CH 8 Smartbook
The point in time when gift cards expire or when it becomes unlikely that customers will redeem them is known as: gift card retirement gift card expiration gift card breakage
gift card breakage
**The mathematical formula for working capital is current assets ______ current liabilities. divided by minus multiplied by plus
minus
When a contingent event that may give rise to a future loss is likely to occur, it is said to be ___ .
probable
Asset
probable future benefit
**Another name for the acid-test ratio is the ___ ratio.
quick
Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should credit notes payable when Munster -pays off the line of credit. -negotiates the terms of the line of credit. -receives cash under the line of credit.
receives cash under the line of credit.
***Taxes collected for taxing authorities are recognized as operating expenses. long-term liabilities. prepaid expenses. revenue. current liabilities.
current liabilities.
If a company receives a payment from a customer in advance for work to be done the following year, this should be classified as a(n) revenue. deferred revenue. accounts receivable. common stock.
deferred revenue.
***Current assets minus current liabilities equals ___ ___.
working capital
Kauff Company properly classifies certain liabilities payable in 15 months as current liabilities. Kauff's operating cycle must be: longer than one year shorter than one year uncertain equal to one year
longer than one year
***Disclosure related to a contingent event usually is not required if the likelihood of payment is ___.
remote (or unlikely / low)
***Disclosure related to a contingent event usually is not required if the likelihood of payment is ___.
remote (or unlikely/ low)
***When a company borrows from another company, the note is referred to as commercial paper. accounts payable. trade payables. a line of credit.
commercial paper.
**The current ratio, acid-test ratio, and amount of working capital are common indicators of: liquidity profitability solvency
liquidity
***Which of the following measure liquidity? Working capital Return on assets Acid-test ratio Current ratio Times-interest earned
Working capital Acid-test ratio Current ratio
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 receivable. -notes payable. -notes receivable. -accounts payable.
accounts payable.
**Quick ratio is another commonly used term for the _____. current ratio acid-test ratio working capital gross profit margin
acid-test ratio
**The ratio that is a more conservative measure than the current ratio of a company's ability to pay its current liabilities is the: -time-interest earned ratio -asset turnover ratio -acid-test ratio -working capital
acid-test ratio
***An interest rate, unless otherwise specified, is typically a(n)___ rate.
annual
A liability is a present responsibility to sacrifice ___ in the future due to a transaction or other event that happened in the ___.
assets (or benefits/ resources); past
Liabilities that are payable within one year commonly are classified as ___ liabilities, while those payable more than one year from now commonly are classified as ___ liabilities.
current; long-term
The term referring to a company having a sufficient amount of cash to pay its current debts is consistency. security. solvency. liquidity.
liquidity.
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 debit notes receivable $5,000. credit notes expense $5,000. credit notes payable $5,000. debit notes payable $5,000.
credit notes payable $5,000.
***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
Liabilities are classified as operating and nonoperating. revenues and expenses. operating and investing. current and long-term.
current and long-term.
The flipside of a contingent gain is a contingent asset. loss. reserve.
loss.
Deferred revenue is classified as a liability an expense a revenue an asset
a liability
Which of the following is a guarantee that protects a customer from product defects for a specified period of time? Promissory note Contingency Sales allowance Warranty
Warranty
***The feature that distinguishes loss ___ from other liabilities is the uncertain outcome.
contingency
***A(n) ___ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
A(n) )___ gain is an existing uncertainty that might result in a gain.
contingent
A transaction or event in which the outcome is uncertain is referred to as a(n) ___.
contingency
***Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___ liabilities.
contingent
***Tax collected on sales is classified as a(n) ___ ___
current liability
Management typically prefers reporting liabilities as long-term rather than current because financial statement users perceive current liabilities as: -riskier than long-term liabilities -a sign of poor debt management -a sign of imminent default
riskier than long-term liabilities
***FICA tax is paid by -both the employee and employer. -the employee only. -the employer only. -neither the employee nor the employer.
both the employee and employer.
***When a company borrows from another company, the note is referred to as -trade payables. -accounts payable. -a line of credit. -commercial paper.
commercial paper.
True or false: Sales tax is recorded on the income statement because it is a cost of making a sale.
