Chapter 11

Ann Ellis's regular rate of pay is $12 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were

$624.

From a liquidity standpoint, it is more desirable for a company to have current a. assets equal current liabilities. b. liabilities exceed current assets. c. assets exceed current liabilities. d. liabilities exceed long-term liabilities.

Assets exceed current liabilities

The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.

a current liability.

A note payable is in the form of a. a contingency that is reasonably likely to occur. b. a written promissory note. c. an oral agreement. d. a standing agreement.

a written promissory note

All of the following are reported as current liabilities except a. accounts payable. b. bonds payable. c. notes payable. d. unearned revenues.

bonds payable

Shaw Company sells 2,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 40 units for a total cost of $2,000. What amount will be reported on Shaw Company's balance sheet as Estimated Warranty Liability on December 31, 2010? a. $2,000 b. $3,000 c. $1,000 d. It cannot be determined.

$1,000

The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be a. $6,000. b. $3,333. c. $1,500. d. $1,000.

$1,000

The interest charged on a $50,000 note payable, at the rate of 8%, on a 3-month note would be a. $4,000. b. $2,000. c. $1,000. d. $667.

$1,000.

A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $315,000, what is the amount of the sales taxes owed to the taxing agency? a. $300,000 b. $315,000 c. $15,750 d. $15,000

$15,000

Valerie's Salon has total receipts for the month of $16,430 including sales taxes. If the sales tax rate is 6%, what are Valerie's sales for the month? a. $15,444.20 b. $17,415.80 c. $15,500.00 d. It cannot be determined.

$15,500.00

The interest charged on a $100,000 note payable, at the rate of 8%, on a 90-day note would be a. $8,000. b. $4,444. c. $2,000. d. $667.

$2,000.

Shaw Company sells 2,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 40 units for a total cost of $2,000. What amount should Shaw Company accrue on December 31 for estimated warranty costs? a. $3,000 b. $2,000 c. $1,000 d. $15,000

$3,000

Crawford Company has total proceeds (before segregation of sales taxes) from sales of $4,770. If the sales tax is 6%, the amount to be credited to the account Sales is: a. $4,770. b. $4,484. c. $5,056. d. $4,500.

$4,500.

Reliable Insurance Company collected a premium of $15,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Premiums at December 31? a. $0. b. $5,000. c. $10,000. d. $15,000.

$5,000.

The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be a. $3,000. b. $1,500. c. $750. d. $500.

$500

Jan Goll has worked 44 hours this week. She worked in excess of 8 hours each day. Her regular hourly wage is $15 per hour. What are Jan's gross wages for the week? (The company Jan works for is in compliance with the Fair Labor Standards Act.) a. $660 b. $690 c. $990 d. $720

$690

Assuming a FICA tax rate of 8% on the first $100,000 in wages, and a federal income tax rate of 20% on all wages, what would be an employee's net pay for the year if he earned $110,000 for the year? a. $110,000 b. $79,200 c. $88,000 d. $80,000

$80,000

A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $189,000, what is the amount of the sales taxes owed to the taxing agency? a. $180,000 b. $189,000 c. $9,450 d. $9,000

$9,000

Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $18,900. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $900 b. $945 c. $45 d. It cannot be determined.

$900

Hardy Company has current assets of $90,000, current liabilities of $100,000, long-term, assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are: a. $90,000 and .90:1. b. -$10,000 and 1.50:1. c. $10,000 and .90:1. d. -10,000 and .90:1.

-10,000 and .90:1.

Most companies involved in interstate commerce are required to compute overtime at a. the worker's regular hourly wage. b. 1.25 times the worker's regular hourly wage. c. 1.5 times the worker's regular hourly wage. d. 2.5 times the worker's regular hourly wage.

1.5 times the worker's regular hourly wage.

Which of the following items would not be identified if a contingent liability were disclosed in a financial statement footnote? a. The nature of the item b. The expected outcome of the future event c. A numerical probability of the expected loss d. The amount of the contingency, if known

A numerical probability of the expected loss

The entry to record the proceeds upon issuing an interest-bearing note is a. Interest Expense Cash Notes Payable b. Cash Notes Payable c. Notes Payable Cash d. Cash Notes Payable Interest Payable

Cash Notes Payable

Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 60,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?

Cash Unearned Subscription Revenue

A cash register tape shows cash sales of $1,500 and sales taxes of $90. The journal entry to record this information is

Cash 1,590 Sales 1,500 Sales Taxes Payable 90

A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is

Cash 1,620 Sales Tax Payable 120 Sales 1,500

Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1. Givens Brick Company signs a $200,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is

Cash 200,000 Notes Payable 200,000

Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1. Givens Brick Company signs a $200,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?

