Test bank accounting 25th editon warren chapter 11 current liabili

Chapter 11 Current Liabilities and Payroll Student: _ Receiving payment prior to delivering goods or services causes a current liability to be incurred True False For a current liability to exist, the following two tests must be met The liability must be due usually within a year and must be paid out of current assets True False All long-term liabilities eventually become current liabilities True False The borrower is the one who issues a note payable to a creditor True False Notes payable may be issued to creditors to satisfy accounts payable created earlier True False Interest expense is reported in the operating expense section of the income statement True False A loan in which the lender deducts interest from the amount borrowed before the money is advanced to the borrower is called an interest bearing note True False For an interest bearing note payable, the amount borrowed is equal to the face amount of the note True False The amount of money a borrower receives from the lender is called discount rate True False 10 The proceeds of a discounted note are equal to the face value of the note True False 11 The discount on a note payable is charged to an account that has a normal credit balance True False 12 The proceeds from discounting a $20,000, 60-day, note payable at 6% is $20,200 True False 13 Amounts withheld from each employee for Social Security and Medicare varies by state True False 14 Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s federal income taxes True False 15 Form W-2 is called the Wage and Tax Statement True False 16 If, prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $98,800, earnings subject to social security tax are $100,000, and the tax rate is 6.0%, the employer's social security tax on the $2,000 gross earnings paid on the last day of the year is $120 True False 17 An employee's take home pay is equal to gross pay less all voluntary deductions True False 18 Taxes deducted from an employee's earnings to finance social security and Medicare benefits are called FICA taxes True False 19 Generally, all deductions made from an employee's gross pay are required by law True False 20 Payroll taxes are based on the employee's net pay True False 21 Most employers are required to withhold federal unemployment taxes from employee earnings True False 22 FICA tax is a payroll tax that is paid only by employers True False 23 Medicare taxes are withheld from an employee's pay only until the employee has earned a specific amount each year True False 24 Medicare taxes are paid by both the employee and the employer True False 25 Federal unemployment taxes are paid by the employer and the employee True False 26 Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs True False 27 Like many taxes deducted from employee earnings, federal income taxes are subject to a maximum amount per employee per year True False 28 Federal unemployment compensation tax becomes an employer's liability at the time the employee is paid True False 29 FICA tax becomes a liability to the federal government at the time an employee's payroll is prepared True False 30 Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes True False 31 Federal income taxes withheld increase the employer's payroll tax expense True False 32 The use of a separate payroll bank account is not an advantageous control, because it creates more complexity in reconciliation functions for a company and invites theft True False 33 Employers are required to compute and report payroll taxes on a calendar-year basis, even if a different fiscal year is used for financial reporting and income tax purposes True False 34 Payroll taxes levied against employers become an employer liability at the time the employee wages are incurred True False 35 For paying their payroll, most employers use payroll checks drawn on a special bank account True False 36 The payroll register is a multicolumn form used to assemble the data related for all employees True False 37 The total net pay for a period is determined from the payroll register True False 38 Internal controls for cash payments also apply to payrolls True False 39 While separation of duties may play a strong role in the internal control of inventory, it is not significant in controlling payroll True False 40 For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits True False 41 Depending upon when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a long-term or a current liability True False 42 During the first year of operations, employees earned vacation pay of $35,000 The vacations will be taken during the second year The vacation pay expense should be recorded in the second year as the vacations are taken by the employees True False 43 One of the more