Accounting 2 Chapter 11 Smart Book

On June 1, Sawyer Co. borrowed $5,000 by extending their past-due account payable with a 45-day, 12% interest-bearing note. On July 16, the due date, Sawyer pays the amount due in full. Sawyer would record this payment with a (debit/credit) _______ to Interest Expense in the amount of _______.

debit; $75 Reason: $5,000x.12x(45/360)=$75

Which of the following represent reasonably possible contingent liabilities? Select all that apply.

debt guarantees potential legal claims

Unemployment taxes are examples of (employee/employer) taxes.

employer

A(n) ______ liability is a known obligation that is of an uncertain amount but that can be reasonably estimated.

estimated

Bina Consulting Co. collected $500 from a customer in advance to provide consulting fees for the next two months. The $500 would be recorded with a debit to Cash and a credit to the Unearned Revenues, which is a(n) (asset/liability/equity) account.

liability

Bryne Co. sells merchandise and collects a 5% state sales tax. The tax is recorded on Bryne's general ledger as a(n) ______ account.

liability

When a company has a current obligation to make a future payment to their supplier due to a shipment of supplies that were received last week, the company would record this transaction with an increase to an asset account and a(n) ________ account.

liability

Unearned subscription revenues that extends over multiple periods is an example of a _______ known liability.

multi-period Reason: This is a multi-period liability because the unearned subscription revenue will extend over multiple periods.

Employee income tax depends on: (Check all that apply).

number of employee withholding allowances employee's income

A potential legal claim is recorded

only if payment for damages is probable and the amount can be reasonably estimated.

Amounts withheld from an employee's gross pay are called:

payroll deductions

A contingent liability can be ignored (not recorded in the financial statements or notes to the financial statements) if it is considered as (probable/reasonably possible/remote) possibility.

remote

A written promise to pay a specified amount on a stated future date within one year or the company's operating cycle, whichever is longer, is considered a __________.

short-term note payable

Cadie Construction Co. signed a note promising to pay a cement supplier $1,000 60-days from now. As a result of this transaction, Cadie would record a(n) ________ on her balance sheet.

short-term note payable

The ratio of income before interest expense (and any income taxes) divided by interest expense reflects the risk of a company not being able to pay fixed expenses if sales decline is called the ____________ ratio.

times interest earned

A known liability is a measurable obligation arising from agreements, contracts, or laws. Known liabilities would include all of the following items, except:

warranties.

Sheldon has a $15,000 liability for a machine that has an interest rate of 10%. The interest expense for one year is?

$1,500

Winn Co. signs a 60 day note payable for a $15,000 copy machine with an interest rate of 8%. Winn will record total interest expense of

$200 Reason: $15,000 x .08 x (60/360) = $200.

Boyd's Bicycle Sales and Repairs Co. offers a 6-month warranty on all new bicycle purchases. Based on history, Boyd determines that warranty repairs are equal to approximately 2% of sales. During the month, Boyd sales total $20,000. Boyd will record Warranty Expense in the amount of ______ for the month.

$400

Kenesha Co. reported income before interest expense and income taxes of $30,000; interest expense of $3,000; and income taxes of $4,000. Calculate the times interest earned ratio.

10 Reason: (30,000/3000)=10

Spot Co. purchases office supplies from Sally Supplies, Inc.. Spot does not pay cash for the purchase, and now owes the amount to Sally. This transaction would typically be recorded in which account in Spot's books?

Accounts Payable

Jorge Lopez worked 40 hours this week and earned $1,000 in total compensation. Federal and state taxes and other withholdings totaled $350. Jorge's gross pay totals $(Blank 1).

Blank 1: 1000 or 1,000

On January 8, Lee Co. borrows $100,000 cash from National Bank by signing a 90-day, 6% interest note. On April 8, Lee Co. will pay National Bank a total of $101,500. Principal on the note totals $(Blank 1).

Blank 1: 100000 100,000 x 6% = $6000 x 90/360 =1500 101500 - 1500 = 100,000

On July 1, Scene Co. borrowed $15,000 cash from First Bank by signing a 30-day, 5% interest-bearing note. Scene will record this entry with a credit to Notes Payable in the amount of $(Blank 1).

Blank 1: 15000

Trighton's Trailer Co. sells trailers and provides a one-year warranty on all new trailer sales. Based on history, Trighton anticipates that 2% of trailers will be returned and will have a warranty cost of $100 per trailer. During the month, Victor sold 300 trailers for a total of $255,000. At the end of the month, Trighton will record $(Blank 1) in warranty expense.

Blank 1: 600

Jorge Lopez worked 40 hours this week and earned $1,000. Federal and state taxes, and other withholdings totaled $350. Jorge's net pay totals $(Blank 1).

Blank 1: 650 or $650

Federal government taxes implemented on employers in order to provide unemployment benefits to qualified workers are known as (use acronym) (Blank 1).

Blank 1: FUTA

(Blank 1) is the difference between the amount borrowed and the amount repaid.

Blank 1: Interest

A liability created by buying goods or services on credit is typically recorded to (Blank 1) (Blank2).

Blank 1: accounts Blank 2: payable

When a company guarantees the payment of debt owed by a supplier, customer or another company, the guarantor usually discloses the guarantee as a (Blank 1)_ liability.

