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Chapter 9
ACCOUNTING FOR CURRENT LIABILITIES
True / False Questions
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.
2. Obligations not due within one year or the company’s operating cycle, whichever is longer,
are reported as current liabilities.
3. All expected future payments are liabilities.
4. A single liability cannot be divided between current and noncurrent liabilities.
5. A company cannot have a liability if the amount of the obligation is unknown.
6. A liability may exist even if there is uncertainty about whom to pay, when to pay, or how
much to pay.
7. Trade accounts payable are amounts owed to suppliers for products or services purchased
on credit.
8. Unearned revenues are current liabilities.
9. Sales taxes payable is debited and cash is credited when companies send sales taxes
collected from customers to the government.
10. Vacation benefits is an example of a known liability.
11. A contingent liability is a potential obligation that depends on a future event arising from a
past transaction or event.
12. Payroll is an example of a contingent liability for the employer.
13. The full disclosure principle requires the reporting of contingent liabilities that are
reasonably possible.
14. Uncertainties from the development of new competing products are not contingent
liabilities.
15. Debt guarantees are usually disclosed as a contingent liability.
16. 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.
17. A potential lawsuit claim is disclosed when the claim can be reasonably estimated and it is
reasonably possible.
18. A high value for the times interest earned ratio means that a company is a lower risk
borrower.
19. The times interest earned ratio is calculated by dividing interest expense by income before
interest expense and income taxes.
20. 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.
21. 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.
22. 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.
23. Promissory notes cannot be transferred from party to party because they are
nonnegotiable.
24. A note payable can be used to extend the payment due on an account payable.
25. Even if the end of an accounting period occurs between the signing of a note payable and
its maturity date, the matching principle requires that interest expense not be accrued on a
note payable until the note is paid.
26. Required payroll deductions include income taxes, Social Security taxes, pension and
health contributions, union dues, and charitable giving.
27. 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.
28. Employers must pay FICA taxes twice the amount of the FICA taxes withheld from their
employees.
29. The state unemployment tax rates applied to an employer are adjusted according to an
employer’s merit rating.
30. A high merit rating for state unemployment taxes means that an employer has high
employee turnover or seasonal hiring.
31. Employers must keep individual earnings reports for each employee.
32. Deposits of amounts payable to the federal government may be paid through federal
depository banks.
33. FUTA requires employers to pay a federal unemployment tax on all salary or wages paid
to each employee.
34. The Form W-2 must be given to employees before January 31 following the year covered
by the Form W-2.
35. Payments of FUTA are made quarterly to a federal depository bank if the total amount due
exceeds $500.
36. A known obligation of an uncertain amount that can at least be reasonably estimated is
reported as an estimated liability.
37. Accrued vacation benefits are a form of estimated liability for an employer.
38. A liability is incurred when income is earned because income tax expense is created by
earning income.
39. 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.
40. Employers can use a wage bracket withholding table to compute federal income taxes
withheld from each employee’s gross pay.
41. 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.
42. Companies with many employees rarely use a special payroll bank account from which to
pay employees.
43. 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.
44. An employee earnings report is a cumulative record of each employee’s hours worked,
gross earnings, deductions, and net pay.
45. When the number of withholding allowances claimed on Form W-4 increases, the amount
of income tax withheld decreases.
46. 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.
47. 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.
48. 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.
49. 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.
50. 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.
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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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 Revenue.
57. 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.
58. 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.
59. 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.
60. 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.
61. 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.
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62. 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.
63. 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.
64. 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.
65. 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.
66. 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.
67. A company’s had 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.
68. 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).
69. 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
70. 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.
71. The difference between the amount received from issuing a note payable and the amount
repaid at maturity is referred to as:
A. Interest.
B. Principle.
C. Face Value.
D. Cash.
E. Accounts Payable.
72. 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.
73. 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.
74. 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?
A. $0
B. $75
C. $900
D. $225
E. $300
75. 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?
A. Debit interest expense, $0; credit interest payable, $0.
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.
76. 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?
A. $9,000
B. $720
C. $9,120
D. $9,720
E. $9,240
77. 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?
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.
78. Employers’ responsibilities for payroll do not include:
A. Providing each employee with an annual report of his or her wages subject to FICA and
federal income taxes along with the amount of these taxes withheld.
B. Filing Form 941, the Employer’s Quarterly Federal Tax Return.
C. Filing Form 940, the Annual Federal Unemployment Tax Return.
D. Maintaining individual earnings records for each employee.
E. Recording an expense for the employee Federal Income Tax withholding.
79. Gross pay is:
A. Take-home pay.
B. Total compensation earned by an employee before any deductions.
C. Salaries after taxes are deducted.
D. Deductions withheld by an employer.
E. The amount of the paycheck.
80. The employer should record deductions from employee pay as:
A. Employee receivables.
B. Payroll taxes.
C. Current liabilities.
D. Wages payable.
E. Employee payables.
81. FICA taxes include:
A. Social Security and Medicare taxes.
B. Charitable giving.
C. Employee state income tax.
D. Federal and state unemployment taxes.
E. Employee federal income tax.
82. The amount of federal income taxes withheld from an employee’s paycheck is determined
by:
A. Current earnings for the pay period and number of withholding allowances the employee
claims.
