ACCT 206 Video Lecture & Assessment LO 9-1, 3, 5, 6, 7

Jefferson Company borrowed $6,000 on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash outflow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0 and $360

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% on the first $7,000 of salary earned. Based on this information the total amount of accrued payroll tax expense incurred by Mr. Ortega's employer is

$1,020

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an Unemployment tax rate of 6% on the first $7,000 of income. Based on this information, Mr.Ortega's net pay for January 31, Year 1 is

$6,090

On September 1, Year 1 Western Company borrowed $36,000 cash. The one-year note carried a 5% rate of interest. The amount of interest expense on the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

$600 interest expense and zero cash outflow from operating activities.

According to GAAP a contingent liability can be classified as

-probable and estimable. -reasonably possible, or probable but not estimable. -remote.

Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400 of current liabilities and $2,600 of long-term liabilities shown on its Year 1 balance sheet. Based on this information Omar's debt to assets ratio is

0.75

Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400 of current liabilities and $2,600 of long-term liabilities on its Year 1 balance sheet. Based on this information, Omar's current ratio is.

2.50

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

270, 90

Which of the following would not likely appear in the current liabilities section of a classified balance sheet?

Bonds Payable

Which of the following industries is likely to have the highest debt to assets ratio?

Building Supplies

Which of the following would not likely appear on a classified balance sheet?

Current retained earnings

Forest Beach Company experienced an event that had the following effects on its financial statements. Assets = Liab.+ Equity | Rev. - Exp. = Net Inc. | Cash Flows - = - + NA | NA - NA = NA | - FA Which of the following events could have caused these effects?

Paid cash to settle the principal balance of note payable

Which of the following is responsible for paying unemployment tax?

Employer only

(T/F) A contingent liability is an actual obligation arising from a past event.

False

(T/F) A current asset is an asset that is cash or an asset that will be converted into cash within one year or one operating cycle whichever is shorter.

False

Which of the following is responsible for paying social security (FICA) tax?

Federal Government

Which of the following statements is true?

Lower current ratios suggest greater liquidity

Mr. Ortega earns a monthly salary of $8,000. Based on Mr. Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr. Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% (5.4% state tax plus 0.6% federal tax) on the first $7,000 of salary earned. Which of the following is the journal entry required to recognize the accrued payroll tax expense incurred by Mr. Ortega's employer?

Payroll Tax Expense 1,020 (Debit) FICA Tax - Social Security Payable 480 (Credit) FICA Tax - Medicare Payable 120 (Credit) Federal Unemployment Tax Payable ($7,000 × .006) 42 (Credit) State Unemployment Tax Payable ($7,000 × .054) 378 (Credit)

Homeland Security Systems experienced an event that had the following effects on its financial statements. Assets = Liab.+ Equity | Rev. - Exp. = Net Inc. | Cash Flows NA = + - | NA - + = - | NA Which of the following events could have caused these effects?

Recognizing a contingent liability that has a probable chance of occurring and is estimable

Mr. Ortega earns a monthly salary of $8,000. Based on Mr.Ortega's Form W-4, the tax tables require withholding $900 per month for income taxes. Mr.Ortega has authorized his employer to deduct $380 per month for medical insurance and $30 per month for a charitable contribution to the Humane Society. Assume a FICA tax rate of 6%, a Medicare tax rate of 1.5%, and an unemployment tax rate of 6% on the first $7,000 of salary earned. Which of the following is the journal entry required to recognize the salary expense for Mr. Ortega?

Salary Expense 8,000 (Debit) Employee Income Tax Payable 900 (Credit) FICA Tax - Social Security Payable 480 (Credit) FICA Tax - Medicare Payable 120 (Credit) Medical Insurance Premiums Payable 380 (Credit) Humane Society Payable 30 (Credit) Cash 6,090 (Credit)

(T/F) A classified balance sheet separates assets and liabilities into categories that distinguish between accounts that are identified as current from those that are identified as long-term.

True

(T/F) A company is not required to recognize or disclose a contingent liability that has a remote chance of actually occurring.

True

(T/F) The length of an operating cycle is the time it takes to turn cash into inventory, then inventory into accounts receivable, and then accounts receivable back into cash.

True

(T/F) Accrued interest expense will appear on the income statement but not on the statement of cash flows.

True (Accrued interest expense means that a company has recognized interest expense but has not yet paid the cash associated with the expense. As a result, the income statement will be affected but the statement of cash flows will not be affected.)

The debt to asset ratio is a measure of

cash flow

A balance sheet that displays assets and liabilities into current versus non-current categories is commonly called a

classified balance sheet.

On November 1, Year 1 Cove Company borrowed $7,000 cash from Shelter Company. Cove issued a one-year note that carried a 7% annual rate of interest. Which of the following journal entries would be necessary to record the issue of the note on November 1, Year 1?

debit cash (7000) credit notes payable (7000) (The event is an asset source event. The asset account (cash) increases and the liability (notes payable) increases. Debit entries increase asset accounts and credit entries increase liability accounts. In this case, the Cash (asset) account is debited and the Notes Payable (liability) account is credited.)

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. Which of the following journal entries would be required to recognize accrued interest on December 31, Year 1?

debit interest expense (270) credit interest payable (270)

The current ratio is calculated b

dividing current assets by current liabilities.

The debt to assets ratio is calculated by

dividing total liabilities by total assets

On November 1, Year 1 Cove Company borrowed $7,000 cash from Shelter Company. The one-year note carried a 7% rate of interest. Which of the following shows how borrowing the money will affect Cove's financial statements on November 1, Year 1?

increase assets and liabilities. increase in financing activities (The event is an asset source event. The asset account (cash) increase and the liability (notes payable) increases. In other words, liabilities would be identified as the source of the cash. Since no interest has been incurred, there is no impact on the income statement. The cash inflow is a financing activity.)

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Gomez's financial statements?

increase liabilities and expenses 1,000, decrease retained earnings and net income (1,000). cash flows not affected

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 2 will effect Gomez's financial statements?

increase liabilities and expenses 1,400, decrease retained earnings and net income (1,400). cash flows not affected

Standard Company has a contingent liability that has a likelihood of actual occurrence that is classified probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Standard is required to

recognize a liability and an expense in its financial statements.

GreyCo has initiated a lawsuit against PhilCo for a copyright violation. Negotiations between the lawyers representing the two companies suggest that it is probable that GreyCo will win the case and will collect a $1,000,000 settlement fee. Generally Accepted Accounting Principles (GAAP)

requires PhilCo to recognize a $1,000,000 contingent liability but does not permit GreyCo to recognize a $1,000,000 contingent asset.