SmartBook Ch 8
Identify characteristics of notes payable that are not common to accounts payable
- Interest bearing - Based on promissory note
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
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.
FICA is the acronym for the
Federal Insurance Contribution Act
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
A contingent liability is an existing situation that might result in a loss depending on the outcome of a future event.
uncertain
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
An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.
revenue
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. (Enter one word per blank)
annual
Taxes collected for taxing authorities are recognized as
current liabilities
Which of the following may be a proper balance sheet classification of contingent events?
- long-term liability - current liability
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
withholding taxes
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
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
Liabilities are classified as
current and long-term
Amounts that are subtracted from an employee's gross pay are referred to as
payroll withholdings
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to liabilities.
contingent
Which of the following must employers by law withhold from their employees' pay?
Federal income taxes
For a manufacturer, the most commonly reported contingent liabilities relate to product
warranties
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
warranty
Which of the following 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
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
Gift card refers to the point in time when gift cards expire or when the likelihood of redemption becomes remote.
breakage
The feature that distinguishes loss from other liabilities is the uncertain outcome. (Enter one word per blank)
contingencies
A transaction or event in which the outcome is uncertain is referred to as a(n) . (Enter one word per blank)
contingency
A(n) liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
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
Deferred revenue should be classified as a(n) on the balance sheet. (Enter one word per blank)
liability
Deferred revenue is classified as
a liability
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
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
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called benefits.
fringe
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
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
What are the two classifications for liabilities?
- Long-term - Current
The point in time when gift cards expire or when it becomes unlikely that customers will redeem them is known as:
gift card breakage
Choose the correct formula for calculating interest.
Face amount x annual interest rate x fraction of the year
Which of these payroll taxes are paid only by the employer? (Check all that apply.)
- FUTA - SUTA
Common current liabilities include:
- The current portion of long-term debt - Sales tax payable - Deferred revenues
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
- Probable - Reasonably possible - Remote
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
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.
Blank 1: account or accounts Blank 2: note or notes
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.
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.
On September 1, 2021, 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 2021?
$4,000 Reason: $24,000/24 months = $1,000 per month x 4 months = $4,000 revenue recognized.
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
Correctly match the salary-related costs with the payee.
Employee - State and federal income tax Employer - State and federal unemployment tax
Which of the following is an important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
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
On June 1, 2021, 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 2021?
$7,000 Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue
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)
On November 1, Year 1, 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, Year 2. The journal entry on November 1, Year 1 would include which of the following?
- Debit to Cash $100,000 - Credit to Note Payable $100,000
Which of the following payroll-related taxes must the employer pay by law?
- Federal Insurance Contributions Act amounts - Unemployment taxes
Which of the following are employer payroll costs?
- Federal and state unemployment taxes - Employer portion of Medicare tax
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 these payroll taxes are paid by the employer and the employee? (Check all that apply.)
- Medicare - Social Security Reason: The employer matches the amount that the employee has paid through withholding.
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
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
Which of the following voluntary contributions by employees may employers deduct from their employees' pay?
- employee investments in retirement - contributions toward retirement funds
Which of the following payroll-related costs are incurred by employees?
- federal and state income tax - employee investments in retirement plans
Under US GAAP, a contingent liability should ______.
- not be reported if the loss is remote and unable to be 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 will probably occur and can be reasonably estimated
Which of the following may be a proper income statement classification of contingent events?
- operating expense - non-operating expense
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.
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
A(n) payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)
accounts
A(n) gain is an existing uncertainty that might result in a gain.
contingent
The portion of long-term debt is the amount that will be paid within the next year. (Enter only one word.)
current
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
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