Cash 200,000 Notes Payable 200,000

Which one of the following payroll taxes does not result in a payroll tax expense for the employer? a. FICA tax b. Federal income tax c. Federal unemployment tax d. State unemployment tax

Federal income tax

On January 1, 2010, Donahue Company, a calendar-year company, issued $400,000 of notes payable, of which $100,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2010, is a. Current Liabilities, $400,000. b. Long-term Debt , $400,000. c. Current Liabilities, $100,000; Long-term Debt, $300,000. d. Current Liabilities, $300,000; Long-term Debt, $100,000.

Current Liabilities, $100,000; Long-term Debt, $300,000.

On January 1, 2010, Howard Company, a calendar-year company, issued $600,000 of notes payable, of which $150,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2010, is a. Current Liabilities, $600,000. b. Long-term Debt, $600,000. c. Current Liabilities, $300,000; Long-term Debt, $300,000. d. Current Liabilities, $150,000; Long-term Debt, $450,000.

Current Liabilities, $150,000; Long-term Debt, $450,000.

On September 1, Joe's Painting Service borrows $50,000 from National Bank on a 4-month, $50,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared?

Interest Expense 1,000 Interest Payable 1,000

On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

Interest Expense 5,000 Interest Payable 5,000

The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is a. Notes Payable Interest Payable Cash b. Notes Payable Interest Expense Cash c. Notes Payable Cash d. Notes Payable Cash Interest Payable

Notes Payable Interest Payable Cash

Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1. Givens Brick Company signs a $200,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

Notes Payable 200,000 Interest Payable 12,000

On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is

Notes Payable 250,000 Interest Payable 5,000 Cash 255,000

On September 1, Joe's Painting Service borrows $50,000 from National Bank on a 4-month, $50,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is

Notes Payable 50,000 Interest Payable 1,000

Which one of the following is shown first under current liabilities by many companies as a matter of custom? a. Accrued expenses b. Current maturities of long-term debt c. Sales taxes payable d. Notes payable and accounts payable

Notes payable and accounts payable

Kelly Rice has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Rice account for the cash received at the end of the engagement?

Prepaid Consulting Fees Earned Consulting Revenue

Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance?

Sales Taxes Payable 600 Cash 600

Ed's Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed's Bookstore make to show the April remittance?

Sales Taxes Payable 750 Cash 750

Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.

accrued over the life of the note.

The journal entry to record the payroll for a period will include a credit to Wages and Salaries Payable for the gross a. amount less all payroll deductions. b. amount of all paychecks issued. c. pay less taxes payable. d. pay less voluntary deductions.

amount less all payroll deductions.

The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a long-term liability. d. not be separated from the long-term portion of debt.

be reclassified as a current liability.

Current maturities of long-term debt a. require an adjusting entry. b. are optionally reported on the balance sheet. c. can be properly classified during balance sheet preparation, with no adjusting entry required. d. are not considered to be current liabilities.

can be properly classified during balance sheet preparation, with no adjusting entry required.

If a liability is dependent on a future event, it is called a a. potential liability. b. hypothetical liability. c. probabilistic liability. d. contingent liability.

contingent liability.

Lincoln Company sells 600 units of a product that has a one-year warranty on parts. The average cost of honoring one warranty contract is $50. During the year 30 contracts are honored at a cost of $1,500. It is estimated that 60 contracts will be honored in the following year. The adjusting entry at the end of the current year will include a a. credit to Estimated Warranty Liability for $3,000. b. credit to Estimated Warranty Liability for $4,500. c. debit to Warranty Expense for $1,500. d. debit to Warranty Expense for $4,500.

credit to Estimated Warranty Liability for $3,000.

A company receives $132, of which $12 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Tax Expense for $12. b. credit to Sales Tax Payable for $12. c. debit to Sales for $132. d. debit to Cash for $120.

credit to Sales Tax Payable for $12.

Sales taxes collected by a retailer are recorded by a. crediting Sales Taxes Revenue. b. debiting Sales Taxes Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.

crediting Sales Taxes Payable.

The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.

current assets divided by current liabilities.

Working capital is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.

current assets minus current liabilities.

Sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.

current liabilities.

Advances from customers are classified as a(n) a. revenue. b. expense. c. current asset. d. current liability.

current liability.

On October 1, 2010, Pennington Company issued a $40,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2010, the adjusting entry for accrued interest will include a: a. credit to Notes Payable of $1,000. b. debit to Interest Expense of $1,000 c. credit to Interest Payable of $2,000. d. debit to Interest Expense of $1,500.

debit to Interest Expense of $1,000

On October 1, 2010, Pennington Company issued a $40,000, 10%, nine-month interest-bearing note. Assuming interest was accrued in June 30, 2011, the entry to record the payment of the note on July 1, 2011, will include a: a. debit to Interest Expense of $1,000. b. credit to Cash of $40,000 c. debit to Interest Payable of $3,000. d. debit to Notes Payable of $43,000.

debit to Interest Payable of $3,000.

