Deck 9: Reporting and Analyzing Current Liabilities

Question 1

A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.

Answer 1

True

Question 2

A single liability cannot be divided between current and noncurrent liabilities.

Answer 2

False

Question 3

A liability may exist even if there is uncertainty about whom to pay,when to pay,or how much to pay.

Answer 3

True

Question 4

Accounting for contingent liabilities covers three possibilities: (1)The future event is probable and the amount cannot be reasonably estimated; (2)The future event is remote or unlikely to recur; (3)The likelihood of the liability to occur is impossible.

Question 5

Accounting for contingent liabilities depends on the likelihood that a future event will occur.

Question 6

A high value for the times interest earned ratio means that a company is a lower risk borrower.

Question 7

Uncertainties from the development of new competing products are not contingent liabilities.

Question 8

Unearned revenues are current liabilities.

Question 9

Trade accounts payable are amounts owed to suppliers for products or services purchased on credit.

Question 10

All expected future payments are liabilities.

Question 11

Obligations not due within one year are reported as current liabilities.

Question 12

Debt guarantees are usually disclosed as a contingent liability.

Question 13

A company cannot have a liability if the amount of the obligation is unknown.

Question 14

Sales Taxes Payable is credited when companies collect taxes from customers.

Question 15

A potential lawsuit claim is disclosed when the claim can be reasonably estimated and it is reasonably possible.

Question 16

Vacation benefits is an example of a known liability.

Question 17

The times interest earned ratio is calculated by dividing interest expense by income before interest expense and income taxes.

Question 18

Experience shows that the default rate on liabilities increases sharply when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods.

Question 19

A contingent liability is a potential obligation that depends on a future event arising from a past transaction or event.

Question 20

Payroll is an example of a contingent liability for the employer.

Question 21

Deposits of amounts payable to the federal government may be paid through federal depository banks.

Question 22

Notes cannot be transferred from party to party because they are nonnegotiable.

Question 23

A corporation has a $40,000 credit balance in the Income Tax Payable account.Period end information shows that the actual liability is $47,000.The company should record an entry to debit Income Tax Expense for $7,000 and credit Income Taxes Payable for $7,000.

Question 24

FUTA requires employers to pay a federal unemployment tax on all salary or wages paid to each employee.

Question 25

A liability is incurred when income is earned because income tax expense is created by earning income.

Question 26

The amount of FICA tax that employers must pay is twice the amount of the FICA taxes withheld from their employees.

Question 27

Employers must keep individual earnings reports for each employee.

Question 28

A company's income before interest expense and taxes is $250,000 and its interest expense is $100,000.Its times interest earned ratio is 2.5.

Question 29

The state unemployment tax rates applied to an employer are adjusted according to an employer's merit rating.

Question 30

A high merit rating for state unemployment taxes means that an employer has high employee turnover or seasonal hiring.

Question 31

A note payable can be used to extend the payment due on an account payable.

Question 32

Required payroll deductions include income taxes,Social Security taxes,pension and health contributions,union dues,and donations.

Question 33

Payments of FUTA are made quarterly to a federal depository bank if the total amount due exceeds $500.

Question 34

Employers can use a wage bracket withholding table to compute federal income taxes withheld from each employee's gross pay.

Question 35

The Form W-2 must be given to employees before January 31 following the year covered by the Form W-2.

Question 36

A known obligation of an uncertain amount that can at least be reasonably estimated is reported as an estimated liability.

Question 37

Even if the end of an accounting period occurs between the signing of a note payable and its maturity date,the expense recognition principle requires that interest expense not be accrued on a note payable until the note is paid.

Question 38

A short-term note payable is a written promise to pay a specified amount on a definite future date within one year or the operating cycle,whichever is shorter.

Question 39

The amount of federal income tax withheld from employee pay depends on the employee's annual earnings rate and the number of withholding allowances claimed by the employee.

