Question 1

How does a classified balance sheet enhance the usefulness of accounting information?

Accepted Answer

The answer of How does a classified balance sheet enhance...

Question 2

Indicate whether each of the following statements is true or false.
a)The amount of warranty expense is an estimate that is based on the amount of merchandise sold.b)A warranty obligation only occurs if a buyer purchases an extended warranty.c)When a warranty claim is settled, the seller's equity decreases.d)When a warranty claim is settled, the seller's liabilities increase.e)Product warranties usually represent legal liabilities that must be reported in the financial statements.

Accepted Answer

b)False c)False d)False e)Ta)This is true. Warranty expense is generally estimated as a percentage of sales.b)This is false. A warranty obligation occurs whenever a warranty is offered, whether the customer pays extra or not.c)This is false. When a warranty claim is settled, it decreases assets (cash)and liabilities (warranties payable). It does not affect expenses, net income, or stockholders' equity.d)This is false. Settling a warranty claim decreases assets (cash)and liabilities (warranties payable).e)This is true. Although the amount and timing of warranty obligations are uncertain, warranties usually represent liabilities that must be reported in the financial statements.

Question 3

On October 1, Year 1, Tankard Company borrowed $45,000 from the bank and issued a note for that amount. The note had a one-year term and an annual interest rate of 8%.. Perez Company borrowed money from its bank in July Year 1. The accrual of interest on the loan at the end of Year 1:
a)reduces cash flows.b)involves recognition of interest expense.c)does not affect income for Year 1.d)involves recognition of a liability.e)records a cash payment for interest.

Accepted Answer

The answer of On October 1, Year 1, Tankard Company...

Question 4

How is the current ratio calculated? What is its significance in analyzing financial statements?

Accepted Answer

The answer of How is the current ratio calculated? What...

Question 5

Broward Company estimated its warranty obligations to customers at $6,250 for the current year. During the year, Broward paid $3,920 to settle warranty claims made by customers.
Required: a)What is the amount of warranty expense for the current year?b)If this is the first year of operations, what is the amount of warranty liability that will be shown on the balance sheet at the end of the year?

Accepted Answer

The answer of Broward Company estimated its warranty obligations to...

Question 6

Indicate whether each of the following statements is true or false.
a)The extension of a warranty on goods sold normally represents a legal obligation to the seller of the goods.b)Recognizing the warranty obligation increases the Warranties Payable account and decreases a revenue account.c)Recording the payment of cash to settle a warranty claim increases expenses (Warranties Expense)and decreases liabilities (Warranties Payable).d)Net income is not affected by the payment of cash to settle a warranty claim.e)Total assets are not affected by the adjustment to record the warranty obligation.

Accepted Answer

b)False c)False d)True e)Ta)This is true. Offering a warranty creates a legal obligation on the part of the seller.b)This is false. Recognizing the warranty obligation increases liabilities (warranties payable)and expenses (warranty expense). It does not decrease revenue.c)This is false. Recording the payment of cash to settle a warranty claim decreases assets (cash)and decreases liabilities (warranties payable).d)This is true. Recording warranty payments does not affect revenues or expenses; thus, it does not affect net income.e)This is true. The adjustment is a claims exchange transaction that increases liabilities (warranties payable)and decreases stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income.

Question 7

Moreno Company began Year 1 with a balance of $300 in Sales Tax payable. During the year, the company recorded taxable sales of $92,500. The ending balance in Sales Tax payable was $445. Moreno's sales tax rate is 4%.
Required: a)How much sales tax did Moreno collect during Year 1?b)How much sales tax did Moreno remit (pay to taxing authority)during Year 1?

Accepted Answer

The answer of Moreno Company began Year 1 with a...

Question 8

On October 1, Kramer Company issued a $100,000 face value discount note. The note had a 6% discount rate and a one-year term to maturity. Kramer received cash in the amount of $94,000.

Accepted Answer

The answer of On October 1, Kramer Company issued a...

