate for FICA Medicare 1.45%. The employer's total FICA payroll tax for this employee is:

A) $62.35.
B) $266.60.
C) $328.95.
D) $657.90.
E) Zero, since the FICA tax is a deduction from an employee's pay, and not an employer tax.

Question 79

Recording employee payroll deductions may involve:

A) Liabilities to individual employees.
B) Liabilities to federal and state governments.
C) Liabilities to insurance companies.
D) Liabilities to labor unions.
E) All of these.

Question 80

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.