Chapter 8 Reading Terms

True or False: Payroll tax expense is FUTA and/or SUTA, which are required taxes.

True

Mathematically, the current ratio is expressed as current assets divided by .__________ ___________.

current liabilities

What are the two criteria used to determine whether a contingent liability is reported in the financial statements? a) The ability to estimate the amount of payment b) The payment date c) The likelihood of payment d) The percentage of the payment to total income

A & C

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? a) Prepaid assets b) Accounts receivable c) Inventory d) Short-term trading securities

A & C

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) __________.

warranties

Which of the following are included in FICA taxes? a) A 6.2% social security tax b) A 1.45% Medicare tax c) A 5.4% SUTA tax d) A 6.2% FUTA tax

A & B

A loss that is judged to be probable and for which the amount is reasonably estimable should be a) ignored. b) disclosed only in the notes. c) deferred until the related uncertainly is resolved. d) recorded.

D

Melvin charges a fee of $1,080 for merchandise purchased by a customer. Assuming that the amount includes 8% of sales tax, Melvin should credit sales tax payable for: a) $1,086.40 b) $80 c) $86.40 d) $1,080

B ($1,080 - (1,080/1.08))

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: a) $600 b) $300 c) 0 d) $1,200

B ($10,000 x 0.12 x 3/12)

Under US GAAP, a contingent liability should ______. a) be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated b) be reported on the balance sheet if the loss will probably occur and can be reasonably estimated c) not be reported if the loss is remote and unable to be estimated d) be reported on the balance sheet if the loss may possibly occur and can be reasonably estimated

A, B, & C

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.

Accounts; Notes

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) A debit to Deferred Revenue of $300 and a credit to Cash of $300. b) A debit to Cash of $300 and a credit to Deferred Revenue of $300. c) A debit to Revenue of $300 and a credit to Cash of $300. d) A debit to Cash of $300 and a credit to Revenue of $300.

B The credit is to Deferred revenue because the cash has been collected in advance. Later when ABC Airlines provides the service of flying its customers, it can record a decrease to Deferred revenue (debit) and increase Revenue (credit).

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: a) debit to asset b) debit to contingent liability c) credit to retained earning d) debit to loss e) credit to contingent liability

D & E

Correctly match the salary-related costs with the payee. Employee Employer a) State and federal unemployment tax b) State and federal income tax

Employee B) State and federal income tax Employer A) State and federal unemployment tax

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

Under GAAP, we do not record contingent ________ until the gain is known with certainty.

gain

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) a) liability. b) asset. c) expense. d) loss.

A

An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account. a) expense b) revenue c) liability d) asset

B

Which of the following is an important criteria used to determine the reporting of a contingent liability? a) The effect on key balance sheet ratios b) The potential effect on financial statement users c) The classification of the related expense or loss d) The likelihood of future payment or loss

D

Which payroll tax is paid equally by the employee and the employer? a) FUTA b) State income tax c) Federal income tax d) FICA e) SUTA

D

Ralph charges a fee of $2,180 for services performed for a new client. Assuming that the fee includes 9% of sales tax, Ralph should credit sales tax payable for: a) $376.20 b) $ 2,000 c) $196.20 d) $180

D ($2,180 - ($2,180/1.09))

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

Which of the following items are included in the numerators for both the current ratio and the acid-test ratio? a) Accounts receivable b) Inventory c) Current investments d) Prepaid assets

A & C

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 a) $350,000. b) $400,000. c) $425,000. d) $500,000.

B

Liabilities are classified as a) operating and nonoperating. b) current and long-term. c) revenues and expenses. d) operating and investing.

B

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700, Medicare $1,450, federal income tax $18,000 and state income tax $3,850. The journal entry to record wages paid includes a ______. a) $6,700 debit to FICA payable b) $100,000 debit to Salaries expense c) $70,000 debit to Salaries expense d) $100,000 credit to Cash

B

Which of the following is a guarantee that protects a customer from product defects for a specified period of time? a) Contingency b) Warranty c) Promissory note d) Sales allowance

B

Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of the estimated warranty liability that Supreme should recognize on its 2018 balance sheet? a) $40,000 b) $10,000 c) $50,000

A ($25,000 + $15,000 = $40,000)

Cannery Company pays health insurance for its employees of $1,000 for the pay period. The journal entry to record this fringe benefit includes which of the following? a) Debit Salaries Expense $1,000 b) Credit accounts payable $1,000 c) Debit Payroll Tax Expense $1,000 d) Credit wages payable $1,000

A & B

Kevin sells $100 of goods to a customer for cash. The sales tax is 8%. The journal entry for this sale will include which of the following entries? a) Credit revenues $108 b) Credit accounts payable $108 c) Credit revenues $100 d) Debit cash $108 e) Credit sales tax payable $8

C, D, & E

A(n) ______________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.