popular defined contribution plans is the 401k plan True False 44 A defined contribution plan promises employees a fixed annual pension benefit True False 45 In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit True False 46 The accounting for defined benefit plans is usually very easy and straight forward True False 47 During the first year of operations, a company granted warranties on its products The estimated cost of the product warranty liability at the end of the year is $8,500 The product warranty expense of $8,500 should be recorded in the years of the expenditures to repair the products covered by the warranty payments True False 48 Obligations that depend on past events and that are based on future possible events are contingent liabilities True False 49 In order to be a recorded contingent liability, the liability must be possible and easily estimated True False 50 The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense True False 51 Current liabilities are A due, but not receivable for more than one year B due, but not payable for more than one year C due and receivable within one year D due and payable within one year 52 Notes may be issued A when assets are purchased B to creditor's to temporarily satisfy an account payable created earlier C when borrowing money D all of the above 53 On June 8, Alton Co issued an $95,000, 6%, 120-day note payable to Seller Co What is the due date of the note? A October B October C October D October 54 On June 8, Alton Co issued an $90,000, 6%, 120-day note payable to Seller Co Assuming a 360-day year for your calculations, what is the maturity value of the note? A $90,450 B $90,000 C $91,800 D $95,400 55 On July 8, Alton Co issued an $80,000, 6%, 120-day note payable to Seller Co Assume that the fiscal year of Alton Co ends July 31 Using the 360-day year in your calculations, what is the amount of interest expense recognized by Alton in the current fiscal year? A $1,200.00 B $106.67 C $306.67 D $400.00 56 On June 8, Alton Co issued an $80,000, 6%, 120-day note payable to Seller Co Assume that the fiscal year of Seller Co ends June 30 Using the 360-day year in your calculations, what is the amount of interest revenue recognized by Seller in the following year? A $1,200.00 B $1,208.89 C $1,306.67 D $1,600.00 57 On June 8, Alton Co issued an $80,000, 6%, 120-day note payable on an overdue account payable to Seller Co Assume that the fiscal year of Alton Co ends June 30 Which of the following relationships is true? A Alton is the creditor and credits Accounts Receivable B Seller is the creditor and debits Accounts Receivable C Seller is the borrower and credits Accounts Payable D Alton is the borrower and debits Accounts Payable 58 A business borrowed $40,000 on March of the current year by signing a 60-day, 9% interest bearing note Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a A debit to Interest Payable $600 B debit to Interest Expense $600 C credit to Cash for $40,000 D credit to Cash for $46,300 59 When a borrower receives the face amount of a discounted note less discount, this amount is known as: A the note proceeds B the note discount C the note deferred interest D the note principal 60 Assuming a 360-day year, the interest charged by the bank, at the rate of 9%, on a 90-day, discounted note payable of $100,000 is A $9,000 B $2,250 C $750 D $1,000 61 Assuming a 360-day year, when a $40,000, 90-day, 9% interest-bearing note payable matures, total payment will amount to: A $40,900 B $43,600 C $900 D $3,600 62 Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank The discount rate used by the bank in computing the proceeds was A 6.25% B 10.00% C 10.26% D 9.75% 63 Mobile Co issued a $45,000, 60-day, discounted note to Guarantee Bank The discount rate is 6% At maturity, assuming a 360-day year, the borrower will pay: A $45,450 B $42,300 C $45,000 D $44,550 64 Chang Co issued a $50,000, 120-day, discounted note to Guarantee Bank The discount rate is 6% Assuming a 360-day year, the cash proceeds to Chang Co are A $49,750 B $47,000 C $49,000 D $51,000 65 The journal entry a company uses to record the issuance of a note for the purpose of converting an existing account payable would be A debit Cash; credit Accounts Payable B debit Accounts, Payable; credit Cash C debit Cash; credit Notes Payable D debit Accounts Payable; credit Notes Payable 66 The journal entry a company uses to record the issuance of an interest-bearing note for the purpose of borrowing funds for the business is A debit Accounts Payable; credit Notes Payable B debit Cash; credit Notes Payable C debit Notes Payable; credit Cash D debit Cash and Interest Expense; credit Notes Payable 67 The journal entry a company uses to record the issuance of a discounted note for the purpose of borrowing funds for the