CH 8 Concepts Review & Self Study

A company has total payments for the month of March for its 20 employees of $100,000. The FICA tax rate (Social Security and Medicare) is 7.65%. What is the total amount due to the government for FICA taxes?

$15,300

A local Starbucks sells gift cards of $10,000 during the year. By the end of the year, customers have redeemed $8,000 of gift cards. What will be the year-end balance in the Deferred revenue account?

$2,000

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on December 31, Year 1?

$20,000 credit to Interest Payable

Express Jet barrows $100 million on October 1, 2021 for one year at 6% interest. For what amount does Express Jet report interest expense for the year ended December 31, 2021?

$4.5 million

Pizza Shop sells toaster ovens with a one-year warranty to fix any defects. For the current year, 100 toaster ovens have been sold. By the end of the year 4 ovens have been fixed for an average of $80 each. Management estimates that 5 most of the 100 sold will need to be fixed next year for an estimated $80 each. For how much Pizza Shop report warranty li at the end of the current year?

$400

The city Summerton has a sales tax rate of 8%. A local convince store sells merchandise, and the customer pays a total of $38.34. What effect does this transaction have on total liabilities?

Increase of $2.84

Which of the following statements regarding liabilities is not true?

Liabilities result from future transactions

term-40Current liabilities

May include contingent liabilities

The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as

Sales tax payable

Which of the following is not deducted from an employee's salary?

Unemployment taxes

The acid-test ratio is

cash, current investments, and accounts receivable divided by current liabilities

The accounting treatment for a lawsuit depends on:

the ability to estimate the amount of payment; the type of contingency

A contingent liability is an existing:

uncertain situations that might result in a future loss

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

Disclose but not reported as a liability

Social Security and Medicare taxes with

FICA taxes

Contingent gains are recorded only if a gain is probable and the amount can be reasonably estimated.

False

We record interest expense on a note payable in the period in which:

We incur interest

Clarendon Corporation has a $5 million liability at December 31, Year 1, of which $1 million is payable in Year 2. In its December 31, Year 1 balance sheet, the company will report the $5 million debt as a:

$1 million current liability and $4 million long-term liability

Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on June 1, Year 2?

$1,045,00 credit to Cash

Star Appliance sells previously owned appliances. Each appliance carries a one-year warranty against defects. Suppose that appliance sales for the entire month of December are $50,000. The company expects future warranty costs to be 3% of sales. What amount should Star Appliance report as a liability on December 31?

$1,500

Express Jet barrows $100 million on October 1, 2021 for one year at 6% interest. For what amount does Express Jet report interest payable for the year ended December 31, 2021?

$1.5million

Caddell Corporation borrows $100,000 from a bank on August 1, Year 1, by signing an 8 percent, six-month note for the amount borrowed plus accrued interest due six months later on February 1, Year 2. Which of the following is recorded on August 1, Year 1?

$100,000 credit to notes payable

The payroll related information for Smart Packers is provided below. The company has a total payroll for the month of January of $100,000 for its 30 employees. Use the information provided to answer the following questions. (Assume that none of the employees earn more than $7,000 in January.) Federal and state income tax withheld$20,000 Health insurance premiums paid by employer$10,000 Contribution to retirement plan paid by employer$15,000 FICA tax rate (Social Security and Medicare) 7.65%Federal and state unemployment tax rate 6.20% Knowledge Check 01What is the amount of Payroll Tax Expense for the month?

$13,850

The payroll related information for Smart Packers is provided below. The company has a total payroll for the month of January of $100,000 for its 30 employees. Use the information provided to answer the following questions. (Assume that none of the employees earn more than $7,000 in January.) Federal and state income tax withheld$20,000 Health insurance premiums paid by employer$10,000 Contribution to retirement plan paid by employer$15,000 FICA tax rate (Social Security and Medicare) 7.65%Federal and state unemployment tax rate 6.20%. What is the fringe amount?

$25,000

Barnes Corporation introduces a new e-book reader that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 10 percent of sales. By the end of the first year of selling the product, total sales are $5 million, and actual warranty expenditures are $100,000. What amount should Barnes report as a liability at the end of the year?

