Accounting Chapter 8
True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
False
which of the following statements regarding liabilities is not true?
Liabilities result from future transactions
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
working capital
the difference between current assets and current liabilities
gift card breakage
the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
Current Liabilities
Debts that, in most cases, are due within one year from the balance sheet date. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.
Current Liabilities:
May include contingent liabilities
Assuming the current ratio of 1.00 and an acid-test ration of 0.75, how will the purchase of inventory with cash affect each ratio?
No change to the current ratio and decrease the acid-test ratio
By law, an employer is required to pay which of the following amounts as payroll taxes?
Social Security contributions Federal unemployment tax Medicare contributions
True/False We record interest expense in the period in which we pay it, rather than in the period we incur it
True
Deferred revenue is classified as
a liability
commercial paper
borrowing from another company rather than from a bank
A transaction or event in which the outcome is uncertain is referred to as a(n)
contingency
A loss that is judged to be probable and for which the amount is reasonably estimable should be
recorded
FICA taxes
Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.
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.
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
apply the appropriate accounting treatment for contingencies
a contingent liability is recorded only if a loss is probable and the amount is reasonably estimable. unlike contingent liabilities, contingent gains are not recorded until the gain is certain and no longer a contingency.
contingent liability
an existing uncertain situation that might result in a loss a contingent liability is recorded only if a loss is probable and the amount is reasonably estimable
line of credit
an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork
The Acid-Test Ratio is:
cash, current investments, and accounts receivable divided by current liabilities
The feature that distinguishes loss ____ from other liabilities is the uncertain outcome.
contingencies
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___ liabilities.
contingency
Liabilities are classified as
current and long term
current ratio
current assets divided by current liabilities; measures the availability of current assets to pay current liabilities
distinguish between current and long-term liabilities
in most cases, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable inmate than one year
quick assets
includes only cash, current investments, and accounts receivable
Deferred revenue should be classified as a(n) ___ on the balance sheet.
liability
The flipside of a contingent gain is a contingent
loss
notes receivable is an asset that creates interest revenue
notes payable is a liability that creates interest expense
contingencies
Uncertain situations that can result in a gain or a loss for a company
Which of the following is NOT deducted from an employee salary?
Unemployment taxes
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
Warranty
We record interest expense on a note payable in the period in which:
We incur interest
Taxes collected for taxing authorities are recognized as
current liabilities.
If a liability is classified as current, rather than noncurrent, the company's working capital will ______.
decrease
A contingent liability is an existing ___ situation that might result in a loss depending on the outcome of a future event.
uncertain
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
liquidity
having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts
Obtaining a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
Which of the following are examples of fringe benefits provided by employers to their employees?
payment of insurance premiums on employees behalf contributions to retirement and other savings accounts reduced or no-cost company-provided services
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.
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
What are the two classifications for liabilities?
Current Long-term
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?
$4.5 million
acid-test ratio
Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities
On November 1, 2018, 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, 2019. The journal entry on November 1, 2018 would include which of the following?
Credit to Note Payable $100,000 Debit to Cash $100,000
Common current liabilities include:
Deferred revenues Sales tax payable The current portion of long-term debt
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:
Disclosed but not reported as a liability
Which of the following must employers by law withhold from their employees' pay?
Federal income taxes
Which of the following may be classified as contingent liabilities?
Frequent flyer program awards Future litigation losses Product warranties
unemployment taxes
a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees
A(n) ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
accounts
a ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
accounts
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.
fringe benefits
additional employee benefits paid for by the employer
contingent gain
an existing uncertain situation that might result in a gain we usually do not record contingent gains until the gain is known with certainty
Payroll withholdings ______.
are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
withholding taxes.
Express Jet borrows $100 million on October 1, 2018, for one year at 6% interest, how much interest PAYABLE does it record for the year ended December 31, 2018?
$1.5 million
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)
Withholding taxes for federal and state income tax are based upon which items?
Amounts earned by employees Number of exemptions claimed
debt covenant
An agreement between a borrower and a lender that requires that certain minimum financial measures be met or the lender can recall the debt
deferred revenue
cash received in advance from a customer for products or services to be provided in the future
Which of the following transactions will increase a company's working capital?
Receipt of cash on a long-term notes receivable
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Remote Probable Reasonably possible
account for employee and employer payroll liabilities
employee salaries are reduced by withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. The employer, too, incurs additional payroll expenses for unemployment taxes, the employer portion of FICA taxes, and employer insurance and retirement contributions.
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ___ benefits.
fringe
sales tax payable
sales tax collected from customers by the seller, representing current liabilities payable to the government
The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as:
sales tax payable
account for notes payable and interest payable
we record interest expense in the period we incur it, rather than in the period in which we pay it. many short-term loans are arranged under an existing line of credit with a bank, or for larger corporations in the form of commercial paper, a loan from one company to another.
explain the accounting for other current liabilities
when a company receives cash in advance from customers, it debits Cash and credits Deferred Revenue, a current liability account. When the company provides those goods to its customers, it debits Deferred Revenue and credits Sales Revenue sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government we report the currently maturing portion of a long-term debt as a current liability in the balance sheet.
Current assets minus current liabilities equals
working capital
asses liquidity using current liability ratios
working capital is the difference between current assets and current liabilities. The current ratio is equal to current assets divided by current liabilities. The acid-test ratio is equal to quick assets (cash, short-term investments, and account receivable) divided by current liabilities. Each measures a company's liquidity, its ability to pay currently maturing debts.
notes payable
written promises to repay amounts borrowed plus interest