False Reason: Sales tax should be recorded as a liability because it is an amount collected from the customer and must be remitted to the state. False
***Which of the following may be classified as contingent liabilities? -Future litigation losses -Deferred revenues -Product warranties -Deposits from customers -Frequent flyer program awards
-Future litigation losses -Product warranties -Frequent flyer program awards
A contingent event for which the likelihood of payment is properly judged to be remote: -is not required to be disclosed in the financial statement notes -must be recorded if the amount is estimated significant -must be disclosed in the financial statement notes
is not required to be disclosed in the financial statement notes
***A contingent liability is recorded if which conditions are met? -It is probable that a future loss will occur. -There is a remote chance that a future loss will occur. -The amount of the loss can be reasonably estimated.
-It is probable that a future loss will occur. -The amount of the loss can be reasonably estimated.
Amounts that are subtracted from an employee's gross pay are referred to as employee costs. payroll taxes. net pay. payroll withholdings.
payroll withholdings.
****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? -An estimate of the potential loss should be made (if possible) and disclosed. -A disclosure must describe the contingency. -The contingency should not be accrued nor disclosed. -The contingency must be accrued if the amount of the potential loss can be reasonably estimated
-An estimate of the potential loss should be made (if possible) and disclosed. -A disclosure must describe the contingency.
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? -An estimate of the potential loss should be made (if possible) and disclosed. -The contingency should not be accrued nor disclosed. -A disclosure must describe the contingency. -The contingency must be accrued if the amount of the potential loss can be reasonably estimated
-An estimate of the potential loss should be made (if possible) and disclosed. -A disclosure must describe the contingency.
***Which of the following are NOT required to be deducted from an employee's paycheck? -Federal income tax -Charitable contributions -State unemployment tax (SUTA) -Federal unemployment tax (FUTA) -Medicare taxes -Social Security
-Charitable contributions -State unemployment tax (SUTA) -Federal unemployment tax (FUTA)
Which of these payroll taxes are paid only by the employer? (Check all that apply.) -FUTA -SUTA -Social Security -Medicare
-FUTA -SUTA Reason: For SUTA and FUTA The employer matches the amount that the employee has paid through withholding.
***Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay? -Federal and state unemployment taxes -Federal income taxes -Employee contributions to retirement plans -Health insurance paid by the employee -Employer contribution for social security taxes
-Federal income taxes -Employee contributions to retirement plans -Health insurance paid by the employee
Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.) -SUTA -Medicare -Social Security -FUTA
-Medicare -Social Security Reason: SUTA and FUTA are only paid by the employer
***By law, an employer is required to pay which of the following amounts as payroll taxes? -Medicare contributions -Health insurance premiums -Social Security contributions -Federal unemployment tax -Life insurance premiums
-Medicare contributions -Social Security contributions -Federal unemployment tax
****Withholding taxes for federal and state income tax are based upon which items? Number of exemptions claimed Size of the corporation in total assets Amounts earned by employees Number of employees at the company
-Number of exemptions claimed -Amounts earned by employees
***Which of the following terms are used to categorize the likelihood of the occurrence of a future loss? -Remote -Uncertain -Reasonably possible -Certain -Probable
-Remote -Reasonably possible -Probable
***What are the two criteria used to determine whether a contingent liability is reported in the financial statements? -The percentage of the payment to total income -The payment date -The likelihood of payment -The ability to estimate the amount of payment
-The likelihood of payment -The ability to estimate the amount of payment
***Payroll withholdings ______. (Select all that apply.) -increase the amount of cash an employee receives -are voluntary -are amounts subtracted from employees' gross earnings to determine their net pay -are amounts added to employees' gross earnings to determine their net pay -decrease the amount of cash an employee receives
-are amounts subtracted from employees' gross earnings to determine their net pay -decrease the amount of cash an employee receives
***Which of these payroll taxes are paid only by the employer? (Check all that apply.) -Social Security -SUTA -Medicare -FUTA
SUTA FUTA
***If a company has a current ratio of 1.2, which of the following is true? -The company has $1.20 in current assets for each dollar of current liabilities. -The company has $1.20 in current liabilities greater than its current assets. -The company has 1.2 times more current assets than its competitors. -The company has $1.20 in current assets for each dollar of equity.
The company has $1.20 in current assets for each dollar of current liabilities.
***Which of the following is an important criteria used to determine the reporting of a contingent liability? -The likelihood of future payment or loss -The classification of the related expense or loss -The potential effect on financial statement users -The effect on key balance sheet ratios
The likelihood of future payment or loss
***Which of the following are common characteristics of commercial paper? -The loan is between two companies -The loan period is between 90 and 365 days -The loan is between a company and a bank -The loan period is between 30 and 270 day
The loan is between two companies The loan period is between 30 and 270 day
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) loss. expense. liability. asset.
liability.
