Question 1

Nationwide Magazine sells 63,000 subscriptions on account in March. The subscription price is $14 each. The subscriptions start in April. The journal entry in March would include a:

Accepted Answer

The journal entry in March would include a credit to Unearned Subscription Revenue for $882,000 because the revenue is not yet earned; it will be recognized over the subscription period starting in April.

Question 2

The journal entry to record accrued interest on a short-term note payable includes a debit to:

Accepted Answer

When recording accrued interest on a short-term note payable, the company would debit Interest Expense and credit Interest Payable. This is because the interest expense has been incurred but not yet paid, resulting in an increase in the company's liabilities (Interest Payable). The cash transaction related to the interest expense will be recorded when the interest is actually paid.

Question 3

Which of the following liability accounts is usually NOT an accrued liability:

Accepted Answer

Notes Payable is typically a formal written agreement to pay a specific amount of money at a future date, rather than an accrued liability which is usually an obligation recognized before payment is due.

Question 4

Monthly sales are $530,000. Warranty costs are estimated at 6% of monthly sales. Warranties are honored with replacement products. No defective products are returned during the month. At the end of the month, the company should record a journal entry with a credit to:

Accepted Answer

The company should record a liability for the estimated warranty costs, which is 6% of $530,000, equaling $31,800. This is credited to Estimated Warranty Payable.

Question 5

Mike's Pharmacy sold inventory with a selling price of $2800 to customers for cash. They also collected sales taxes of $500. The journal entry to record this information includes a:

Accepted Answer

The answer of Mike's Pharmacy sold inventory with a selling...

Question 6

Wisconsin Bank lends Local Furniture Company $140,000 on November 1. Local Furniture Company signs a $140,000, 3%, 4-month note. The fiscal year end of Local Furniture Company is December 31. The journal entry made by Local Furniture Company on December 31 is:

Accepted Answer

The interest for two months (November and December) is accrued at the fiscal year-end. The interest is calculated as $140,000 * 3% * (2/12) = $700. Therefore, the entry is to debit Interest Expense and credit Interest Payable for $700.

Question 7

Sales taxes collected from customers are sent to the state at the end of each month. What journal entry is prepared?

Accepted Answer

Sales taxes collected from customers are a liability and should be recorded as a credit to Sales Taxes Payable. When the payment is made to the state, it should be recorded as a debit to Sales Taxes Payable and a credit to Cash.

Question 8

Mariano Corporation sells 12,000 units of inventory during the first year of operations for $700 each. Mariano provides a one-year warranty on parts. It is estimated that 4% of the units will be defective and that repair costs are estimated to be $70 per unit. In the year of sale, warranty contracts are honored on 70 units for a total cost of $4900. What amount will be reported as Estimated Warranty Liability at the end of the year?

Accepted Answer

The answer of Mariano Corporation sells 12,000 units of inventory...

Question 9

Illinois Bank lends Lisle Furniture Company $70,000 on December 1. Lisle Furniture Company signs a $70,000, 6%, 4-month note. The total cash paid at maturity of the note is: (Round your final answer to the nearest dollar.)

Accepted Answer

The total cash paid at maturity includes the principal and the interest. The interest is calculated as $70,000 * 6% * (4/12) = $1,400. Therefore, the total cash paid is $70,000 + $1,400 = $71,400.

Question 10

Unearned Service Revenue relating to services, to be provided in one month, is reported on the balance sheet as:

Accepted Answer

Unearned Service Revenue relates to services that have not yet been provided and therefore represents a liability that the company owes to customers. As such, it is classified as a current liability on the balance sheet.

Question 11

Aisha Company paid $1,500 cash to replace a wheel on equipment sold under a two-year warranty in the prior year. The entry to record the payment will debit:

Accepted Answer

The payment made to replace the wheel on equipment sold under a two-year warranty is an estimated warranty expense that needs to be recorded as an increase in the Estimated Warranty Payable account. Therefore, the entry to record the payment will debit the Estimated Warranty Payable account and credit Cash.

Question 12

Kathy's Corner Store has total cash sales for the month of $38,000 excluding sales taxes. If the sales tax rate is 8%, which journal entry is needed? (Ignore Cost of Goods Sold.)

Accepted Answer

The total cash received includes sales tax, so Cash is debited for $41,040 ($38,000 + 8% of $38,000). Sales Revenue is credited for $38,000, and Sales Tax Payable is credited for $3,040 (8% of $38,000).

Question 13

Failure to record an accrued liability for wages earned by employees causes a company to:

Accepted Answer

The answer of Failure to record an accrued liability for...

Question 14

Michigan Bank lends Detroit Furniture Company $80,000 on December 1. Detroit Furniture Company signs a $80,000, 6%, 4-month note. The total cash paid for interest (only)at maturity of the note is: (Round your final answer to the nearest dollar.)

Accepted Answer

The interest on the note is calculated using the formula: Interest = Principal x Rate x Time. Here, the principal is $80,000, the rate is 6% (or 0.06), and the time is 4/12 of a year (since the note is for 4 months). Therefore, the interest is $80,000 x 0.06 x (4/12) = $1,600.

Question 15

Madison Bank lends Neenah Paper Company $110,000 on January 1, 2017. Neenah signs a $110,000, 10%, 6-month note. The journal entry made by Neenah on January 1, 2017 will debit:

Accepted Answer

Neenah Paper Company receives $110,000 in cash and incurs a liability of $110,000 in the form of a note payable.

Question 16

Notes payable due in six months are reported as:

Accepted Answer

Notes payable due in six months are considered a short-term obligation and are therefore classified as current liabilities on the balance sheet.

Question 17

Total wages employees earned for the payroll period are called ________. The amount of wages the employees take home is the ________.

Accepted Answer

"Total wages" refers to gross pay, while "the amount of wages the employees take home" refers to net pay. Option B correctly identifies gross pay as the total wages earned and net pay as the amount taken home by employees after deductions. Option A and D use incorrect terms or order. Option C has the terms switched.

Question 18

On December 31, 2017, Estimated Warranty Payable is reported on the balance sheet for White and Decker Company. The liability pertains to products sold, in 2017, with five year warranties. The Estimated Warranty Payable should be reported on the balance sheet at December 31, 2017 as a:

Accepted Answer

The Estimated Warranty Payable should be split between a current liability for the portion expected to be settled within one year and a long-term liability for the portion expected to be settled beyond one year.

Question 19

The accounting principle that requires a company to record warranty expense in the same period that it records sales revenue is the:

Accepted Answer

The expense recognition principle requires that companies record expenses in the same period as the related revenue. Since a warranty expense is an expense related to the sale of a product, it should be recognized in the same period as the revenue from the sale.

Question 20

Montana Company sold merchandise with a retail price of $34,000 for cash. Montana Company is required to collect 6% state sales tax. The total cash received from customers was:

Accepted Answer

The total cash received includes the retail price plus the sales tax. The sales tax is 6% of $34,000, which is $2,040. Therefore, the total cash received is $34,000 + $2,040 = $36,040.

Quiz 9: Liabilities