Question 40

Accrued vacation benefits are a form of estimated liability for an employer.

Question 41

Obligations to be paid within one year or the company's operating cycle,whichever is longer,are:

A)Current assets.
B)Current liabilities.
C)Earned revenues.
D)Operating cycle liabilities.
E)Bills.

Question 42

In order to be reported,liabilities must:

A)Be certain.
B)Sometimes be estimated.
C)Be for a specific amount.
D)Always have a definite date for payment.
E)Involve an outflow of cash.

Question 43

When the number of withholding allowances claimed on Form W-4 increases,the amount of income tax withheld decreases.

Question 44

A contingent liability is:

A)Always of a specific amount.
B)A potential obligation that depends on a future event arising from a past transaction or event.
C)An obligation not requiring future payment.
D)An obligation arising from the purchase of goods or services on credit.
E)An obligation arising from a future event.

Question 45

All of the following statements regarding liabilities are true except:

A)A liability is a probable future payment of assets or services.
B)Unearned future wages to be paid to employees should be recorded as liabilities.
C)For a liability to be reported,it must be a present obligation that results from a past transaction or event,and requires a future payment of assets or services.
D)Information about liabilities is more useful when the balance sheet identifies them as either current or long term.
E)Liabilities can involve uncertainty in whom to pay.

Question 46

Contingent liabilities are recorded or disclosed unless they are:

A)Probable and estimable.
B)Remote.
C)Reasonably possible.
D)Probable and not estimable.
E)Possible and estimable.

Question 47

Which of the following do not apply to unearned revenues?

A)Also called deferred revenues.
B)Amounts received in advance from customers for future delivery of products or services.
C)Also called collections in advance.
D)Also called prepayments.
E)Amounts to be received in the future from customers for delivery of products or services in the current period.

Question 48

Accounts payable are:

A)Amounts owed to suppliers for products and/or services purchased on credit.
B)Long-term liabilities.
C)Estimated liabilities.
D)Not usually due on specific dates.
E)Always payable within 30 days.

Question 49

Debt guarantees are:

A)Never disclosed in the financial statements.
B)Considered to be contingent liabilities.
C)A bad business practice.
D)Recorded as liabilities even though it is highly unlikely that the original debtor will default.
E)Considered to be current liabilities.

Question 50

If a company has advance ticket sales totaling $2,000,000 for the upcoming football season,the receipt of cash would be journalized as:

A)Debit Sales,credit Unearned Revenue.
B)Debit Unearned Revenue,credit Sales.
C)Debit Cash,credit Unearned Revenue.
D)Debit Unearned Revenue,credit Cash.
E)Debit Cash,credit Ticket sales payable.

Question 51

All of the following are true of known liabilities except:

A)Include accounts payable,notes payable,and payroll.
B)Are obligations set by agreements,contracts,or laws.
C)Are measurable.
D)Are definitely determinable.
E)May depend on some future event occurring.

Question 52

The report that shows the pay period dates,hours worked,gross pay,deductions,and net pay of each employee for every pay period is the payroll register.

Question 53

All of the following statements regarding uncertainty in liabilities are true except:

A)Liabilities can involve uncertainty in whom to pay.
B)A company can create a liability with a known amount even when the holder of the note may not be known until the maturity date.
C)A company can have an obligation of a known amount to a known creditor but not know when it must be paid.
D)A company only records liabilities when it knows whom to pay,when to pay,and how much to pay.
E)A company can be aware of an obligation but not know how much will be required to settle it.

Question 54

Obligations not expected to be paid within the longer of one year or the company's operating cycle are reported as:

A)Current assets.
B)Current liabilities.
C)Long-term liabilities.
D)Operating cycle liabilities.
E)Bills.

Question 55

Each employee records the number of withholding allowances claimed on the withholding allowance certificate that is filed with the employer,which is the Form W-4.

Question 56

Companies with many employees rarely use a special payroll bank account from which to pay employees.