Deferred revenue is classified as a(n) expense. liability. revenue. asset.
liability.
Current Liability
Normally payable within one year
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 - $20,000 x 0.08 - $20,000 x 0.08 x 6/12
$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.
A(n) ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
account
liability
future sacrifice
***Payroll withholdings are -the employer's portion of taxes paid for social security and Medicare. -the items subtracted from an employee's gross pay to arrive at take-home pay. -the payments submitted for both the employee and employer to the government for taxes.
the items subtracted from an employee's gross pay to arrive at take-home pay.
Tax collected on sales is classified as a(n) ___ ___
current liability
employer
State and federal unemployment tax
***Which of the following payroll-related costs are incurred by employees? -federal and state income tax -contributions to state unemployment taxes -employee investments in retirement plans -contributions to federal unemployment taxes
federal and state income tax employee investments in retirement plans
***Although a company may have a high current ratio and appear successful, the accounts used to calculate the current ratio that may have issues or problems are inventories. cash. accounts receivable. equipment.
inventories. accounts receivable.
***Norton's current ratio is 2.5 and its quick ratio is .9. What is the most likely cause for this difference in the current and quick ratio? -Norton has a high inventory balance. -Norton has more current liabilities than current assets. -Norton has more fixed assets than inventory. -Norton has more accounts receivable than cash.
Norton has a high inventory balance.
***A transaction or event in which the outcome is uncertain is referred to as a(n) ___.
contingency
Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year? -A current liability of $540,000. -A noncurrent liability of $504,000. -A current liability of $36,000. -A noncurrent liability of $540,000.
A noncurrent liability of $504,000. A current liability of $36,000. Reason: Total mortgage is $540,000 ($3,000 x 15 years x 12 months). Current portion is $36,000 ($3,000 x 12 months). Noncurrent portion is $504,000 ($540,000 - $36,000)
What are the two classifications for liabilities? Long-term Operating Investing Current Recurring
Long-term Current
***Which of the following may be a proper income statement classification of contingent events? -operating expense -contra-revenue -non-operating expense -discontinued operations
-operating expense -non-operating expense
***A loss that is judged to be probable and for which the amount is reasonably estimable should be -disclosed only in the notes. -recorded. -deferred until the related uncertainly is resolved. -ignored.
-recorded.
****Which of the following items are included in the numerators for both the current ratio and the acid-test ratio? Inventory Current investments Prepaid assets Accounts receivable
Current investments Accounts receivable
Identify a primary reason why financial statement users assess a company's liquidity. -Liquidity represents the most important indicator of profitability. -Lack of liquidity leads to low asset turnover ratios. -Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.
Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.
Long-term Liability
Normally payable more than one year from now
Which of the following obligations is NOT commonly classified as a current liability? Accrued liabilities Dividends payable Accounts payable Note payable due in 3 years
Note payable due in 3 years
Which of the following transactions will increase a company's working capital? -Purchase of inventory on account -Collection of an accounts receivable balance -Receipt of cash on a long-term notes receivable -Receipt of cash on a short-term notes receivable -Payment of an accounts payable
Receipt of cash on a long-term notes receivable
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 Revenue of $300. -A debit to Deferred Revenue of $300 and a credit to Cash of $300. -A debit to Revenue of $300 and a credit to Cash of $300. -A debit to Cash of $300 and a credit to Deferred Revenue of $300.
-A debit to Cash of $300 and a credit to Deferred Revenue of $300.
Gift card ___ refers to the point in time when gift cards expire or when the likelihood of redemption becomes remote.
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: $9,600 $800 $1,600
$800 Reason: $20,000 x 0.08 x 6/12
***Common current liabilities include: -Prepaid insurance -The current portion of long-term debt -Sales tax payable -Notes payable due in two years -Deferred revenues
-The current portion of long-term debt -Sales tax payable -Deferred revenues
***Gladys Company negotiates a line of credit with its bank. The agreement specifies that Gladys may borrow up to $100,000 at a 6% annual interest rate. When Gladys signs the agreement with the bank, Gladys should -record interest expense. -record a notes payable. -not make any journal entry.
not make any journal entry.
