Chapter 8 SmartBook

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

annual, 12 month rate.

FICA tax is paid by

both the employee and employer.

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

Creates interest expense on the income statement

Which of the following are employer payroll costs?

Employer portion of Medicare tax Federal and state unemployment taxes

Which of these payroll taxes are paid only by the employer? (Check all that apply.)

FUTA SUTA

Which of the following payroll-related taxes must the employer pay by law?

Federal Insurance Contributions Act amounts Unemployment taxes

Which of the following is an important criteria used to determine the reporting of a contingent liability?

The likelihood of future payment or loss

Mathematically, the current ratio is expressed as current assets divided by _______ ________

current liabilities

The portion of a long-term liability that will be paid within the next year is referred to and reported as the:

current portion of long-term debt

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

fringe benefits

The term referring to a company having a sufficient amount of cash to pay its current debts is

liquidity.

The flipside of a contingent gain is a contingent

loss.

An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.

revenue

employer

state and federal unemployment tax

Payroll withholdings are

the items subtracted from an employee's gross pay to arrive at take-home pay.

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

Current assets minus current liabilities equals

working capital

Aviation Systems is involved in a $10 million lawsuit filed against one of its suppliers, Electronic Innovators. The litigation is in final appeal, and legal counsel advises that it is probable that Aviation Systems will win the lawsuit and be awarded somewhere between $6 and $10 million.

Gain contingencies are not recorded.

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

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

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required at December 31, 2018 would include which of the following?

Debit interest expense $4,000

FICA is the acronym for the

Federal Insurance Contribution Act.

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.

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings.

the ________ portion of long-term debt is the amount that will be paid within the next year.

current

Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?

Health insurance paid by the employee Federal income taxes Employee contributions to retirement plans

Which type of contingent liability would most likely be found on a balance sheet prepared under U.S. GAAP?

Probable contingent liability that can be estimated.

Which of the following may be classified as contingent liabilities?

Product warranties Future litigation losses Frequent flyer program awards

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

Reasonably possible Probable Remote

Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:

credit to contingent liability debit to loss

Which of the following may be a proper income statement classification of contingent events?

non-operating expense operating expense

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

increase in assets and an increase in liabilities

Which of the following may be a proper balance sheet classification of contingent events?

long-term liability current liability

a(n) __________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.

contingent

Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.)

Medicare Social Security

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?

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

Payroll withholdings ______. (Select all that apply.)

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

Under US GAAP, a contingent liability should ______.

be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated not be reported if the loss is remote and unable to be estimated be reported on the balance sheet if the loss will probably occur and can be reasonably estimated

The mathematical formula for working capital is current assets ______ current liabilities.

minus

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

account

Gift card ________ refers to the point in time when gift cards expire or when the likelihood of redemption becomes remote.

breakage

Which of the following voluntary contributions by employees may employers deduct from their employees' pay?

employee investments in retirement contributions toward retirement funds

employee

state and federal income tax

The employer's portion of FICA tax remitted to the taxing authority is:

the same as the employee's portion

An interest rate, unless otherwise specified, is typically a(n) ______ rate

annual

The feature that distinguishes loss __________ from other liabilities is the uncertain outcome. (Enter one word per blank)

contingencies

Deductions from employee pay for contributions toward retirement savings plans and contributions for charitable organizations are examples of:

voluntary employee deductions

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

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

Social Security contributions Federal unemployment tax Medicare contributions

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

probable

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

recorded

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

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

Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):

Liability

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

decrease

___________ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas a(n) _______ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity dat e

accounts notes

The ratio that is a more conservative measure than the current ratio of a company's ability to pay its current liabilities is the:

acid-test ratio

Jingle Company signs a 6-month, $20,000 note. Stated interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as

$20,000 x 0.08 x 6/12

Volker Company signs a 3-month, $10,000 note. Stated interest rate is 12% payable at the maturity date. Interest incurred on the note is:

$300

On September 1, 2018, Great Lakes Equipment receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Great Lakes Equipment should recognize on the income statement for the year ending December 2018?

