Chapter 8
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.
Payroll withholdings ______________
are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives
A transaction or event in which the outcome is uncertain is referred to as a(n) ____________
contingency
The feature that distinguishes loss _____________ from other liabilities is the uncertain outcome.
contingency
An ______________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
A transaction or event in which the outcome is uncertain is referred to as a(n)
Contingency
An __________________ gain is an existing uncertainty that might result in a gain.
Contingency
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to
Contingent
Which of the following are employer payroll costs?
Employer portion of Medicare tax Federal and state unemployment taxes
Which of these payroll taxes are paid only by the employer? (Check all that apply.)
FUTA SUTA
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 are employer payroll costs?
Federal and state unemployment taxes Employer portion of Medicare tax
Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?
Federal income taxes Health insurance paid by the employee Employee contributions to retirement plans
Which of the following may be classified as contingent liabilities?
Product warranties Frequent flyer program awards Future litigation losses
Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?
The current ratio will remain the same.
Which of the following is an important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
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
Liabilities are classified as
current and long-term.
Taxes collected for taxing authorities are recognized as
current liabilities.
The portion of a long-term liability that will be paid within the next year is referred to and reported as the:
current portion of long-term debt
If a liability is classified as current, rather than noncurrent, the company's working capital will _________________
decrease
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)
liability
The flipside of a contingent gain is a contingent
loss
A contingent liability is an existing __________________ situation that might result in a loss depending on the outcome of a future event.
unknown
Which of the following tends to be the source of the most commonly reported contingent liability?
warranties
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
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ________________ benefits
Fringe
Withholding taxes for federal and state income tax are based upon which items?
Number of exemptions claimed Amounts earned by employees
When a contingent event that may give rise to a future loss is likely to occur, it is said to be
Probable
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to _____________________ liabilities
contingent
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.
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
credit to contingent liability for lawsuit $10,000.
Deferred revenues and sales tax payable typically are reported as _______________ liabilities
current
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:
debit to loss credit to contingent liability
An ____________________ 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
The term referring to a company having a sufficient amount of cash to pay its current debts is
liquidity
The mathematical formula for working capital is current assets ________________ Current liabilities
minus
What are the two classifications for liabilities?
Current Long-term
Which of the following transactions will increase a company's working capital?
Receipt of cash on a long-term notes receivable
An __________________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)
Account
The _______________ portion of long-term debt is the amount that will be paid within the next year. (Enter only one word.)
Current
Mathematically, the current ratio is expressed as current assets divided by ______________ _____________
Current Liabilities
Which of the following is the formula for the current ratio?
Current assets divided by current liabilities.
What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.
Current ratio will increase Acid-test ratio will increase
On November 1, Year 1, 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, Year 2. The journal entry on November 1, Year 1 would include which of the following?
Debit to Cash $100,000 Credit to Note Payable $100,000
If a liability is classified as current, rather than noncurrent, the company's working capital will _______
Decrease
A contingent liability is recorded if which conditions are met?
It is probable that a future loss will occur. The amount of the loss can be reasonably estimated.
Identify a primary reason why financial statement users assess a company's liquidity.
Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.
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)
Liability
Deferred revenue should be classified as a(n) __________________ on the balance sheet
Liability
Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.)
Medicare Social Security
A loss that is judged to be probable and for which the amount is reasonably estimable should be
Recorded
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Remote Reasonably possible Probable
Which of the following are not required to be deducted from an employee's paycheck?
State unemployment tax (SUTA) Federal unemployment tax (FUTA) Charitable contributions
Common current liabilities include:
The current portion of long-term debt Deferred revenues Sales tax payable
Which of the following payroll-related taxes must the employer pay by law?
Unemployment taxes Federal Insurance Contributions Act amounts
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
Warranty
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
Withholding taxes
Current assets minus current liabilities equals ______________ ________________
Working Capital
Deferred revenue is classified as
a liability
Amounts that are subtracted from an employee's gross pay are referred to as
payroll withholdings.
Which of the following are examples of fringe benefits provided by employers to their employees?
reduced or no-cost company-provided services contributions to retirement and other savings accounts payment of insurance premiums on employees behalf
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.
Payroll withholdings are
the items subtracted from an employee's gross pay to arrive at take-home pay.
For a manufacturer, the most commonly reported contingent liabilities relate to product _______________
warranties