CH 8 Concept Videos

Which of the following is included in calculating the current ratio, but excluded in calculating the acid-test ratio? Prepaid expenses Cash Accounts receivable Current investments

Prepaid expenses

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $2 to $3 million. No amount within the range appears more likely than others. Which of the following is the company required to do in this scenario? Record a $3 million liability with no further disclosure. Record a $2 million liability and disclose the potential additional loss. Record a $5 million liability with no further disclosure. Record a $3 million liability and disclose the potential additional loss.

Record a $2 million liability and disclose the potential additional loss.

A current ratio of 2.2 indicates that: for every $1 of current assets, the company has $2.20 of current liabilities. for every $1 of current liabilities, the company has $2.20 of current assets. for every $1 of net income, the company has $2.20 of current assets. for every $1 of sales revenue, the company has $2.20 of current assets.

for every $1 of current liabilities, the company has $2.20 of current assets.

In general, the higher the current ratio, the greater the company's liquidity.

true

In the case of a contingent liability, if the likelihood of payment is reasonably possible, we record no entry but make full disclosure in a note to the financial statements to describe the contingency.

true

A contingent liability is an existing: certain situation that might result in a future gain. certain situation that might result in a future loss. uncertain situation that might result in a future gain. uncertain situation that might result in a future loss.

uncertain situation that might result in a future loss.

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on June 1, Year 2? Multiple Choice $25,000 debit to Interest Payable $1,045,000 credit to Cash $20,000 credit to Interest Expense $1,045,000 debit to Note Payable

$1,045,000 credit to Cash Correct. Note Payable will be debited for $1 million, Interest Expense will be debited for $25,000 (for 5 months interest incurred), and Interest Payable will be debited for $20,000. Cash will be credited for $1,045,000.

Caddell Corporation borrows $100,000 from a bank on August 1, Year 1, by signing an 8 percent, six-month note for the amount borrowed plus accrued interest due six months later on February 1, Year 2. Which of the following is recorded on August 1, Year 1? $104,000 debit to Cash $104,000 debit to Notes Payable $100,000 credit to Cash $100,000 credit to Notes Payable

$100,000 credit to Notes Payable

The payroll related information for Smart Packers is provided below. The company has a total payroll for the month of January of $100,000 for its 30 employees. Use the information provided to answer the following questions. (Assume that none of the employees earn more than $7,000 in January.) Federal and state income tax withheld$20,000 Health insurance premiums paid by employer$10,000 Contribution to retirement plan paid by employer$15,000 FICA tax rate (Social Security and Medicare) 7.65% Federal and state unemployment tax rate 6.20% What is the amount of Payroll Tax Expense for the month?

$13,850

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on December 31, Year 1? $20,000 credit to Cash $25,000 debit to Interest Expense $20,000 credit to Interest Payable $20,000 credit to Note Payable

$20,000 credit to Interest Payable Correct. Interest payable is credited for $20,000 ($1 million x 6% x 4/12).

The payroll related information for Smart Packers is provided below. The company has a total payroll for the month of January of $100,000 for its 30 employees. Use the information provided to answer the following questions. (Assume that none of the employees earn more than $7,000 in January.) Federal and state income tax withheld$20,000 Health insurance premiums paid by employer$10,000 Contribution to retirement plan paid by employer$15,000 FICA tax rate (Social Security and Medicare) 7.65% Federal and state unemployment tax rate 6.20% What is the amount of fringe benefits for the month? $20,000 $25,000 $10,000 15,000

$25,000

Barnes Corporation introduces a new e-book reader that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 10 percent of sales. By the end of the first year of selling the product, total sales are $5 million, and actual warranty expenditures are $100,000. What amount should Barnes report as a liability at the end of the year? $100,000 $400,000 $500,000 $5 million

$400,000

Windsor Corporation borrows $100,000 from a bank on November 1, Year 1, by signing a 9 percent, six-month note for the amount borrowed plus accrued interest due six months later on May 1, Year 2. What is the interest expense per month on this note? $750 $1,000 $1,200 $3,000

$750 Correct. Interest expense per month = $100,000 x .09 x 1/12 = $750.

Identify a liability that does not require a cash payment. Accounts payable Notes payable Salaries payable Deferred revenue

Deferred revenue

Which of the following are payroll costs for employers? (Select all that apply.) Employee contribution to retirement plan Employer contribution to retirement plan Employee portion of FICA taxes Employer portion of FICA taxes Federal and state income taxes Federal and state unemployment taxes

Employer contribution to retirement plan Employer portion of FICA taxes Federal and state unemployment taxes

Which of the following are withheld from an employee's salary? Employee portion of health insurance Federal and state income taxes Federal and state unemployment taxes FICA taxes

FICA taxes Federal and state income taxes. Employee portion of health insurance.

Contingent gains are recorded only if a gain is probable and the amount can be reasonably estimated.

False

The current ratio is similar to the quick ratio but is based on a more conservative measure of current assets available to pay current liabilities.

False

We classify the portion of long-term debt maturing within one year from the balance sheet date as a long-term liability.

False

Working capital is the best measure of liquidity when comparing one company with another.

False

Which of the following is not a measure of liquidity? Acid-Test Ratio Current Ratio Gross Profit Ratio Working Capital

Gross Profit Ratio

The accounting treatment for a lawsuit depends on: (Select all that apply.) Check All That Apply the ability to estimate the amount of payment the amount of time until the lawsuit is settled the likelihood of payment the type of contingency

The ability to estimate the amount of payment the likelihood of payment

In most cases, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year.

True

When a company collects sales taxes, it debits Cash, and credits both Sales Revenue and Sales Tax Payable.

True

Diamond Electronics sells previously owned electronics. Each product carries a one-year warranty against defects. Suppose that product sales for the entire month of December are $80,000. The company expects future warranty costs to be 6% of sales. On December 31, Year 1, the company will record a: debit to Warranty Expense for $4,800 debit to Warranty Liability for $4,800 credit to Warranty Expense for $80,000 credit to Warranty Liability for $80,000

debit to Warranty Expense for $4,800

Liquidity refers to: a company's ability to pay its long-term liabilities. having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. the ability of reported earnings to reflect the company's true earnings. the earnings or operating effectiveness of a company.

having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.

Boyd Corporation borrows $300,000 from a bank on March 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later. On issuance date, this transaction: increases assets and increases liabilities. increases assets and decreases liabilities. decreases assets and increases liabilities. decreases assets and decreases liabilities.

increases assets and increases liabilities.

All of the following are essential characteristics of liabilities, except _____. they represent probable future benefits they are probable future sacrifices of economic benefits they arise from present obligations to other entities they result from past transactions or events

they represent probable future benefits

The accounting treatment for a lawsuit depends on: the ability to estimate the amount of payment the amount of time until the lawsuit is settled the likelihood of payment the type of contingency

the ability to estimate the amount of paymentthe likelihood of payment