The time it takes to spend cash to provide goods and services to a customer until collection of cash from that customer is referred to as the company's ___ ___.
operating cycle
***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 turn over its assets stay profitable earn a high return
pay its current liabilities
For a manufacturer, the most commonly reported contingent liabilities relate to product ___.
warranty
***Which of the following are essential characteristics of a liability? (Select all that apply.) -The obligation results from a past event. -The future sacrifice arises from a written contract. -The future sacrifice arises from a present obligation. -A future sacrifice of an economic benefit is probable. -The future sacrifice is certain and can be reliably measured.
-The obligation results from a past event. -The future sacrifice arises from a present obligation. -A future sacrifice of an economic benefit is probable.
***Which of the following payroll-related taxes must the employer pay by law? -Union dues -Contributions toward retirement funds -Unemployment taxes -Federal Insurance Contributions Act amounts
-Unemployment taxes -Federal Insurance Contributions Act amounts
**Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income? 1.0 0.90 1.5 2.4
2.4
**Which of the following items are included in the numerators for both the current ratio and the acid-test ratio? Inventory Accounts receivable Current investments Prepaid assets
Accounts receivable Current investments
Identify characteristics of notes payable that are not common to accounts payable. -Usually classified as current liability -Based on promissory note -Interest bearing -Does not arise from past transaction
Based on promissory note Interest bearing
**Ming Corporation sells $100,000 goods on account to customers. Ming estimates that warranties will be 3% of sales. At the end of the year, Ming will require which of the following entries for warranties? -Debit warranty liability $3,000; Credit warranty contingency $3,000 -No journal entry is required. -Debit warranty expense $3,000; Credit warranty liability $3,000 -Debit warranty expense $3,000; Credit warranty income $3,000
Debit warranty expense $3,000; Credit warranty liability $3,000 Reason: $100,000 x 3%
employee
State and federal income tax
***Current maturities of long-term debt should be classified as ___ liabilities.
current
***The formula for the acid-test or quick ratio is quick assets divided by ___ ___.
current liabilities
Mathematically, the current ratio is expressed as current assets divided by ___ ___.
current liabilities
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 $1,100. sales revenue of $1,000. sales taxes payable of $100.
sales revenue of $1,000. sales taxes payable of $100.
***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 -lawsuits -natural disasters
warranties
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
***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 $500,000. $250,000. $375,000.
$250,000. Reason: When no amount within the range appears more likely than others, we record the minimum amount.
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 $1,200 0 $600
$300 Reason: $10,000 x 0.12 x 3/12
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 $3,000 $12,000 $24,000
$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 $350,000. $500,000. $400,000. $425,000.
$400,000.
Which of the following are long-term liabilities? -20-year mortgage payable -Common stock -Wages payable -Note payable due in 3 years -Note payable due in 3 months
-20-year mortgage payable -Note payable due in 3 years
***On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. The entry ABC would record at maturity, assuming all year-end (December 31) adjusting entries were made correctly, would include a ______. -credit to Cash of $52,250 -credit to Cash of $50,000 -debit to Interest payable of $1,000 -debit to Notes payable of $50,000 -debit to Interest expense of $1,250 -debit to Interest expense of $2,250
-credit to Cash of $52,250 -debit to Interest payable of $1,000 -debit to Notes payable of $50,000 -debit to Interest expense of $1,250 Reason: ABC pays cash for both principal and interest: $50,000+2,250=$52,250.
***Which of the following is the formula for the current ratio? Current liabilities divided by current assets. Current assets plus current liabilities. Current assets times current liabilities. Current assets divided by current liabilities.
Current assets divided by current liabilities.
****True or False: The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax of 6.2% of the first $7,000 earned by each employee reduced by a maximum 5.4% credit for contributions to a state unemployment program.
True
A(n) ___ 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.
account; notes
***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) -a 3 month rate. -6 month rate. -annual, 12 month rate.
annual, 12 month rate.
***Assets represent probable future economic ___ , whereas liabilities represent probable future economic ___.
benefits; sacrifices
***Which of the following may be a proper balance sheet classification of contingent events? -current liability -retained earnings -long-term liability -accumulated other comprehensive income
current liability long-term liability
At the end of the current year, Maximilliam Inc. signs a 10 year mortgage note, which requires monthly payments of principle and interest. On its current year balance sheet, Maximilliam reports the mortgage as: -current liability only -long-term liability only -current liability (1 year) and long-term liability (9 years)
current liability (1 year) and long-term liability (9 years)
***The portion of a long-term liability that will be paid within the next year is referred to and reported as the: long-term debt current debt total current liability current portion of long-term debt
current portion of long-term debt
***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 $750 -debit to Interest expense of $3,000 -debit to Interest expense of $1,000 -debit to Interest expense of $2,250
debit to Interest expense of $1,000 Reason: Interest expense=$50,000 x 0.06 x (4/12)=$1,000. The interest rate, 6%, is an annual rate, not a 9-month rate. In the current year, 4/12 of 6% will be expensed and the remaining 5/12 (for a total of 9/12) will be expensed in the following year.
