ch 8
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.
Which of the following payroll-related taxes must the employer pay by law?
Federal Insurance Contributions Act amounts Unemployment taxes
Which of the following may be classified as contingent liabilities?
Future litigation losses Frequent flyer program awards Product warranties
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 of the following are not required payroll withholdings?
State unemployment tax (SUTA) Charitable contributions Federal unemployment tax (FUTA)
Deferred revenue is classified as
a liability
When an employer withholds items such as charitable organization contributions from an employee's pay, the employer must record the item as
a liability until the amount is paid to the organization.
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.
A transaction or event in which the outcome is uncertain is referred to as a(n) ___
contingency
A(n) ___ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___ liabilities.
contingent
Taxes collected for taxing authorities are recognized as
current liabilities.
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
An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.
revenue
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.
Deductions from employee pay for contributions toward retirement savings plans and contributions for charitable organizations are examples of:
voluntary employee deductions
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
For a manufacturer, the most commonly reported contingent liabilities relate to product ___
warranty
Payroll withholdings ______. (Select all that apply.)
decrease the amount of cash an employee receives are amounts subtracted from employees' gross earnings to determine their net pay
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.
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?
4000
Which of the following may be a proper income statement classification of contingent events?
non-operating expense operating expense
When a contingent event that may give rise to a future loss is likely to occur, it is said to be ___
probable
Another name for the acid-test ratio is the ___ ratio.
quick
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?
remain the same
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
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
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
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?
7000 Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.
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.
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
What are the two classifications for liabilities?
Current Long-term
Which of the following is the formula for the current ratio?
Current assets divided by current liabilities.
Common current liabilities include:
Deferred revenues The current portion of long-term debt Sales tax payable
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
Withholding taxes for federal and state income tax are based upon which items?
Number of exemptions claimed Amounts earned by employees
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 terms are used to categorize the likelihood of the occurrence of a future loss?
Reasonably possible Remote Probable
Which of the following is an important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
Warranty
an ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
account
Identify characteristics of notes payable that are not common to accounts payable.
based on the promise note interest bearing
Under US GAAP, a contingent liability should ______.
be reported on the balance sheet if the loss will probably occur and can be reasonably estimated 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
FICA tax is paid by
both the employee and employer.
Gift card ___ refers to the point in time when gift cards expire or when the likelihood of redemption becomes remote.
breakage
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
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 4000
Which of the following payroll-related costs are incurred by employees?
federal and state income tax employee investments in retirement plans
Which payroll tax is paid equally by the employee and the employer?
fica
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ___ benefits
fringe
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ___ benefits.
fringe
Obtaining a note payable for cash results in a(n) ______.
increase / increase
Deferred revenue should be classified as a(n) ___ on the balance sheet.
liability
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.
an ___ 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
liabilty
Which of the following may be a proper balance sheet classification of contingent events?
long-term liability current liability
The flipside of a contingent gain is a contingent
loss
Payroll withholdings are
the items subtracted from an employee's gross pay to arrive at take-home pay.
The employer's portion of FICA tax remitted to the taxing authority is:
the same as the employee's portion
A contingent liability is an existing ___ situation that might result in a loss depending on the outcome of a future even
uncertain
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.
Quick ratio is another commonly used term for the _____.
acid-test ratio
An interest rate, unless otherwise specified, is typically a(n) ___ rate
annual
The mathematical formula for working capital is current assets ______ current liabilities.
minus
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 Reason: $20,000 x 0.08 x 6/12
Which of the following are included in FICA taxes?
A 1.45% Medicare tax A 6.2% social security tax
A(n) ___ gain is an existing uncertainty that might result in a gain. Listen to the complete question
Blank 1: contingent or contingency
Mathematically, the current ratio is expressed as current assets divided by ___
Blank 1: current Blank 2: liabilities or liability
Current assets minus current liabilities equals ___ ___
Blank 1: working Blank 2: capital or capitol
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.
Current ratio will increase Acid-test ratio will increase
Which of the following must employers by law withhold from their employees' pay?
Federal income taxes
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.
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
The ___ portion of long-term debt is the amount that will be paid within the next year.
current
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:
debit to loss credit to contingent liability
If a liability is classified as current, rather than noncurrent, the company's working capital will ______.
decrease
Amounts that are subtracted from an employee's gross pay are referred to as
payroll withholdings.
On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, ABC's adjusting entry at December 31 would include a ______.
debit to Interest expense of $1,000
The point in time when gift cards expire or when it becomes unlikely that customers will redeem them is known as:
gift card breakage
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 Reason: $20,000 x 0.08 x 6/12 The stated interest rate of 8% is an annual rate and the applicable interest is for 6 months.
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: Multiple choice question.
300 Reason: $10,000 x 0.12 x 3/12
A loss that is judged to be probable and for which the amount is reasonably estimable should be
recorded
___ refers to a company's cash position and overall ability to obtain cash in the normal course of business.
Blank 1: Liquidity
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
withholding taxes.
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.
An ___ 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 date.
Blank 1: account or accounts Blank 2: note or notes
The feature that distinguishes loss ___ from other liabilities is the uncertain outcome.
Blank 1: contingencies, contingency, or contingent
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
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 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
True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
False
FICA is the acronym for the
Federal Insurance Contribution Act.
Which of the following are employer payroll costs?
Federal and state unemployment taxes Employer portion of Medicare tax
Which of the following transactions will increase a company's working capital?
Receipt of cash on a long-term notes receivable
Which of these payroll taxes are paid only by the employer? (Check all that apply.)
SUTA FUTA
Which of these payroll taxes are paid by the employer and the employee?
Social Security Medicare
By law, an employer is required to pay which of the following amounts as payroll taxes?
Social Security contributions Federal unemployment tax Medicare contributions
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.
Liabilities are classified as
current and long-term.
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