Question 57

Amounts received in advance from customers for future products or services:

A)Are revenues.
B)Increase income.
C)Are liabilities.
D)Are not allowed under GAAP.
E)Require an outlay of cash in the future.

Question 58

Contingent liabilities must be recorded if:

A)The future event is probable and the amount owed can be reasonably estimated.
B)The future event is remote.
C)The future event is reasonably possible but not estimable.
D)The amount owed cannot be reasonably estimated.
E)The future event is probable but not estimable.

Question 59

An employee earnings report is a cumulative record of each employee's hours worked,gross earnings,deductions,and net pay.

Question 60

When a company is obligated for sales taxes payable,it is reported as a(n):

A)Estimated liability.
B)Contingent liability.
C)Current liability.
D)Business expense.
E)Long-term liability.

Question 61

Uncertainties such as natural disasters are:

A)Not contingent liabilities because they are future events not arising from past transactions or events.
B)Contingent liabilities because they are future events arising from past transactions or events.
C)Disclosed because of their usefulness to financial statements.
D)Estimated liabilities because the amounts are uncertain.
E)Reported in the same way as debt guarantees.

Question 62

Short-term notes payable:

A)Cannot replace an account payable.
B)Can be issued in return for money borrowed from a bank.
C)Are not negotiable.
D)Are a conditional promise to pay.
E)Rarely involve interest charges.

Question 63

On November 1,Alan Company signed a 120-day,8% note payable,with a face value of $9,000.What is the maturity value of the note on March 1? (Use 360 days a year.)

A)$9,000
B)$720
C)$9,120
D)$9,720
E)$9,240

Question 64

On December 1,Victoria Company signed a 90-day,6% note payable,with a face value of $15,000.What is the adjusting entry to record the accrued interest on December 31?

A)Debit Interest Expense,$75; Credit Notes Payable,$75.
B)Debit Interest Expense,$225; Credit Notes Payable,$225.
C)Debit Interest Expense,$75; Credit Interest Payable,$75.
D)Debit Interest Expense,$150; Credit Interest Payable,$150.
E)No adjusting entry is required.

Question 65

Interest expense is not:

A)Incurred on current liabilities.
B)Likely to stay the same when sales change.
C)A fixed expense.
D)Likely to fluctuate when sales change.
E)A factor in determining a company's borrowing risk.

Question 66

On December 1,Victoria Company signed a 90-day,6% note payable,with a face value of $15,000.What is the journal entry to record the issuance of the note on December 1?

A)Debit Cash,$15,225; Credit Notes Payable,$15,000,Credit Interest Payable,$225.
B)Debit Cash,$15,000; Credit Notes Payable,$15,000.
C)Debit Cash,$15,000; Debit Interest Expense,$225; Credit Notes Payable,$15,225.
D)Debit Cash,$15,000; Debit Interest Expense,$75; Credit Notes Payable,$15,075.
E)Debit Cash,$15,000; Debit Interest Expense,$75; Credit Notes Payable,$15,000; Credit Interest Payable,$75.

Question 67

The correct times interest earned computation is:

A)(Net income + Interest expense + Income taxes)/Interest expense.
B)(Net income + Interest expense - Income taxes)/Interest expense.
C)(Net income - Interest expense - Income taxes)/Interest expense.
D)(Net income - Interest expense + Income taxes)/Interest expense.
E)Interest expense/(Net income + Interest expense + Income taxes expense).

Question 68

The times interest earned ratio reflects:

A)A company's ability to pay its operating expenses on time.
B)A company's ability to pay interest even if sales decline.
C)A company's profitability.
D)The relation between income and debt.
E)The relation between assets and liabilities.

Question 69

Times interest earned is calculated by:

A)Multiplying interest expense by income.
B)Dividing interest expense by income before interest expense.
C)Dividing income before interest expense and income taxes by interest expense.
D)Multiplying interest expense by income before interest expense.
E)Dividing income before interest expense by interest expense and income taxes.