business is A debit Cash and Interest Expense; credit Notes Payable B debit Cash and Interest Payable; credit Notes Payable C debit Accounts Payable; credit Notes Payable D debit Notes Payable; credit Cash 68 The journal entry a company uses to record the payment of a discounted note is A debit Notes Payable and Interest Expense; credit Cash B debit Notes Payable; credit Cash C debit Cash; credit Notes Payable D debit Accounts Payable; credit Cash 69 The journal entry a company uses to record the payment of an interest-bearing note is A debit Cash; credit Notes Payable B debit Accounts Payable; credit Cash C debit Notes Payable and Interest Expense; credit Cash D debit Notes Payable and Interest Receivable; credit Cash 70 A current liability is a debt that is reasonably expected to be paid A between months and 18 months B out of currently recognized revenues C within one year D out of cash currently on hand 71 Grayson Bank agrees to lend the Trust Company $120,000 on January Trust Company signs a $120,000, 8%, 9-month note The entry made by Trust Company on January to record the proceeds and issuance of the note is: A Interest Expense 9,600 Cash 110,400 Notes Payable 120,000 B Cash Notes Payable 120,000 120,000 C Cash Interest Expense Notes Payable 129,600 D Notes Payable Interest Payable Cash Interest Expense 120,000 7,200 120,000 7,200 9,600 120,000 169 Aqua Construction installs swimming pools They calculate that warranty obligations are 5% of gross sales For the year just ending Aqua’s gross sales were $1,500,000 Due to previous quarter recognitions, the Warranty Liability account has a credit balance of $48,700 Determine the year’s total warranty liability and journalize any necessary value to establish the year’s liability at December 31st Due to sales, $1,500,000, warranty liability is $75,000 ($1,500,000 ´ 5%) Since $48,700 has already been recognized, $26,300 ($75,000 - $48,700) must still be recognized Dec 31st Warranty Expense Warranty Payable 26,300 26,300 170 Lamar Industries warrants its products for one year The estimated product warranty is 3% of sales Assume that sales were $190,000 for June In July, a customer received warranty repairs requiring $185 of parts and $50 of labor Required: (1) (2) Journalize the adjusting entry required at June 30, the end of the first month of the current year, to record the accrued product warranty Journalize the entry to record the warranty work provided in July (1) P 5,70 r o d u ct W ar nt y E x p e n s e Prod 5,70 uct War rant y Paya ble To reco rd warr anty expe nse for June , 3% ´ $190,0 00 (2) P 235 r o d u ct W ar nt y P a y a bl e Sup 185 plies Wag 50 es Paya ble 171 Hadley Industries warrants its products for one year The estimated product warranty is 4% of sales Assume that sales were $210,000 for June In July, a customer received warranty repairs requiring $205 of parts and $75 of labor Required: (1) (2) Journalize the adjusting entry required at June 30, the end of the first month of the current year, to record the accrued product warranty Journalize the entry to record the warranty work provided in July (1) P 8,40 r o d u ct W ar nt y E x p e n s e Prod 8,40 uct War rant y Paya ble To reco rd warr anty expe nse for June 4% ´ $210,0 00 (2) P 280 r o d u ct W ar nt y P a y a bl e Sup 205 plies Wag 75 es Paya ble 172 The current assets and current liabilities for Kolbie Company and Newton Company are shown as follows at the end of 2012 Kolbie Company ( in millions) For the Year ending December 31, 2012 Newton Company (in millions) For the Year ending December 31, 2012 Current Assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets* Total current assets $8,352 6,034 3,029 346 2,195 $19,956 $8,546 752 5,152 660 2,829 $17,939 Current Liabilities: Accounts payable Accrued and other current liabilities Total current liabilities $4,970 3,329 $8,299 $10,430 6,361 $16,791 *These represent prepaid expenses and other non-quick current assets Required: (1) Determine the quick ratio for both companies Round to two decimal places (2) Interpret the quick ratio difference between the two companies (1) Quick Ratio Kolbie Co Newton Co 2.10 0.86 Quick Ratio = Quick Assets / Current Liabilities Kolbie Co.: Quick Ratio = ($19,956 – 346 – 2,195) / $8,299 = 2.10 Newton Co.: Quick Ratio = ($17,939 – 660 – 2,829)/ $16,791 = 0.86 (2) It is clear that Kolbie’s short-term liquidity is stronger than Newton’s Kolbie’s quick ratio is 144% [(2.10 – 0.86)/0.86] higher Kolbie has a much stronger relative cash and short-term investment position than does Newton Kolbie’s cash and short-term investments are over 72% of total current assets (173% of current liabilities), compared to Newton’s 52% of total current assets (55% of current liabilities) In addition, Newton’s relative accounts payable position is