Accounting 8
Assuming a current ratio of 1.00 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? (LO8-6) 1. Increase the current ratio and increase the acid-test ratio. 2. No change to the current ratio and decrease the acid-test ratio. 3. Decrease the current ratio and decrease the acid-test ratio. 4. Increase the current ratio and decrease the acid-test ratio.
2
what is social security tax rate? what is medicare? what is fica's tax rate?
6.2% 1.45% 7.65% (6.2+1.45)
Current liabilities: (LO8-1) a. May include contingent liabilities. b. Include obligations payable within one year or one operating cycle, whichever is shorter. c. Can be satisfied only with the payment of cash. d. Are preferred by most companies over long-term liabilities.
A
Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be: (LO8-5) a. Disclosed but not reported as a liability. b. Disclosed and reported as a liability. c. Neither disclosed nor reported as a liability. d. Reported as a liability but not disclosed.
A
Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will settle the lawsuit for an estimated amount in the range of $75,000 to $175,000, with all amounts in the range considered equally likely. How should Western report this litigation? (LO8-5) a. As a liability for $75,000 with disclosure of the range. b. As a liability for $125,000 with disclosure of the range. c. As a liability for $175,000 with disclosure of the range. d. As a disclosure only. No liability is reported.
A
What is a contingent liability and what are some examples?
A contingent liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event Examples: Lawsuits, product warranties, environmental problems, and premium offers.
Contingent gain is what?
A situation that might result in a gain, often on the more likely side, yet it is depending on something
We record interest expense on a note payable in the period in which: (LO8-2) a. We pay cash for interest. b. We incur interest. c. We pay cash and incur interest. d. We pay cash or incur interest.
B
Which of the following is not deducted from an employee's salary? (LO8-3) a. FICA taxes. b. Unemployment taxes. c. Income taxes. d. Employee portion of insurance and retirement payments.
B
If Express Jet borrows $100 million on October 1, 2018, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 2018? (LO8-2) a. $0. b. $1 million. c. $1.5 million. d. $6 million.
C
The acid-test ratio is: (LO8-6) a. Current assets divided by current liabilities. b. Cash and current investments divided by current liabilities. c. Cash, current investments, and accounts receivable divided by current liabilities. d. Cash, current investments, accounts receivable, and inventory divided by current liabilities.
C
Which of the following statements regarding liabilities is not true? (LO8-1) a. Liabilities can be for services rather than cash. b. Liabilities are reported in the balance sheet for almost every business. c. Liabilities result from future transactions. d. Liabilities represent probable future sacrifices of benefits.
C
Working capital:
Current assets - current liabilities
The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as: (LO8-4) a. Sales tax expense. b. Sales tax revenue. c. Sales tax receivable. d. Sales tax payable.
D
How would you record a deferred revenue? when a company accepts money in advance of rendering service or delivering goods? what happens once the company delivers the goods?
Debit: Cash Credit: Deferred Revenue Post delivery: Debit: Deferred Revenue Credit: sales revenue
When a company borrows cash from a bank, the company signs a note promising to repay the amount borrowed plus interest: How would this be recorded? This is when cash proceeds are received when the note is signed
Debit: Cash Credit: notes payable
How do you record interest incurred but not paid?
Debit: Interest Expense Credit: Interest Payable
When the note and interest become due or payable, the company records the following type of journal entry:
Debit: Notes Payable Debit: Interest Expense Debit: Interest payable Credit: Cash
For the lender, when the note and interest become due, how would it be recorded?
Debit: Notes receivable Debit: Interest revenue Debit: Interest receivable
Record additional payroll tax expenses:
Debit: Payroll tax expense Credit: Fica tax payable Credit: Unemployment tax payable
Record employer provided fringe benefits:
Debit: Salaries expense Credit: accounts payable
How do you record estimated warranty obligations?
Debit: Warranty Expense Credit: Warranty Liability
Entry to record an actual warranty payment?
Debit: Warranty Payment Credit: Cash
Sales tax payable: how would you record the sale? How would you record remittance of taxes to state tax agency
Debit: cash Credit: sales revenue Credit: Sales tax payable Debit: Sales tax payable Credit: Cash
Employee salaries expenses and withholdings is recorded as:
Debit: salaries expense Credit: Income tax payable Credit: fica tax payable Credit: salaries payable
is a contingent liability recorded if a loss is unlikely?
False, a contingent liability is recorded when there is a probable loss
What does FICA stand for and what taxes fall under FICA?
Federal Insurance Contributions Act Social security and medicare taxes
Employees only pay this payroll current liability:
Federal and state income taxes
Employers only pay this payroll current liability:
Federal and state unemployment taxes
What are additional employee benefits paid for by the employer referred to as?
Fringe benefits
interest is recorded in the period it incurred or the period that it was paid?
Incurred
Accounts payable is a current liability or expense?
Liability
What does distinguishing between current and long term liabilities help investors and creditors asses?
Risk
Payroll Current Liabilities: Employer and employee pay shares in the following:
Social security and medicare Health, dental, disability, and life insurance Retirement or savings play
What are the criteria for contingent liability:
The likelihood of payment: 1. probable 2. reasonably possible 3. remote the amount of payment 1. reasonably estimable 2. not reasonably estimable
What are the most common examples of a contingent liability
Warranties
How often are liabilities due?
Within one year
What are the 3 measures of liquidity?
Working capital= current assets -current liabilities Current ratio= current assets/current liabilities Acid-test ratio= cash + accounts receivable + Current investments / Current liabilities
Debt Covenant:
an agreement between a borrower and a lender that requires certain minimum financial measures be met or the lender can recall the debt.
difference between current and long term liabilities:
current liabilities are payable within one year and long term liabilities are payable more than one year from now
The government does not collect the same amount of FICA tax from the employer? true or false?
false, the government collects 7.65% from the employee and the employer thus the government collects a 15.3% tax between the employee and the employer of a business
Liquidity refers to having what?
having sufficient cash to pay maturing debts
How do you calculate interest on notes?
interest = face value*annual interest rate* fraction of the year
Reporting liabilities as long-term can make a company seem?
less risky (long term debt is more stable)
The employer records the amounts deducted from employee payroll as what until it pays them to the appropriate organizations?
liabilities
How long are long term liabilities payable?
more than a year from the current date
the time it takes to produce revenue:
operating cycle
if a company has an operating cycle longer than one year, its current liabilities are defined by the:
operating cycle rather than by the length of a year
interest in terms of an annual percentage can be applied to what?
the face value of the loan
When a company borrows money from a borrower, who makes interest?
the lender makes money off of the borrower in return for the borrower using the lender's money
It is the law for companies to withhold federal and state income taxes?
yes