Question 70

A company's income before interest expense and income taxes is $350,000 and its interest expense is $100,000.Its times interest earned ratio is:

A)0.29
B)3.50
C)2.50
D)1.75
E)0.50

Question 71

A short-term note payable:

A)Is a written promise to pay a specified amount on a definite future date within one year or the company's operating cycle,whichever is longer.
B)Is a contingent liability.
C)Is an estimated liability.
D)Is not a liability until the due date.
E)Cannot be used to extend the payment period for an account payable.

Question 72

A company has fixed interest expense of $5,000,its income before interest expense and income taxes is $17,000,and its net income is $9,400.The company's times interest earned ratio equals:

A)0.5.
B)1.8.
C)1.9.
D)3.4.
E)0.3.

Question 73

If the times interest earned ratio:

A)Increases,then risk increases.
B)Increases,then risk decreases.
C)Is greater than 1.5,the company is in default.
D)Is less than 1.5,the company is carrying too little debt.
E)Is greater than 3.0,the company is likely carrying too much debt.

Question 74

On November 1,Alan Company signed a 120-day,8% note payable,with a face value of $9,000.What is the adjusting entry for the accrued interest at December 31 on the note? (Use 360 days a year.)

A)No adjusting entry is required.
B)Debit interest payable,$120; credit interest expense,$120.
C)Debit Interest Expense,$120; credit Interest Payable,$120.
D)Debit Interest Expense,$720; credit Interest Payable,$720.
E)Debit Interest Payable,$240; credit Interest Expense,$240.

Question 75

On December 1,Victoria Company signed a 90-day,6% note payable,with a face value of $15,000.Assuming the company does not prepare reversing entries,what is the journal entry to record the repayment of the note on March 1?

A)Debit Notes Payable,$15,225; Credit Cash,$15,225.
B)Debit Notes Payable,$15,000; Credit Cash,$15,000.
C)Debit Notes Payable,$15,000; Debit Interest Expense,$225; Credit Cash,$15,225.
D)Debit Notes Payable,$15,000; Debit Interest Expense,$150; Debit Interest Payable,$75; Credit Cash,$15,225.
E)Debit Notes Payable,$15,075; Debit Interest Expense,$150; Credit Cash,$15,225.

Question 76

On November 1,Alan Company signed a 120-day,8% note payable,with a face value of $9,000.Alan made the appropriate year-end accrual.What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.)

A)Debit Notes Payable $9,000; debit Interest Payable $120; credit Cash $9,120.
B)Debit Cash $9,240; credit Notes Payable $9,240.
C)Debit Notes Payable $9,240; credit Interest Payable $120; credit Interest Expense $120; credit Cash $9,000.
D)Debit Notes Payable $9,000; debit Interest Payable $120; debit Interest Expense $120; credit Cash $9,240.
E)Debit Notes Payable $9,000; debit Interest Expense $240; credit Cash $9,240.

Question 77

The difference between the amount received from issuing a note payable and the amount repaid at maturity is referred to as:

A)Interest.
B)Principal.
C)Face Value.
D)Cash.
E)Accounts Payable.

Question 78

On December 1,Victoria Company signed a 90-day,6% note payable,with a face value of $15,000.What amount of interest expense is accrued at December 31 on the note? (Use 360 days a year.)

A)$0
B)$75
C)$900
D)$225
E)$300

Question 79

A company's fixed interest expense is $8,000,its income before interest expense and income taxes is $32,000.Its net income is $9,600.The company's times interest earned ratio equals:

A)0.25.
B)0.30.
C)0.83.
D)3.33.
E)4.0.

Question 80

In the accounting records of a defendant,lawsuits:

A)Are estimated liabilities.
B)Should always be recorded.
C)Should always be disclosed.
D)Should be recorded if payment for damages is probable and the amount can be reasonably estimated.
E)Should never be recorded.