A company receives $174, of which $14 is for sales tax. The journal entry to record the sale would include a a debit to Sales Tax Expense for $14. b. debit to Sales Tax Payable for $14. c. debit to Sales for $174. d. debit to Cash for $174.

debit to Sales for $174.

A contingency that is remote a. should be disclosed in the financial statements. b. must be accrued as a loss. c. does not need to be disclosed. d. is recorded as a contingent liability.

does not need to be disclosed.

The amount of income taxes withheld from employees is dependent on each of the following except the a. employee's gross earnings. b. employee's net pay. c. length of the pay period. d. number of allowances claimed by the employee.

employee's net pay.

With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.

equal to the note's face value

The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's a. maturity value. b. market value. c. face value. d. cash realizable value.

face value

Employee payroll deductions include each of the following except a. federal unemployment taxes. b. federal income taxes. c. FICA taxes. d. insurance, pension plans, and union dues.

federal unemployment taxes.

The total compensation earned by an employee is called a. take-home pay. b. net pay. c. net earnings. d. gross earnings.

gross earnings

Disclosure of a contingent liability is usually made a. parenthetically, in the body of the balance sheet. b. parenthetically, in the body of the income statement. c. in a note to the financial statements. d. in the management discussion section of the financial statement.

in a note to the financial statements.

Current liabilities generally appear a. after long-term debt on the balance sheet. b. in decreasing order of magnitude on the balance sheet. c. in order of maturity on the balance sheet. d. in increasing order of magnitude on the balance sheet.

in decreasing order of magnitude on the balance sheet.

The accounting for warranty cost is based on the matching principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period. d. only if the repairs are expected to be made within one year.

in the period in which the product was sold.

As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.

increased; the Interest Payable account is increased.

When an interest-bearing note matures, the balance in the Notes Payable account is a. less than the total amount repaid by the borrower. b. the difference between the maturity value of the note and the face value of the note. c. equal to the total amount repaid by the borrower. d. greater than the total amount repaid by the borrower.

less than the total amount repaid by the borrower.

Sales taxes collected by the retailer are recorded as a(n) a. revenue. b. liability. c. expense. d. asset.

liability.

FICA taxes do not provide workers with a. life insurance. b. supplemental retirement. c. employment disability. d. medical benefits.

life insurance.

Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued.

long term

The accounting for warranty costs is based on the a. going concern principle. b. matching principle. c. conservatism principle. d. objectivity principle.

matching principle.

Which of the following is usually not an accrued liability? a. Interest payable b. Wages payable c. Taxes payable d. Notes payable

notes payable

Sales taxes collected by a retailer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.

of the customers.

In most companies, current liabilities are paid within a. one year through the creation of other current liabilities. b. the operating cycle through the creation of other current liabilities. c. one year out of current assets. d. the operating cycle out of current assets.

one year out of current assets

Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities.

out of current assets

A contingent liability need only be disclosed in the financial statement notes when the likelihood of the contingency is a. reasonably possible. b. probable. c. remote. d. unlikely.

reasonably possible.

Unearned Rental Revenue is a. a contra account to Rental Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.

reported as a current liability.

Warranty expenses are reported on the income statement as a. administrative expenses. b. part of cost of goods sold. c. contra-revenues. d. selling expenses.

selling expenses.

The relationship of current assets to current liabilities is used in evaluating a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency.

short-term debt paying ability

If a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, the contingent liability a. should be recorded in the accounts. b. should be disclosed in the notes accompanying the financial statements. c. should not be recorded or disclosed in the notes until the contingency actually happens. d. must be paid for the amount estimated.

should be disclosed in the notes accompanying the financial statements.

The relationship between current liabilities and current assets is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt.

useful in evaluating a company's liquidity

Madden Electric began operations in 2010 and provides a one year warranty on the products it sells. They estimate that 10,000 of the 200,000 units sold in 2010 will be returned for repairs and that these repairs will cost $6 per unit. The cost of repairing 8,000 units presented for service in 2010 was $48,000. Madden should report a. warranty expense of $12,000 for 2010. b. warranty expense of $60,000 for 2010. c. estimated warranty liability of $60,000 on December 31, 2010. d. no warranty obligation on December 31, 2010, since this is only a contingent liability.

warranty expense of $60,000 for 2010.

A current liability is a debt that can reasonably be expected to be paid a. within one year. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.

within one year