***If a liability is classified as current, rather than noncurrent, the company's working capital will ______. decrease stay the same increase
decrease
**Under GAAP, we do not record contingent ___ until the gain is known with certainty.
gain
***Obtaining a note payable for cash results in a(n) ______. -decrease in assets and a decrease liabilities -decrease in assets and an increase in liabilities -increase in liabilities and a decrease in stockholders' equity -increase in assets and an increase in liabilities
increase in assets and an increase in liabilities Reason: The issuance of a note payable is recorded with a debit to Cash and a credit to Notes Payable, a liability.
Interest expense is recorded in the period when it is ___.
incurred
***On October 1, 2018, Perry Corporation signed a 12-month, 8% interest-bearing promissory note for $10,000. Assume that all appropriate adjusting journal entries were made at 12/31. The journal entry required when the note matures on October 1, 2019 would include a debit to interest expense for $400 $600 $800 $200
$600
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 $6,000 $5,000 $12,000
$7,000 Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.
***Which of the following are common examples of long-term liabilities that require reporting of a current portion of the liability? -long-term notes payable with quarterly payments of interest -corporate bonds due in five years -long-term notes payable with quarterly payments of principal and interest -mortgage requiring monthly payments of principal and interest
-long-term notes payable with quarterly payments of principal and interest -mortgage requiring monthly payments of principal and interest
***Which of the following are common examples of long-term liabilities that require reporting of a current portion of the liability? -long-term notes payable with quarterly payments of principal and interest -corporate bonds due in five years -long-term notes payable with quarterly payments of interest -mortgage requiring monthly payments of principal and interest
-long-term notes payable with quarterly payments of principal and interest -mortgage requiring monthly payments of principal and interest
***Under US GAAP, a contingent liability should ______. -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 -be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated -be reported on the balance sheet 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 -be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated
****Under US GAAP, a contingent liability should ______. -not be reported if the loss is remote and unable to be estimated. -be reported on the balance sheet if the loss may possibly occur and can be reasonably estimated. -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. -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.
***Which of the following describes the requirement to pay FUTA. -An employer must pay FUTA taxes even if the employer pays SUTA taxes -An employer must pay FUTA taxes only if no SUTA taxes are due -Both FUTA and SUTA taxes are optional taxes
An employer must pay FUTA taxes even if the employer pays SUTA taxes
***Notes payable is classified as a liability that has which of the following effects? Creates an asset on the balance sheet Creates revenue on the income statement Creates interest expense on the income statement Creates deferred revenue on the income statement
Creates interest expense on the income statement
***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 Interest Expense $6,000 -Debit to Cash $100,000 -Credit to Note Payable $106,000
Credit to Note Payable $100,000 Debit to Cash $100,000 Reason: Interest expense and Interest Payable is not recorded until time has elapsed.
**Which of the following are items included in the numerator of the quick ratio? Current investments Inventory Accounts receivable Current liabilities Cash
Current investments Accounts receivable Cash
***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 $3,000 -Debit interest expense $4,000 -Credit cash $6,000 -Credit notes payable $4,000
Debit interest expense $4,000 Reason: The annual rate of interest is 12% so the total interest of $12,000 is multiplied by the faction of the year or 4/12
***Rimland Corporation has employee salary expense of $10,000 on April 30, 2018. FICA contributions are 7.65%, and FUTA contributions are 6.2%. The journal entry for payroll tax expense will include which of the following? -Debit Salary expense $1,385 -Credit cash $10,000 -Credit wages payable $8,615 -Debit payroll tax expense $1,385
Debit payroll tax expense $1,385
Ming Corporation sells $100,000 goods on account to customers. Ming estimates that warranties will be 3% of sales. At the end of the year, Ming will require which of the following entries for warranties? -Debit warranty liability $3,000; Credit warranty contingency $3,000 -No journal entry is required. -Debit warranty expense $3,000; Credit warranty liability $3,000 -Debit warranty expense $3,000; Credit warranty income $3,000
Debit warranty expense $3,000; Credit warranty liability $3,000 Reason: $100,000 x 3%
**Wang Corporation sells $200,000 goods on account to customers. Wang estimates that warranties will be 2% of sales. At the end of the year, Wang will require which of the following entries for warranties? -Debit warranty liability $4,000; Credit warranty contingency $4,000 -Debit warranty expense $4,000; Credit warranty income $4,000 -Debit warranty expense $4,000; Credit warranty liability $4,000 -No journal entry is required.
