Principles of Accounting Ch 8

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred Revenue account?

$2,000

Smith Company filed suit against Western, Incorporated, seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?

No asset or gain is reported.

How long are interest rates generally measured?

annually

Which of these payroll taxes are paid only by the employer? (Check all that apply.) a) Medicare b) Social Security c) FUTA d) SUTA

c) and d)

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

contingency

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

liability

What may be a proper balance sheet classification of contingent events?

long-term liability or current liability

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.

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

Number of exemptions claimed and amounts earned by employees

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

Remote, reasonably possible, and probable

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

Sales tax payable

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.

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 what?

a credit to contingent liability and a debit to loss

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 what?

a debit to loss for $10,000 and a credit to contingent liability for lawsuit $10,000

What are some common current liabilities?

accounts payable, salaries payable, utilities payable, interest payable, the current portion of long-term debt, sales tax payable and deferred revenues

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 what?

accounts payable.

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

What is an accounts payable?

amounts a company owes to suppliers of merchandise or services that it has bought on credit

What is a contingent gain?

an existing uncertain situation that might result in a gain

Which of the following may be classified as contingent liabilities? a) Deposits from customers b) Frequent flyer program awards c) Deferred revenues d) Product warranties e) Future litigation losses

b), d), and e)

What are liabilities classified as?

current and long-term

What is working capital?

current assets - current liabilities

Deferred revenues and sales tax payable typically are reported as what?

current liabilities

Taxes collected for taxing authorities are recognized as what?

current liabilities.

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

liability

What is liquidity?

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

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.

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 is the estimated warranty liability reported in the balance sheet this year?

$30,000-$5,000=$25,000

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?

$400

What are employer payroll costs?

- Employer portion of Medicare tax - Federal and state unemployment taxes - Employer contributions to retirement and savings plans - Employer contributions for health, dental, disability, and life insurance

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

Payroll withholdings ________

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

What are examples of fringe benefits provided by employers to their employees?

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

On November 1, year 1, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay all the interest as well as the principal on October 31, year 2. The journal entry on November 1, year 1 would include what?

- credit to Note Payable for $100,000 - Debit to Cash for $100,000

Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?

0

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 is the warranty expense reported in the income statement this year?

0.05x$600,000=$30,000

When a product or service is delivered to a customer that previously paid in advance, how is the delivery recorded as?

A debit to a liability and a credit to a revenue account.

When a customer pays in advance for a product or service, how is the advance payment received by the company recorded as?

A debit to an asset and a credit to a liability account.

What are fringe benefits?

Additional employee benefits paid for by the employer which are non-financial rewards. Fringe benefits include sick leave, vacation pay, company cars, pension plans, and health plans that provide additional compensation to employees beyond base wages. Cafeteria-style fringe benefits plans let employees choose the benefits they want, up to a certain dollar amount.

What is a contingent liability?

An existing uncertain situation that might result in a loss.

What is a liability?

An obligation of a company to transfer some economic benefit in the future

Allied Partners filed suit against Big Sky, Incorporated, seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?

As a liability for $500,000 with disclosure of the range.

What is the acid test ratio?

Cash + current investments + accounts receivable / current liabilities; measures the availability of liquid current assets to pay current liabilities. p.612

What is the current ratio?

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

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 and acid-test ratio will increase

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

debit cash $5,000 and credit notes payable $5,000

What is the current portion of long-term debt?

debt that will be paid within the next year

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

decrease

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

decrease

Which of the following transactions will increase a company's working capital? a) Purchase of inventory on account b) Receipt of cash on a short-term notes receivable c) Collection of an accounts receivable balance d) Payment of an accounts payable e) Receipt of cash on a long-term notes receivable

e) Receipt of cash on a long-term notes receivable

What may be a proper income statement classification of contingent events?

operating expense or non-operating expense

What are amounts that are subtracted from an employee's gross pay referred to as?

payroll withholdings

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. (and a debit to cash of $1,100)

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

to pay its current liabilities

What is not deducted from an employee's salary in most states?

unemployment taxes

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

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