Question 9

Indicate whether each of the following statements is true or false.
a)The amount of federal tax withheld from an employee's salary depends on the employee's gross pay and the number of withholding allowances the employee claims.b)Withheld taxes are recorded in the payroll tax expense account.c)An employer will submit $8,250 in FICA taxes for an employee who earns $55,000 annually. (Assume a Social Security rate of 6 percent on the first $110,000 of income and a Medicare rate of 1.5 percent on all earnings.)d)A voluntary deduction, such as a charitable contribution, creates a liability when it is withheld from employee pay.e)If an employer records gross pay of $2,400 and withholds $700 of that amount, then the employer will recognize $1,700 in salary expense.

Accepted Answer

b)False c)True d)True e)Fa)This is true. Gross pay increases federal tax withheld and allowances decrease federal tax withheld.b)This is false. Withheld taxes are recorded in the employment taxes payable account, but are not included in payroll tax expense.c)This is true. The employer will submit $4,125 of employer FICA taxes and $4,125 of employee FICA taxes, for a total of $8,250.d)This is true. When a voluntary deduction is made, the employer has an obligation to pay that amount to the intended party, which creates a liability.e)This is false. Salary expense will be recorded for the full amount of gross pay.

Question 10

What is liquidity? What is the primary ratio used to evaluate a company's liquidity? How is this ratio calculated?

Accepted Answer

The answer of What is liquidity? What is the primary...

Question 11

Indicate whether each of the following statements is true or false.
a)Operating cycles for most businesses are less than one year.b)If a business does not plan to use any of its current assets to repay a debt, then that debt is listed as long term even if it is due within a year.c)The current ratio is computed by dividing current assets by net income.d)The current ratio is a useful measure of a company's liquidity.e)Liquidity is the ability of a business to repay liabilities in the long run.

Accepted Answer

b)True c)False d)True e)Fa)This is true. An operating cycle is defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash. For most businesses, the operating cycle is less than one year.b)This is true. In general, if a business does not plan to use any of its current assets to repay a debt, that debt is listed as long term even if it is due within one year.c)This is false. Current ratio is equal to current assets divided by current liabilities.d)This is true. The current ratio is a measure of liquidity.e)This is false. Liquidity describes the ability to generate sufficient short-term cash flows to pay obligations as they come due.

Question 12

Ian Brown and Gayle Hubbard both perform work for Max Manufacturing. Ian Brown is an employee, and Gayle Hubbard is an independent contractor. How is this possible? How do these classifications affect payroll taxes?

Accepted Answer

The answer of Ian Brown and Gayle Hubbard both perform...

Question 13

The following transactions apply to Baird Corporation.1)Issued common stock for $40,000 cash.2)Provided services to customers for $32,000 on account.3)Borrowed $30,000 on September 1 at 8% interest with a one-year term.4)Purchased land for $32,000 cash.5)Paid $22,000 for operating expenses.6)Collected $28,000 cash from customers in partial settlement of its accounts receivable.7)Recorded interest on the note payable at year end.8)Paid $4,000 dividends to stockholders.
Required: a)Identify the effect on the statement of cash flows for each of the above transactions. Include the amount and the type of cash flow activity. Cash payments should be entered using parenthesis.b)Classify the above accounting events into one of four types of transactions (asset source, asset use, asset exchange, claims exchange).

Accepted Answer

The answer of The following transactions apply to Baird Corporation.1)Issued...

Question 14

Clarion Company provides a one-year warranty on all merchandise it sells. In Year 1, the company recorded sales of $500,000. It estimated that the warranty costs on these sales would amount to $2,000. In July of Year 2, Clarion paid $250 to satisfy a warranty claim. Indicate whether each of the following statements is true or false.
a)Clarion's adjustment to record the warranty at the end of Year 1 decreased total assets and total stockholders' equity.b)Clarion's adjustment to record the warranties at the end of Year 1 increased Clarion's total liabilities.c)The transaction, dated in July of Year 2, decreased total assets and net income for Year 2.d)The $250 payment to satisfy a warranty claim in July of Year 2, decreased Clarion's total liabilities.e)The adjustment to record the warranty at the end of Year 1 did not affect Clarion's revenue for the year.

Accepted Answer

b)True c)False d)True e)Ta)This is false. The adjustment would increase liabilities (warranties payable)and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income.b)This is true. The adjustment would increase liabilities (warranties payable).c)This is false. The payment of $250 to satisfy the warranty claim decreased assets (cash)and decreased liabilities (warranties payable).d)This is true. The $250 payment decreases warranties payable, a liability.e)This is true. The adjustment would increase liabilities (warranties payable)and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income. It does not affect revenue.