$4,000 Reason: $24,000/24 months = $1,000 per month x 4 months = $4,000 revenue recognized.

Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should record a contingent liability and loss of

$400,000.

Consultants notify management of Discount Pharmaceuticals that a stroke medication poses a potential health hazard. Counsel indicates that a product recall is probable and is estimated to cost the company $8 million.

A loss and a liability must be recorded for $8 million. Income before tax will be reduced and total liabilities will be increased by $8 million.

Which of the following is the formula for the current ratio?

Current assets divided by current liabilities.

Common current liabilities include:

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

Which of the following is true in comparing the current ratio with the acid-test ratio?

The current ratio will always be at least as large as the acid-test ratio.

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

Warranty

Deferred revenue is classified as

a liability

Another name for the acid-test ratio is the

quick ratio

Quick ratio is another commonly used term for the _____.

acid-test ratio

A contingent liability that is probable and can be reasonably estimated must be

recorded

For a manufacturer, the most commonly reported contingent liabilities relate to product _______

warranties

Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?

$30,000

Jingle Company signs a 6-month, $20,000 note. Stated interest rate is 8% payable at the maturity date. Interest incurred on the note is:

800

What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.

Acid-test ratio will increase Current ratio will increase

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.

The acid-test ratio is based on a more conservative measure than the current ratio of the company's ability to:

pay its current liabilities

Kevin sells $100 of goods to a customer for cash. The sales tax is 8%. The journal entry for this sale will include which of the following entries?

Credit revenues $100 Credit sales tax payable $8 Debit cash $108

Which payroll tax is paid equally by the employee and the employer?

FICA

True or false: Your employer is allowed to keep the amounts withheld from your gross pay.

false

Which of the following payroll-related costs are incurred by employees?

federal and state income tax employee investments in retirement plans

The point in time when gift cards expire or when it becomes unlikely that customers will redeem them is known as:

gift card breakage

A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)

liability

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

liability

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?

$0 Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should record a contingent liability and loss of

$250,000 Reason: When no amount within the range appears more likely than others, we record the minimum amount.

On June 1, 2018, Oxian Corp. receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Oxian should recognize on the income statement for 2018?

$7,000 Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.

Which of the following are included in FICA taxes?

A 6.2% social security tax A 1.45% Medicare tax

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles and back. How does ABC Airlines record the $300 collected in advance?

A debit to Cash of $300 and a credit to Deferred Revenue of $300.

Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for recording a liability but are at least reasonably possible?

A disclosure must describe the contingency. An estimate of the potential loss should be made (if possible) and disclosed.

Identify characteristics of notes payable that are not common to accounts payable.

Based on promissory note Interest bearing

Balance Corporation sells $1,000 of goods to a customer for cash. The sales tax is 5%. The journal entry to record the sale will include which of the following?

Credit sales tax payable $50

On October 1, 2018, Logan Corporation signed a 6-month, 8% interest-bearing promissory note for $10,000. The journal entry required at December 31, 2018 would include which of the following?

Debit interest expense $200

Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?

Disclose the contingency and state that an estimate cannot be made.

Choose the correct formula for calculating interest.

Face amount x annual interest rate x fraction of the year

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

Federal income taxes

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

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

A contingent liability is recorded if which conditions are met?

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

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

__________ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events.

Liability

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

Receipt of cash on a long-term notes receivable

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

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

Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?

The current ratio will remain the same.

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

contingency

A(n) __________ gain is an existing uncertainty that might result in a gain.

contingent

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

contingent

Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a

credit to contingent liability for lawsuit $10,000.

Deferred revenues and sales tax payable typically are reported as _________ liabilities

current

Liabilities are classified as

current and long term

Taxes collected for taxing authorities are recognized as

current liabilities.