larger than Kolbie’s, indicating the possibility that Newton has longer supplier payment terms than does Kolbie A quick ratio of 2.10 for Kolbie suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.86 for Newton indicates an efficient but tight quick asset management policy 173 The Core Company had the following assets and liabilities as of December 31, 2012: ASSETS Cash Accounts receivable Inventory Equipment $58,000 25,000 20,000 50,000 LIABILITIES Current portion of long-term debt Accounts payable Long-term debt 20,000 12,000 25,000 Calculate: Current Ratio, Working Capital and Quick Ratio Current Ratio: ($58,000 + $25,000 + $20,000) / ($20,000 + $12,000) = 3.2 Working Capital: $103,000 - $32,000 = $71,000 Quick Ratio: ($58,000 + $25,000) / ($20,000 + $12,000) = 2.6 174 On October 1, Ramos Co signed a $90,000, 60-day discounted note at the bank The discount rate was 6%, and the note was paid on November 30 (Assume a 360-day year is used for interest calculations.) (a) (b) Journalize the entries for October and November 30 Assume that Ramos Co signed a 6% note Journalize the entries for October and November 30 (a) Oct Nov 30 (b) Oct Nov 30 Cash Interest Expense Notes Payable 89,100 900 Notes Payable Cash 90,000 Cash Notes Payable 90,000 Notes Payable Interest Expense Cash 90,000 900 90,000 90,000 90,000 90,900 175 Journalize the following entries on the books of the borrower and creditor Label accordingly (Assume a 360-day year is used for interest calculations.) Jun Jun 30 Aug 29 Regis Co purchased merchandise on account from Winthrop Co., $60,000, terms n/30 Regis Co issued a 60-day, 5% note for $60,000 on account Regis Co paid the amount due Regis Co (Borrower) June 30 Aug 29 Merchandise Inventory Accounts Payable 60,000 Accounts Payable Notes Payable 60,000 Notes Payable Interest Expense Cash 60,000 500 Accounts Receivable Sales 60,000 Notes Receivable Accounts Receivable 60,000 Cash Notes Receivable Interest Revenue 60,500 60,000 60,000 60,500 Winthrop Co (Creditor) June 30 Aug 29 60,000 60,000 60,000 500 176 Journalize the following entries on the books of Winston Co for August 1, September 1, and November 30 (Assume a 360-day year is used for interest calculations.) Aug Winston Co purchased merchandise for $75,000 on account from Bagley Co., terms n/30 Sept Winston Co issued a 90-day, 6% note for $75,000 on account Nov 30 Winston Co paid the amount due Aug Merchandise Inventory Accounts Payable 75,000 Accounts Payable Notes Payable 75,000 Notes Payable Interest Expense Cash 75,000 1,125 Sept Nov 30 75,000 75,000 76,125 177 The following information is for employee Ella Dodd for the week ended March 15 Total hours worked: 48 Rate: $15 per hour, with double time for all hours in excess of 40 Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social security: 6% on maximum earnings of $100,000 Medicare tax: 1.5% on all earnings State unemployment: 3.4% on maximum earnings of $7,000; on employer Federal unemployment: 0.8% on maximum earnings of $7,000; on employer (a) (b) Determine (1) total earnings, (2) total deductions, and (3) cash paid Determine each of the employer's payroll taxes related to the earnings of Ella Dodd for the week ended March 15 (a) (1) (2) (3) 40 hours at $15 hours at $30 Deductions: Income tax United Fund deduction Social Security tax, 6% of $840 Medicare tax, 1.5% of $840 Cash paid (b) Social security and Medicare taxes, 7.5% of $840 State unemployment tax, 3.4% ´ $600 Federal unemployment tax, 0.8% ´ $600 Total $600.00 240.00 $200.00 50.00 50.40 12.60 $840.00 313.00 $527.00 $63.00 20.40 4.80 $88.20 178 The summary of the payroll for the monthly pay period ending July 15 indicated the following: Sales salaries Federal income tax withheld Office salaries Medical insurance withheld Social security tax withheld Medicare tax withheld $125,000 32,300 35,000 7,370 10,200 2,550 Journalize the entries to record (a) the payroll and (b) the employer's payroll tax expense for the month The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8% Only $25,000 of salaries are subject to unemployment taxes (a) Sales Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Federal Income Tax Payable Medical Insurance Payable Salaries Payable 125,000 35,000 10,200 2,550 32,300 7,370 107,580 (b) Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable 13,725 10,200 2,550 775 200 179 Excel Products Inc pays its employees semimonthly The summary of the payroll for December 31, 2012 indicated the following: Salary expense Federal income tax withheld $120,000 20,000 For the year ended 2012, $40,000 of the December 31 payroll is subject to social security tax of 6%; $120,000 is subject to Medicare tax of 1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8% As of January 1, 2013 all of the $120,000 is subject to all payroll