Chapter 8
Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?
- Probable - Reasonably possibly - Remote
What may be classified as contingent liabilities?
- Product warranties - Future litigation losses - Frequent flier program awards
What payroll taxes are paid by the employer and the employee?
- Social security - Medicare
The feature that distinguishes loss _______ from other liabilities is the uncertain outcome.
contingencies
A transaction or event in which the outcome is uncertain is referred to as a(n)
contingent
A(n) ________ ___________ is an existing uncertainty that might result in a gain.
contingent gain
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
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.
The flipside of a contingent gain is a contingent
loss
For a manufacturer, the most commonly reported contingent liabilities relate to product _______
warranty
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
Deffered revenue is classified as _____
a liability
Amounts that are subtracted from an employee's gross pay are referred to as
Payroll withholdings
Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to _______
contingent liabilities
Long-term liability
Normally payable more than one year from now
Current liability
Normally payable within one year
By law, an employer is required to pay which of the following amounts as payroll taxes?
- Medicare contributions - Social Security contributions - Federal unemployment tax
What are some examples of fringe benefits provided by employers to their employees?
- Payment of insurance premiums on employees behalf - Reduced or no-cost company-provided services - Contributions to retirement and other savings accounts
A(n) _________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.
Accounts
What are the important criteria used to determine the reporting of a contingent liability?
The likelihood of future payment or loss
Issuing a note payable for cash results in a(n) ______.
increase in assets and an increase in liabilities
Notes payable is classified as a liability that has what effect?
- Creates interest expense on the income statement
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?
- Debit to Cash $100,000 - Credit to Note Payable $100,000
Common current liabilities include:
- Deffered revenues - The current portion of long-term debt - Sales tax payable
Which of these payroll taxes are paid only by the employer?
- FUTA - SUTA
Which of the following payroll-related taxes must the employer pay by law?
- Federal Insurance Contributions Act amounts - Unemployment taxes
What are some examples that are not required payroll withholdings?
- Federal unemployment tax (FUTA) - State unemployment tax (SUTA) - Charitable contributions
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.
Deferred revenues and sales tax payable typically are reported as
Current liabilities
Taxes collected for taxing authorities are recognized as
Current liabilities
Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called _________
Employee benefits
Which of the following must employers by law withhold from their employees' pay?
Federal income taxes
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.
The term referring to a company having a sufficient amount of cash to pay its current debts is
Liquidity
Taxes subtracted from employees' pay and remitted to the government on their behalf are called
Withholding taxes
When a contingent event that may give rise to a future loss is likely to occur, it is said to be
probable
Payroll withholdings are
the items subtracted from an employee's gross pay to arrive at take-home pay.
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.
- Acid-test ratio will increase - Current ratio will increase
Payroll withholdings ______.
- Are amounts subtracted from employees' gross earnings to determine their net pay - Decrease the amount of cash an employee receives
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