Question 1

The FUTA tax rate most often actually paid by employers is 0.8 percent.

Accepted Answer

The FUTA tax rate most often actually paid by employers is indeed 0.8 percent. However, this rate can vary depending on factors such as state unemployment taxes and credits.

Question 2

Commercial paper normally is issued by companies with poor credit ratings.

Accepted Answer

Commercial paper is typically issued by companies with strong credit ratings, as they are able to borrow at lower interest rates.

Question 3

Current liabilities are classified as either definitely determinable liabilities or contingent liabilities.

Accepted Answer

Current liabilities are classified as definitely determinable liabilities, but contingent liabilities are not classified as current liabilities unless it is probable that they will result in an outflow of resources embodying economic benefits and the amount can be measured reliably.

Question 4

A liability for dividends exists only when the board of stockholders requests them.

Accepted Answer

A liability for dividends exists when dividends are declared by the board of directors, not merely requested by the stockholders. The board of directors must authorize and declare the payment of dividends before it becomes a legal obligation and liability of the company.

Question 5

Because accounting measures should be verifiable,liabilities should not be estimated.

Accepted Answer

Liabilities often require estimation due to uncertain events, such as lawsuits or warranties. However, these estimations should be disclosed and explained in the financial statements.

Question 6

If any portion of a long-term debt is to be paid in the next year,that portion should be classified as a current liability.

Accepted Answer

This statement is true. Any portion of a long-term debt that is due within the next year should be classified as a current liability because it will be paid off within the next operating cycle.

Question 7

The classification of a liability as current or long-term is not important to the evaluation of a company's liquidity.

Accepted Answer

The classification of a liability as current or long-term is crucial in evaluating a company's liquidity. Current liabilities are due within a year and may impact a company's ability to meet its short-term obligations, while long-term liabilities are due after a year and may not have an immediate impact on liquidity. Therefore, different strategies may need to be implemented for managing current and long-term liabilities.

Question 8

There is no limit to the amount of income subject to the FUTA tax.

Accepted Answer

The Federal Unemployment Tax Act (FUTA) tax applies to the first $7,000 of an employee's wages; income beyond that is not subject to FUTA tax.

Question 9

The product warranty liability is an example of an estimated liability.

Accepted Answer

The product warranty liability is an example of an estimated liability as it is based on estimates of future warranty claims and their associated costs.

Question 10

Product warranties are an expense of the period in which the product is sold.

Accepted Answer

Product warranties are considered a cost of goods sold, which means they are recognized as an expense in the same period as when the related product is sold. This means the expense is recognized in the year of sale, not spread out over the life of the product.

Question 11

If an accrued liability for salaries is not recorded,income for the following period will be overstated.

Accepted Answer

The answer of If an accrued liability for salaries is...

Question 12

Unearned revenue arises from the acceptance of payment in advance for a service to be performed.

Accepted Answer

Unearned revenue is also known as deferred revenue and refers to the recognition of revenue at a later date after the payment has been received. This is because the service or product has not yet been provided or delivered. Common examples include subscriptions, pre-paid rent, and deposits.

Question 13

Accrued liabilities often arise as a result of the passage of time.

Accepted Answer

Accrued liabilities are expenses that have been incurred but not yet paid, and they often arise as a result of the passage of time. For example, wages that have been earned by employees but have not been paid yet, or rent that is due at the end of the month but has not been paid yet, are both examples of accrued liabilities that arise due to the passage of time.

Question 14

At the time a company signs a contract to pay an employee a certain salary in the future,it records a liability.

Accepted Answer

The answer of At the time a company signs a...

Question 15

Lines of credit from the bank need not be disclosed in the financial statements or in the notes.

Accepted Answer

Lines of credit from the bank must be disclosed in the financial statements or in the notes to the financial statements as they represent a potential liability that the company may need to repay in the future.

Question 16

When a business sells an item and collects a state sales tax on it,a current liability to the state arises.

Accepted Answer

When a business collects sales tax on behalf of the state, it is considered a liability until it is remitted to the state. Therefore, a current liability to the state does arise when sales tax is collected.

Question 17

Liabilities generally arise from expected future transactions.

Accepted Answer

Liabilities generally arise from past transactions or events, not expected future transactions. They represent an entity's obligations to transfer resources to another party.

Question 18

A liability must never be classified as current if it is due in more than one year.

Accepted Answer

The answer of A liability must never be classified as...

Question 19

Wages are compensation of employees at a yearly or monthly rate.

Accepted Answer

Wages are compensation of employees at an hourly or daily rate, not necessarily yearly or monthly.

Question 20

Because failure to record a liability generally leads to failure to record an expense,it usually results in an overstatement of income.

Accepted Answer

If a liability is not recorded, the corresponding expense will not be recorded as well, leading to an understatement of expenses and an overstatement of income.

Quiz 11: Current Liabilities and Fair Value Accounting