Debit warranty expense $4,000; Credit warranty liability $4,000
***Which of the following are current liabilities? Deferred revenues Taxes payable Accounts payable 2 year note payable
Deferred revenues Taxes payable Accounts 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? -Prepare an estimate and record a loss. -Do not disclose the contingency until an estimate can be made. -Disclose the contingency and state that an estimate cannot be made.
Disclose the contingency and state that an estimate cannot be made.
Which payroll tax is paid equally by the employee and the employer? -SUTA -Federal income tax -State income tax -FUTA -FICA
FICA
***Choose the correct formula for calculating interest. -Present value x rate per interest period -Face amount x annual interest rate x fraction of the year -Face amount x rate per interest period
Face amount x annual interest rate x fraction of the year
True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
False
**True or false: Your employer is allowed to keep the amounts withheld from your gross pay.
False Reason: Your employer is required to send payroll deductions to the appropriate government agency or company.
***True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
False Reason: Only a portion of the employee's pay is subject to FUTA, or federal unemployment tax.
***Which of the following are employer payroll costs? -Federal and state unemployment taxes -Federal income tax withholding -Employee contributions to retirement savings -Employer portion of Medicare tax
Federal and state unemployment taxes Employer portion of Medicare tax
Which of the following are current liabilities? Note payable due in 3 months Note payable due in 23 months Accounts receivable Accounts payable Wages payable
Note payable due in 3 months Accounts payable Wages payable
***Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio? Short-term trading securities Prepaid assets Accounts receivable Inventory
Prepaid assets Inventory
**Which type of contingent liability would most likely be found on a balance sheet prepared under U.S. GAAP? -Remote contingent liability. -Probable contingent liability that can be estimated. -Reasonably possible contingent liability.
Probable contingent liability that can be estimated.
**Which of the following transactions will increase a company's working capital? -Payment of an accounts payable -Receipt of cash on a long-term notes receivable -Receipt of cash on a short-term notes receivable -Collection of an accounts receivable balance -Purchase of inventory on account
Receipt of cash on a long-term notes receivable
***Which of the following is correct regarding gain contingencies? -They are recorded if it is probable that a gain will be realized. -They are recorded if it is possible that a gain will be realized. -They are recorded when the gain is known with certainty.
They are recorded when the gain is known with certainty.
***True or false: Companies prefer to report liabilities as long-term versus current.
True Reason: Classifying liabilities as long-term makes the firm appear less risky.
***We record interest expense in the period in which we pay it. incur it.
incur it.
On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's income statement reports: -interest revenue for six months -interest expense for six months -interest revenue for one month -interest expense for one month
interest expense for one month
On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's balance sheet reports: -interest payable for six months -interest payable for one month -interest receivable for six months -interest receivable for one month
interest payable for one month
The journal entry to record employer payroll taxes affects ______. -liabilities only -assets and liabilities -liabilities and stockholders' equity -assets only
liabilities and stockholders' equity Reason: The entry increases Payroll tax expense and increases liabilities.
A(n) ___ 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
***A ___ of ___ is an informal agreement that permits a company to borrow up to a prearranged amount without having to follow formal loan procedures.
line of credit
***Gladys Company signs an agreement under which Gladys may borrow up to $100,000 at a 6% annual interest rate whenever the company needs cash. This agreement is commonly referred to as a -line of credit -term loan -commercial paper
line of credit
Given a choice, most companies will prefer classifying liabilities as ___.
long-term
Kauff Company properly classifies certain liabilities payable in 15 months as current liabilities. Kauff's operating cycle must be: -uncertain -longer than one year -equal to one year -shorter than one year
longer than one year
***An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account. liability expense revenue asset
revenue Reason: The credit is to revenue and represents the amount of Deferred revenue (a liability) that has been earned and no longer owed.
Classifying liabilities as current or long term helps creditors and investors assess ___.
risk