Contingent

Balance Corporation sells $1,000 of goods to a customer for cash. The sales tax is 5%. The journal entry to record the sale will include which of the following? a) Credit revenues $1,050 b) Debit sales tax expense $50 c) Debit cash $1,000 d) Credit sales tax payable $50

D

West Company pays health insurance for its employees of $2,000 for the pay period. The journal entry to record this fringe benefit includes which of the following? a) Credit wages payable $2,000 b) Debit Payroll Tax Expense $2,000 c) Debit Salaries Expense $2,000 d) Credit accounts payable $2,000

C & D

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 a) credit to contingent liability for lawsuit $10,000. b) debit to contingent liability for $10,000. c) credit to lawsuit expense $10,000. d) credit to retained earnings $10,000.

A

Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2018 income statement? a) $50,000 b) $10,000 c) $40,000

A ($10,000 + $25,000 + $15,000)

A contingent liability is recorded if which conditions are met? a) It is probable that a future loss will occur. b) The amount of the loss can be reasonably estimated. c) There is a remote chance that a future loss will occur.

A & B

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20, Medicare $8.70, federal income tax $58, and state income tax $10. Assuming that John gets paid in cash, ABC would record a journal entry that includes a ______. a) credit to State and Federal Income Tax Payable of $68 b) credit to Cash of $486.10 c) debit to Wages Expense of $600 d) credit to FICA (Social Security and Medicare) Payable of $45.90 e) debit to Wages Expense of $486.10

A, B, C, & D

Lambert Corporation has employee salary expense of $100,000 on May 31. FICA contributions are 7.65%, and FUTA contributions are 6.2%. The journal entry for payroll tax expense will include which of the following entries? a) Credit FUTA payable $6,200 b) Debit Salary expense $100,000 c) Credit FICA payable $7,650 d) Debit payroll tax expense $13,850 e) Credit wages payable $86,150

A, C, & D

Which of the following is correct regarding gain contingencies? a) They are recorded if it is probable that a gain will be realized. b) They are recorded when the gain is known with certainty. c) They are recorded if it is possible that a gain will be realized.

B

Which of the following is the formula for the current ratio? a) Current assets plus current liabilities. b) Current assets divided by current liabilities. c) Current assets times current liabilities. d) Current liabilities divided by current assets.

B

Which type of contingent liability would most likely be found on a balance sheet prepared under U.S. GAAP? a) Remote contingent liability. b) Probable contingent liability that can be estimated. c) Reasonably possible contingent liability.

B

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? a) Credit cash $10,000 b) Debit payroll tax expense $1,385 c) Credit wages payable $8,615 d) Debit Salary expense $1,385

B (765 + 620 = $1385)

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20, Medicare $8.70, federal Income tax $58, and state income tax $10. What is John's net pay? a) $713.90 b) $486.10 c) $532 d) $494.80 e) $600

B (Net pay=$600-$37.20-$8.70-$58-$10=$468.10.)

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 a) $500,000. b) $250,000. c) $375,000.

B When no amount within the range appears more likely than others, we record the minimum amount.

Identify characteristics of notes payable that are not common to accounts payable. a) Usually classified as current liability b) Based on promissory note c) Interest bearing d) Does not arise from past transaction

B & C

Which of the following payroll-related costs are incurred by employees? a) contributions to state unemployment taxes b) employee investments in retirement plans c) contributions to federal unemployment taxes d) federal and state income tax

B & D

FICA tax is paid by a) the employer only. b) the employee only. c) both the employee and employer. d) neither the employee nor the employer.

C

The employer's portion of FICA tax remitted to the taxing authority is: a) higher than the employee's portion b) lower than the employee's portion c) the same as the employee's portion

C

The flipside of a contingent gain is a contingent a) reserve. b) asset. c) loss.

C

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: a) $9,600 b)$1,600c c)$800

C ($20,000 x 0.08 x 6/12)

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. What is the net pay to employees? a) $61,850 b) $100,000 c) $70,000 d) $78,150 e) $130,000

C (Net pay=$70,000=$100,000-6,700-1,450-18,000-3,850)

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet? a) $300,000 b) $100,000 c) $0 d) $600,000 e) $500,000

C No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).

What are the two classifications for liabilities? a) Operating b) Recurring c) Current d) Investing e) Long-term

C & E

True or False: If a state has an unemployment tax program, no FUTA tax must be paid.

False, The federal amount is reduced but not eliminated if a state has a SUTA program.

A transaction or event in which the outcome is uncertain is referred to as a(n) ___________.

contingencies

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

contingent

A(n) __________ ____________is an existing uncertainty that might result in a gain.

contingent gain

A contingent liability is an existing _____________ situation that might result in a loss depending on the outcome of a future event

uncertain