Question 1

There is a limit to the amount of income subject to the FUTA tax.

Accepted Answer

The limit for the amount of income subject to the Federal Unemployment Tax Act (FUTA) tax is $7,000 per employee per year. Any income above this limit is not subject to FUTA tax.

Question 2

Commercial paper consists of secured loans that are sold to the public.

Accepted Answer

Commercial paper consists of unsecured short-term loans that are issued by corporations and sold to the public. They typically have maturities of less than 270 days and are considered a type of promissory note.

Question 3

The classification of a liability as current or long-term is important because it may affect the evaluation of a company's liquidity.

Accepted Answer

The classification of a liability as current or long-term impacts a company's liquidity ratio. If too many current liabilities are present, it may imply a cash flow crisis. The classification of the liability as long-term indicates that it will not become due shortly, and the company will have a more extended period to prepare for its repayment. Therefore, it is essential to classify liabilities correctly to evaluate the company's liquidity.

Question 4

All liabilities involve an obligation of one sort or another.

Accepted Answer

Liabilities are obligations that an entity has towards somebody else, such as the requirement to repay debt or fulfill contractual obligations. Therefore, all liabilities involve some kind of obligation.

Question 5

There is no limit to the amount of income subject to the Medicare tax.

Accepted Answer

Currently, there is no limit to the amount of income subject to the Medicare tax, which is set at 1.45% for employees and 2.9% for self-employed individuals. However, there is a Social Security tax wage base limit, which is $142,800 in 2021, meaning wages above that amount are not subject to the Social Security tax.

Question 6

Working capital equals current assets minus current liabilities.

Accepted Answer

This statement is true. Working capital is calculated by subtracting current liabilities from current assets.

Question 7

The declaration of dividends is solely the decision of the corporation's board of directors.

Accepted Answer

The decision to declare dividends rests solely with the board of directors, based on the corporation's financial position and other factors. Shareholders may influence this decision through their votes and feedback, but ultimately, it is up to the board to determine if and how much of a dividend will be paid.

Question 8

The days' payable is the number of times,on average,that accounts payable are paid in an accounting period.

Accepted Answer

The days' payable refers to the number of days it takes a company to pay its accounts payable, not the number of times it is paid.

Question 9

The days' payable shows how long,on average,a company takes to pay its accounts payable.

Accepted Answer

The days' payable is a ratio that measures how long it takes for a company to pay its accounts payable, which are the amounts owed to vendors and suppliers for goods and services purchased on credit. This ratio is calculated by dividing the accounts payable balance by the average daily cost of goods sold. A higher days' payable indicates that the company is taking longer to pay its bills and may be managing its working capital effectively, while a lower days' payable suggests that the company is paying its bills too quickly and may be facing cash flow challenges.

Question 10

Because failure to record a liability generally leads to failure to record an expense,it usually results in an understatement of income.

Accepted Answer

The answer of Because failure to record a liability generally...

Question 11

Interest on a promissory note is recognized when the note is issued.

Accepted Answer

Interest on a promissory note is recognized over time, as the note holder earns interest on the principal over the life of the note. It is not recognized at the time of issuance.

Question 12

To determine the payables turnover,one first calculates the days' payable.

Accepted Answer

To determine the payables turnover, one first calculates the accounts payable turnover ratio by dividing the total purchases by the average accounts payable balance. The days' payable can be calculated by dividing the number of days in the period by the accounts payable turnover ratio. Therefore, the statement is false.

Question 13

Lines of credit from the bank must be disclosed in the financial statements or in the notes.

Accepted Answer

Lines of credit from the bank are considered a liability and must be disclosed in the financial statements or in the notes. This is to ensure transparency and provide stakeholders with a clear picture of the organization's financial position.

Question 14

Payables turnover is measured in number of days.

Accepted Answer

Payables turnover is typically measured in number of times per year rather than number of days.

Question 15

Commercial paper normally is issued by companies with poor credit ratings.

Accepted Answer

Commercial paper is typically issued by companies with strong credit ratings because it is a short-term, unsecured loan.

Question 16

Liabilities generally arise from future transactions.

Accepted Answer

Liabilities generally arise from past transactions or events, representing obligations that a company is required to settle in the future.

Question 17

A liability must always be classified as long-term if it is due in more than one year.

Accepted Answer

The answer of A liability must always be classified as...

Question 18

Because accounting measures should be verifiable,liabilities should not be estimated.

Accepted Answer

Liabilities often require estimation, such as in the case of contingent liabilities or long-term obligations. Accounting standards allow for such estimations as long as they are based on reasonable assumptions and can be supported by evidence.

Question 19

If an accrued liability for salaries is not recorded,income for the following period will be understated.

Accepted Answer

An accrued liability for salaries represents wages owed to employees for work performed but not yet paid. If this liability is not recorded, it means that wages expense for the period has been understated, which in turn means that net income has been overstated. Therefore, income for the following period will be understated.

Question 20

The term wages refers to the compensation of employees who are paid at an hourly rate.

Accepted Answer

The term wages specifically refers to the payment of employees who are compensated on an hourly basis. It does not refer to salaries, which are typically paid on an annual or monthly basis.

Quiz 9: Current Liabilities and Fair Value Accounting