MGMT 200 Chapter 8
Which of the following may be classified as contingent liabilities?
Frequent flyer program awards Product warranties Future litigation losses
Federal and state income taxes withheld by employers from their employees' payroll are initially recorded with a credit to a(n):
Liability.
Common current liabilities include:
The current portion of long-term debt Sales tax payable Deferred revenues
Which of the following is true in comparing the current ratio with the acid-test ratio?
The current ratio will always be at least as large as the acid-test ratio.
Interest expense is recorded in the period in which:
The interest is incurred.
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
Which of the following payroll-related taxes must the employer pay by law?
Unemployment taxes Federal Insurance Contributions Act amounts
A(n) ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash
account
An interest rate, unless otherwise specified, is typically a(n) ___ rate.
annual or yearly
When a contingent event that may give rise to a future loss is likely to occur, it is said to be
probable
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
Probable Remote Reasonably possible
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 or short-term
A contingent liability is an existing _____ situation that might result in a loss depending on the outcome of a future event.
undecided
Which of the following is a guarantee that protects a customer from product defects for a specified period of time?
warranty
Which of the following is not deducted from an employee's salary?
Unemployment taxes.
True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.
false
Payroll withholdings are
the items subtracted from an employee's gross pay to arrive at take-home pay.
Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of office supplies for cash affect each ratio?
No change to the current ratio and decrease the acid-test ratio.
A transaction or event in which the outcome is uncertain is referred to as a(n)
contingent
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called benefits.
fringe or employee
Obtaining a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
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 mathematical formula for working capital is current assets ______ current liabilities.
minus
In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.
one; one
Which of the following is not a current liability? Notes payable due in six months. Current portion of long-term debt. An unused line of credit. Deferred revenue to be earned in nine months.
An unused line of credit.
Which of the following are employer payroll costs?
Federal and state unemployment taxes Employer portion of Medicare tax
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to ___ liabilities.
contingent
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:
credit to contingent liability debit to loss
Notes payable is classified as a liability that has which of the following effects?
Creates interest expense on the income statement
Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?
Health insurance paid by the employee Federal income taxes Employee contributions to retirement plans
Which of the following is not a characteristic of a liability? It represents a probable, future sacrifice of economic benefits. It must be payable in cash. It arises from present obligations to other entities. It results from past transactions or events.
It must be payable in cash.
Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Smith's legal counsel believes it is probable that Western will have to pay $125,000, although no final settlement has yet been reached. How should Smith report this litigation?
No asset or gain is reported.
A(n) ___ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.
contingent
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.
The feature that distinguishes loss ___ from other liabilities is the uncertain outcome.
contingent
The flipside of a contingent gain is a contingent
loss.
Deferred revenue should be classified as a(n) ___ on the balance sheet.
liability
Aviation Systems sells its products with a three-year manufacturing warranty. The company's sales revenue is $600,000. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during the year. How much warranty expense should the company record this year?
$30,000.
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 more of the 100 sold will need to be fixed next year for an estimated $80 each. For how much should Pizza Shop report warranty liability at the end of the current year?
$400.
On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. The company should report the following adjusting entry at December 31, 20X1:
Debit interest expense and credit interest payable, $4,000.
Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably likely, a contingent liability should be:
Disclosed but not reported as a liability.
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 revenue of $1,000. sales taxes payable of $100.
Express Jet borrows $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?
$1.5 million.
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.
If Executive Airways borrows $10 million on April 1, 20X1, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 20X1?
$450,000
On November 1, 20X1, a company signed a $200,000, 12%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 20X2. What is the amount of interest expense to report in 20X2?
$8,000
When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:
A debit to an asset and a credit to a liability account.
Which of the following represents a characteristic of a liability?
A probable future sacrifice of economic benefits. Arising from present obligations to other entities. Resulting from past transactions or events.
Allied Partners filed suit against Big Sky, Inc., seeking damages for patent infringement. Big Sky's legal counsel believes it is probable that Big Sky will settle the lawsuit for an estimated amount in the range of $500,000 to $700,000, with all amounts in the range considered equally likely. How should Big Sky report this litigation?
As a liability for $500,000 with disclosure of the range.
Which of the following are not required payroll withholdings?
Charitable contributions Federal unemployment tax (FUTA) State unemployment tax (SUTA)
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
Which of the following is paid by both the employee and the employer? FICA taxes. Federal unemployment taxes. State unemployment taxes. Personal income taxes.
FICA taxes.
By law, an employer is required to pay which of the following amounts as payroll taxes?
Federal unemployment tax Social Security contributions Medicare contributions
A contingent liability that is probable and can be reasonably estimated must be
Recorded.
The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as
Sales tax payable.
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.
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. (Enter one word per blank)
liability
The term referring to a company having a sufficient amount of cash to pay its current debts is
liquidity.
Taxes collected for taxing authorities are recognized as
current liabilities.
Payroll withholdings ______.
are amounts subtracted from employees' gross earnings to determine their net pay decrease the amount of cash an employee receives
Suppose that Neuman Exploration Tours has filed a lawsuit against a competitor for an alleged trademark violation. At the end of the year, Neuman's attorney estimates that the company will likely win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain?
$0.
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
What are the two classifications for liabilities?
Current Long-term
Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)
annual, 12 month rate.
Which of the following are examples of fringe benefits provided by employers to their employees?
contributions to retirement and other savings accounts payment of insurance premiums on employees behalf reduced or no-cost company-provided services
The ____ portion of long-term debt is the amount that will be paid within the next year.
current