$400,000

Susan, a recent college graduate, makes a base salary of $70,000 per year. Susan has federal income tax withholding of $12,000, and state tax withholding of $4,000. Employers are required to withhold a 6.2% Social Security tax and a 1.45% Medicare tax. What is Susan's take-home pay?

$48,645

The payroll related information for Smart Packers is provided below. The company has a total payroll for the month of January of $100,000 for its 30 employees. Use the information provided to answer the following questions. (Assume that none of the employees earn more than $7,000 in January.) Federal and state income tax withheld$20,000 Health insurance premiums paid by employer$10,000 Contribution to retirement plan paid by employer$15,000 FICA tax rate (Social Security and Medicare) 7.65%Federal and state unemployment tax rate 6.20% Knowledge Check 01What is the amount of Salaries Payable for the month?

$72,350

Windsor Corporation borrows $100,000 from a bank on November 1, Year 1, by signing a 9 percent, six-month note for the amount borrowed plus accrued interest due six months later on May 1, Year 2. What is the interest expense per month on this note?

$750

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?

As a liability for $75,000 with disclosure of the range

Sales taxes collected from customers by the seller are recorded as _____.

Current liabilities

Identify a liability that does not require a cash payment.

Deferred Revenue

Which of the following are withheld from an employee's salary?

Employee portion of health insurance; Federal and state income taxes; federal and state unemployment taxes

Which of the following are payroll costs for employers?

Employer contribution to retirement plan; employee portion of FICA taxes; Federal and state income taxes

A company receives cash in November, Year 1 for services to be performed in January, Year 2. The company increases both assets and service revenue in November, Year 1.

False

We classify the portion of long-term debt maturing within one year from the balance sheet date as a long-term liability.

False

Working capital is the best measure of liquidity when comparing one company with another.

False

Which of the following is not a measure of liquidity?

Gross Profit Ratio

Liquidity refers to:

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.

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 smith report this litigation?

No asset or gain is reported

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?

No change to the current ratio and decrease the acid-test ratio.

All of the following are essential characteristics of liabilities, except _____.

They represent probable future benefits

At the end of Year 1, Swanson Corporation has $650,000 in current assets and $500,000 in current liabilities. During Year 2, the company realizes a $100,000 increase in each amount, such that at the end of Year 2, the company has $750,000 in current assets and $600,000 in current liabilities. Calculate the current ratio for Year 1 and for Year 2.

True

Holding current assets constant, an increase in current liabilities will decrease the current ratio.

True

In general, the higher the current ratio, the greater the company's liquidity.

True

In the case of a contingent liability, if the likelihood of payment is reasonably possible, we record no entry but make full disclosure in a note to the financial statements to describe the contingency.

True

When a company collects sales taxes, it debits Cash, and credits both Sales Revenue and Sales Tax Payable.

True

Banner Corporation receives $30,000 in May, Year 1 to manufacture and deliver its product in September, Year 1. At the time the product is delivered, Banner will _____.

debit Deferred Revenue and credit Sales Revenue

Diamond Electronics sells previously owned electronics. Each product carries a one-year warranty against defects. Suppose that product sales for the entire month of December are $80,000. The company expects future warranty costs to be 6% of sales. On December 31, Year 1, the company will record a:

debit to Warranty Expense for $4,800

A current ratio of 2.2 indicates that:

for every $1 of current liabilities, the company has $2.20 of current assets.

Boyd Corporation borrows $300,000 from a bank on March 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later. On issuance date, this transaction:

increases assets and increases liabilities

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $2 to $3 million. No amount within the range appears more likely than others. Which of the following is the company required to do in this scenario?

record a $2 million liability and disclose the potential additional loss

Dexter Tours is a defendant in litigation involving an accident that occurred during a cruise. The company is sued for $5 million in damages. The likelihood of a payment occurring is probable, and the amount is estimated to be $3 million. Which of the following is the company required to do in this scenario?

record a $3 million liability

In most cases, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year.

true