Blank 1: contingent

A known obligation of an uncertain amount that can be reasonably estimated is called a(n) (Blank 1) liability.

Blank 1: estimated

On January 8, Lee Co. borrows $100,000 cash from National Bank by signing a 90-day, 6% interest note. On April 8, Lee Co. will pay National Bank a total of $101,500. The difference between the amount paid back to National Bank of $101,500 and the amount borrowed of $100,000 (or $1,500) represents (Blank 1) expense.

Blank 1: interest

A measurable obligation arising from agreements, contracts, or laws is called a (Blank 1) liability.

Blank 1: known

A (Blank 1) 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.

Blank 1: liability

Gross pay minus all deductions—including federal and state taxes, FICA and any voluntary deductions equals (Blank 1) pay.

Blank 1: net, take-home, or take home

The (Blank 1) of a note is the amount that the signer of a note agrees to pay back when it matures, not including interest.

Blank 1: principal or face value

Paid absences offered to employees are called (Blank 1) _ benefits.

Blank 1: vacation

A (Blank 1) is a seller's obligation to replace or fix a product (or service) that fails to perform as expected within a specified period.

Blank 1: warranty

On March 1, Young Co. borrowed $1,000 by extending their past-due account payable with a 120-day, 6% interest-bearing note. On June 29, the due date, Young pays the amount due in full. This entry would be recorded by Young with a credit to _____ in the amount of ______.

Cash; $1,020 Reason: Interest is computed for 120 days. $1,000 x .06 x (120/360) = $20. Cash will be credited for $1,000 + 20. Notes payable will be debited for $1,000.

Niwa Co. replaced a $3,000 account payable balance to Fiona Co. with a 60-day, $3,000 note bearing 5% annual interest. Niwa's entry to record this transaction would include which of the following entries? (Check all that apply.)

Debit to Accounts Payable Credit to Notes Payable

Patel Paving collected $1,000 cash in advance from a customer to provide paving services next month. The entry to record this cash receipt would include the following entries? (Check all that apply.)

Debit to Cash Credit to Unearned Paving Fees

Simar Sales Co. sells and installs kitchen appliances. Simar guarantees parts and labor for one year after installation. Simar would record potential claims in a(n) _______ account.

Estimated Warranty Liability

Leo Calvin is required to have ______ taxes withheld from his pay in order to cover the cost of future retirement, disability, survivorship and medical benefits.

FICA

The Federal Insurance Contributions Act provides retirement, disability, survivorship, and medical benefits to qualified workers. Laws require employers to withhold _____ taxes from employees' pay to cover costs of the system.

FICA

The federal government requires that employers are taxed on employee wages to provide unemployment benefits to qualified workers. These taxes are known as:

FUTA

Keys Co. is located in Florida. An evacuation has been ordered due to Hurricane Edward, which is headed in the direction of Keys. Keys should record a contingent liability prior to the evacuation.

False

Which of the following situations is not a contingent liability?

Future natural disaster

_______ is(are) the total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes.

Gross pay

Which of the following items is not a payroll deduction?

Net pay

Bushra Co. replaced a $1,000 account payable balance to Elin Co. with a 120-day, $1,000 note bearing 8% annual interest. Bushra's entry to record this transaction would include a credit to which account?

Notes Payable

On June 1, Button Co. borrowed $1,000 cash from National Bank by signing a 120-day, 6% interest-bearing note. Button will record this transaction with a credit to _____ in the amount of ______.

Notes Payable; $1,000

Which of the following items are considered employee benefits? (Check all that apply.)

Pension plans Medical insurance

Zion Co. sells $100 of merchandise and collects $10 sales tax. The sales tax is recorded to which account?

Sales tax payable

Which of the following contingent liabilities would require a company to record a note to the financial statements? (Check all that apply.)

The liability is possible and cannot be reasonably estimated. The liability is possible and is estimated to be $35,000. The liability is probable and cannot be reasonably estimated.

Which of the following situations would require a journal entry to record the contingent liability in the financial statements?

The liability is probable and estimated to be $10,000.

Which of the following situations would not be required to be recorded in the financial statements or reported as a note to the financial statements?

The liability is remote and estimated to be $30,000.

Which of the following liabilities could be a multi-period known liability? (Check all that apply.)

Unearned Subscription Revenues Notes Payable

Employers must pay employee taxes in addition to those paid by the employees. Which of the following is paid only by the employer?

Unemployment

Abby Co. allows each employee two weeks of paid time off during each calendar year. Since employees are working for 50 weeks, rather than 52 weeks, Abby must accrue the paid time off during the 50 weeks that the employees work. The year-end adjusting entry is recorded as a credit to the ________ account.

Vacation Benefits Payable

Employee ________ are perks that are provided in addition to salaries and wages, such as all or part of medical, dental, life and disability insurance.

benefits

A ___________ is when an employer provides employees with a percentage of the net income earned during the year.

bonus plan

Angela Bennett is an employee of Marks Co. This past year, Angela received 1% of Marks net income, in addition to her annual salary. This added benefit is called a:

bonus plan

Amounts withheld from employee's earnings for employee income tax is considered a _____ by the employer until the government is paid.

current liability