Accounting Chapter 8

True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.

False

which of the following statements regarding liabilities is not true?

Liabilities result from future transactions

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should

credit notes payable $5,000.

Deferred revenues and sales tax payable typically are reported as ___ liabilities.

current

working capital

the difference between current assets and current liabilities

gift card breakage

the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote

Notes payable is classified as a liability that has which of the following effects?

Creates interest expense on the income statement

Current Liabilities

Debts that, in most cases, are due within one year from the balance sheet date. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.

Current Liabilities:

May include contingent liabilities

Assuming the current ratio of 1.00 and an acid-test ration of 0.75, how will the purchase of inventory with cash affect each ratio?

No change to the current ratio and decrease the acid-test ratio

By law, an employer is required to pay which of the following amounts as payroll taxes?

Social Security contributions Federal unemployment tax Medicare contributions

True/False We record interest expense in the period in which we pay it, rather than in the period we incur it

True

Deferred revenue is classified as

a liability

commercial paper

borrowing from another company rather than from a bank

A transaction or event in which the outcome is uncertain is referred to as a(n)

contingency

A loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

A contingent liability is recorded if which conditions are met?

The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

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

apply the appropriate accounting treatment for contingencies

a contingent liability is recorded only if a loss is probable and the amount is reasonably estimable. unlike contingent liabilities, contingent gains are not recorded until the gain is certain and no longer a contingency.

contingent liability

an existing uncertain situation that might result in a loss a contingent liability is recorded only if a loss is probable and the amount is reasonably estimable

line of credit

an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

The Acid-Test Ratio is:

cash, current investments, and accounts receivable divided by current liabilities

The feature that distinguishes loss ____ from other liabilities is the uncertain outcome.

contingencies

Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___ liabilities.

contingency

Liabilities are classified as

current and long term

current ratio

current assets divided by current liabilities; measures the availability of current assets to pay current liabilities

distinguish between current and long-term liabilities

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

quick assets

includes only cash, current investments, and accounts receivable

Deferred revenue should be classified as a(n) ___ on the balance sheet.

liability

The flipside of a contingent gain is a contingent

loss

notes receivable is an asset that creates interest revenue

notes payable is a liability that creates interest expense

contingencies

Uncertain situations that can result in a gain or a loss for a company

Which of the following is NOT deducted from an employee salary?

Unemployment taxes

Which of the following is a guarantee that protects a customer from product defects for a specified period of time?

Warranty

We record interest expense on a note payable in the period in which:

We incur interest

Taxes collected for taxing authorities are recognized as

current liabilities.

If a liability is classified as current, rather than noncurrent, the company's working capital will ______.

decrease

A contingent liability is an existing ___ situation that might result in a loss depending on the outcome of a future event.

uncertain

Which of the following tends to be the source of the most commonly reported contingent liability?

warranties

liquidity

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

Obtaining a note payable for cash results in a(n) ______.

increase in assets and an increase in liabilities

Which of the following are examples of fringe benefits provided by employers to their employees?

payment of insurance premiums on employees behalf contributions to retirement and other savings accounts reduced or no-cost company-provided services

When a contingent event that may give rise to a future loss is likely to occur, it is said to be

probable

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.

sales taxes payable of $100. sales revenue of $1,000.

Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n) ___

warranty

What are the two classifications for liabilities?

Current Long-term

Express Jet borrows $100 million on October 1, 2018, for one year at 6% interest, how much interest EXPENSE does it record for the year ended December 31, 2018?

$4.5 million

acid-test ratio

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?

Credit to Note Payable $100,000 Debit to Cash $100,000

Common current liabilities include:

Deferred revenues Sales tax payable The current portion of long-term debt

Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be:

Disclosed but not reported as a liability

Which of the following must employers by law withhold from their employees' pay?

Federal income taxes

Which of the following may be classified as contingent liabilities?

Frequent flyer program awards Future litigation losses Product warranties

unemployment taxes

a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

A(n) ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.

accounts

a ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.

accounts

A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)

accounts payable.

fringe benefits

additional employee benefits paid for by the employer

contingent gain

an existing uncertain situation that might result in a gain we usually do not record contingent gains until the gain is known with certainty

Payroll withholdings ______.

are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives

Taxes subtracted from employees' pay and remitted to the government on their behalf are called

withholding taxes.

Express Jet borrows $100 million on October 1, 2018, for one year at 6% interest, how much interest PAYABLE does it record for the year ended December 31, 2018?

$1.5 million

Which of the following are not required to be deducted from an employee's paycheck?

Charitable contributions State unemployment tax (SUTA) Federal unemployment tax (FUTA)

Withholding taxes for federal and state income tax are based upon which items?

Amounts earned by employees Number of exemptions claimed

debt covenant

An agreement between a borrower and a lender that requires that certain minimum financial measures be met or the lender can recall the debt

deferred revenue

cash received in advance from a customer for products or services to be provided in the future

Which of the following transactions will increase a company's working capital?

Receipt of cash on a long-term notes receivable

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?

Remote Probable Reasonably possible

account for employee and employer payroll liabilities

employee salaries are reduced by withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. The employer, too, incurs additional payroll expenses for unemployment taxes, the employer portion of FICA taxes, and employer insurance and retirement contributions.

Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ___ benefits.

fringe

sales tax payable

sales tax collected from customers by the seller, representing current liabilities payable to the government

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as:

sales tax payable

account for notes payable and interest payable

we record interest expense in the period we incur it, rather than in the period in which we pay it. many short-term loans are arranged under an existing line of credit with a bank, or for larger corporations in the form of commercial paper, a loan from one company to another.

explain the accounting for other current liabilities

when a company receives cash in advance from customers, it debits Cash and credits Deferred Revenue, a current liability account. When the company provides those goods to its customers, it debits Deferred Revenue and credits Sales Revenue sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government we report the currently maturing portion of a long-term debt as a current liability in the balance sheet.

Current assets minus current liabilities equals

working capital

asses liquidity using current liability ratios

working capital is the difference between current assets and current liabilities. The current ratio is equal to current assets divided by current liabilities. The acid-test ratio is equal to quick assets (cash, short-term investments, and account receivable) divided by current liabilities. Each measures a company's liquidity, its ability to pay currently maturing debts.

notes payable

written promises to repay amounts borrowed plus interest