taxes Present the journal entries for payroll tax expense if the employees are paid (a) December 31 of the current year, (b) January of the following year (a) Social Security Tax, 6% on $40,000 Medicare Tax, 1.5% on $120,000 State Unemployment, 4.3% on $10,000 Federal Unemployment, 8% on $10,000 Total Payroll Tax Expense Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable $2,400 1,800 430 80 $4,710 4,710 2,400 1,800 430 80 (b) Social Security Tax, 6% on $120,000 Medicare Tax, 1.5% on $120,000 State Unemployment Tax, 4.3% on $120,000 Federal Unemployment Tax, 8% on $120,000 Total Payroll Tax Expense Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable $ 7,200 1,800 5,160 960 $15,120 15,120 7,200 1,800 5,160 960 180 Journalize the following transactions: Dec 31 The accrued product warranty for the year is estimated to be 1.5% of net sales Sales for the year totaled $8,000,000, and sales returns and allowances were $240,000 31 The accrued vacation pay for the year is estimated to be $46,000 31 Paid Reliable Insurance Co $85,000 as fund trustee for the pension plan The annual pension cost is $109,000 Dec 31 Product Warranty Expense Product Warranty Payable 116,400 116,400* *$7,760,000 ´ 015 = $116,400 31 31 Vacation Pay Expense Vacation Pay Payable 46,000 Pension Expense Cash Unfunded Pension Liability 109,000 46,000 85,000 24,000 181 Journalize the following transactions for Riley Corporation: Dec 31 The accrued product warranty for the year is estimated to be 2.5% of net sales Sales for the year totaled $9,000,000, and sales returns and allowances were $150,000 31 The accrued vacation pay for the year is estimated to be $75,000 31 Paid First Insurance Co $55,000 as fund trustee for the pension plan The annual pension cost is $87,000 Dec 31 Product Warranty Expense Product Warranty Payable 221,250 221,250* *$8,850,000 ´ 025 = $221,250 31 31 Vacation Pay Expense Vacation Pay Payable 75,000 Pension Expense Cash Unfunded Pension Liability 87,000 75,000 55,000 32,000 182 Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants As a result, the Environmental Protection Agency (EPA) fined the company $405,000 The company contested the fine In addition, an employee is seeking $180,000 damages related to the spill Finally, a homeowner has sued the company for $260,000 Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000 Jones’ legal counsel believes the following will happen in relationship to these incidents: (a) It is probable that the EPA fine will stand (b) An out-of-court-settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week (c) Counsel believes that the homeowner’s case is much weaker and will be decided in favor of Jones Company (d) Other litigation related to the spill is possible, but the damage amounts are uncertain Required: (1) Based on this information, journalize the contingent liabilities associated with the spill Use the account “Damage Awards and Fines” to recognize the expense for the period (2) Prepare any note disclosure related to the spill (1) Dama 570,000 ge Awar ds and Fines EPA Fines Payable Litigation Claims Payable Note: The “dam age award s and fines” woul d be disclo sed on the inco me state ment under “Othe r expen ses.” 405,000 165,000 (2) The comp any exper ience da hazar dous mater ials spill at one of its plants durin g the previ ous perio d This spill has result ed in a numb er of lawsu its to which the comp any is a party The Envir onme ntal Prote ction Agen cy (EPA ) has fined the comp any $405, 000, which the comp any is conte sting in court Altho ugh the comp any does not admit fault, legal couns el believ 183 For Company A and Company B: (a) (b) Calculate the quick ratio for each company Comment on which one is more able to meet current liabilities Company A Dr Account Cash Cash Equivalents Trade Notes Receivable Accounts Receivable Prepaid Expenses Merchandise Inventory Fixed Assets Accumulated DepreciationFixed Assets $21 14 20 Accounts Payable Current Accrued Liabilities Mortgage Payable Capital Total Company B Cr $81 (a) Company A Quick ratio: $42 ÷ $39 = 1.08 Company B Quick ratio: $48 ÷ $27 = 1.78 (b) Company B would be more liquid Dr Cr $ 25 10 55 $ $ 25 26 13 17 19 24 20 $81 $116 40 $116 ... long-term liability 119 An unfunded pension liability is reported on the balance sheet as A current liability B owner's equity C long-term liability D current liability or long-term liability,... plan 118 Vacation pay payable is reported on the balance sheet as a(n) A current liability or long-term liability, depending upon when the vacations will be taken by employees B current liability... presentation on December 31, 2014, is A Current Liabilities, $1,000,000 B Current Liabilities, $200,000; Long-term Debt, $800,000 C Long-term Debt, $1,000,000 D Current Liabilities, $800,000; Long-term