Question 15

Zinke Company borrowed $100,000 from Plains Bank on July 31, Year 1. The note carried a 6% interest rate with a one-year term to maturity.
Required: 1)Show the effects of borrowing the money and then the adjustment required at the end of Year 1 on the accounting equation.2)What is the amount of interest expense for Year 1?3)How does this transaction affect the statement of cash flows for the Zinke Company for Year 1?

Accepted Answer

The answer of Zinke Company borrowed $100,000 from Plains Bank...

Question 16

At the beginning of Year 2, McKee, Incorporated had a balance in the Warranties Payable account of $15,600. During the year McKee sold for $650,000 several products that carried a two-year warranty. McKee estimated that warranty expense would be 3% of sales for the year.
Required:
a)If McKee's incurred actual warranty cost is $12,500 during Year 1, what is the balance in the Warranties Payable account after the adjustment for warranty expense?

Accepted Answer

The answer of At the beginning of Year 2, McKee,...

Question 17

Jack Grimes is hired by First Associates at a salary of $4,000 per month. He is shocked when his first monthly paycheck is only $3,150. Explain to Jack some of the factors that may have contributed to the difference.

Accepted Answer

The answer of Jack Grimes is hired by First Associates...

Question 18

Fisher Company has been named as the defendant in a class action lawsuit. In addition, the company is located in a region that normally has an active hurricane season. Indicate whether each of the following statements is true or false.
a)If the likelihood of a future obligation is probable and can be reasonably estimated, a liability should be recognized on the balance sheet.b)If the outcome is probable, but cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements.c)If the outcome is reasonably possible but not likely, the contingency should be disclosed in the notes to the financial statements.d)Every lawsuit, regardless how frivolous, should be disclosed in the notes to the financial statements.e)Since it is located in a region for which an active hurricane season has been predicted, the company must disclose the contingent liability, which is the potential for catastrophic loss, in the notes to their financial statements.

Accepted Answer

b)True c)True d)False e)Fa)This is true. If the likelihood of a future obligation arising is probable (likely)and its amount can be reasonably estimated, a liability is recognized in the financial statements.b)This is true. If the likelihood of a future obligation is probable but cannot be reasonably estimated, no liability is reported on the balance sheet. The potential liability is, however, disclosed in the notes to the financial statements.c)This is true. If the likelihood of a future obligation arising is reasonably possible but not likely, no liability is reported on the balance sheet. The potential liability is, however, disclosed in the notes to the financial statements.d)This is false. If the likelihood of a future obligation arising is remote, which might be the case with a frivolous lawsuit, no liability need be recognized in the financial statements or disclosed in the notes to the statements.e)This is false. All businesses face uncertainties such as competition and damage from floods or storms. Such uncertainties are not contingent liabilities, however, because they do not arise from past events.

Question 19

The following is a list of balance sheet accounts (in random order)and balances for Premium Office Supply Company. They have been updated as of December 31, Year 1.
  Required:Prepare a classified balance sheet for Premium Office Supply Company at December 31, Year 1.

Accepted Answer

The answer of The following is a list of balance...

Question 20

Indicate whether each of the following statements is true or false.
a)An eight-month, 6% note for $10,000 will require the issuer to pay $600 in interest.b)Interest expense is considered an operating expense on the income statement.c)Payment of interest is considered an operating activity on the statement of cash flows.d)Payment of interest on a one-year note due on March 1 will include a reduction in liabilities.e)The adjustment to recognize interest expense is an asset use transaction.

Accepted Answer

b)False c)True d)True e)Fa)This is false. Interest on this note (which has a term of 8 months)= $10,000 × 6% × (8 ÷ 12)months = $400.b)This is false. Interest expense is reported below operating income on the income statement.c)This is true. Payment of interest, like payment of all expenses, is reported as an operating activity on the statement of cash flows.d)This is true. Because interest on the note had been accrued at the end of the previous year, payment of interest involves a reduction of interest payable.e)This is false. The adjustment is a claims exchange transaction that increases liabilities (Interest Payable)and decreases stockholders' equity (Retained Earnings).

Quiz 9: Accounting for Current Liabilities and Payroll