B. The employer’s merit rating.
C. The amount of social security taxes withheld.
D. Multiplying the gross pay by 6.2%.
E. Tax tables provided by the state in which the employee works.
83. Recording employee payroll deductions may involve:
A. Liabilities to the employer.
B. Liabilities to federal and state governments.
C. Expenses for state unemployment.
D. Expenses for the gross wages and salaries.
E. Expenses for the employer portion of any medical insurance.
84. The Federal Insurance Contributions Act (FICA) requires that each employer file a:
A. W-4.
B. Form 941.
C. Form 1040.
D. Form 1099.
E. W-2.
85. An employee earned $37,000 during the year working for an employer when the
maximum limit for Social Security was $117,000. The FICA tax rate for Social Security is
6.2% and the FICA tax rate for Medicare is 1.45%. The employee’s annual FICA taxes
amount is:
A. $2,294.00.
B. $536.50.
C. $2,830.50.
D. $1,757.50.
E. $8,950.50
86. Portia Grant is an employee who is paid monthly. For the month of January of the current
year, she earned a total of $8,260. The FICA tax for social security is 6.2% and the FICA tax
rate for Medicare is 1.45%. The FUTA tax rate of .6% and the SUTA tax rate of 5.4% are
applied to the first $7,000 of an employee’s pay. The amount of federal income tax withheld
from her earnings was $1,325.17. Her net pay for the month is:
A. $6,422.71
B. $6,246.94
C. $6,302.94
D. $5,868.94
E. $6,422.71
87. Portia Grant is an employee who is paid monthly. For the month of January of the current
year, she earned a total of $8,260. The FICA tax for social security is 6.2% and the FICA tax
rate for Medicare is 1.45%. The FUTA tax rate of 0.6% and the SUTA tax rate of 5.4% are
applied to the first $7,000 of an employee’s pay. The amount of federal income tax withheld
from her earnings was $1,325.17. What is the total amount of taxes withheld from the Portia’s
earnings?
A. $3,097.17
B. $2,443.21
C. $1,957.06
D. $1,722.00
E. $1,495.36
88. Trey Morgan is an employee who is paid monthly. For the month of January of the current
year, he earned a total of $4,538. The FICA tax for social security is 6.2% and the FICA tax
rate for Medicare is 1.45% for both the employee and the employer. The amount of federal
income tax withheld from his earnings was $680.70. His net pay for the month is:
A. $3,510.14
B. $3,857.30
C. $4,190.84
D. $4,538.00
E. $3,162.98
89. Trey Morgan is an employee who is paid monthly. For the month of January of the current
year, he earned a total of $4,538. The FICA tax for social security is 6.2% and the FICA tax
rate for Medicare is 1.45% for both the employee and the employer. The amount of federal
income tax withheld from his earnings was $680.70. What is the total amount of taxes
withheld from the Trey’s earnings?
A. $1,375.02
B. $746.50
C. $962.06
D. $1,027.86
E. $680.70
90. The annual Federal Unemployment Tax Return is:
A. Form 940.
B. Form 1099.
C. Form 104.
D. Form W-2.
E. Form W-4.
91. The Wage and Tax Statement given to each employee annually is:
A. Form 940.
B. Form 941.
C. Form 1040
D. Form W-2.
E. Form W-4.
92. A bank that is authorized to accept deposits of amounts payable to the federal government
is a:
A. Credit union.
B. FDIC insured bank.
C. Federal depository bank.
D. National bank.
E. Federal Reserve Bank.
93. An employer’s federal unemployment taxes (FUTA) are reported:
A. Annually.
B. Semiannually.
C. Quarterly.
D. Monthly.
E. Weekly.
94. The rate that a state assigns reflecting a company’s stability or instability in employing
workers is the:
A. FICA rate.
B. Tax withholding rate.
C. Pay rate.
D. Credit rating.
E. Merit rating.
95. Employer payroll taxes:
A. Are added expenses beyond that for the wages and salaries earned by employees.
B. Represent the federal taxes withheld from employees.
C. Represent the social security taxes withheld from employees.
D. Are paid by the employee.
E. Are payable for up to a maximum $117,000 of employee earnings.
96. All of the following are employer payroll taxes except:
A. Social Security tax equal to that withheld from employees.
B. Medicare tax equal to that withheld from employees.
C. State unemployment tax.
D. Federal unemployment tax.
E. Federal income tax equal to that withheld from employees.
97. FUTA taxes are:
A. Social Security taxes.
B. Medicare taxes.
C. Employee income taxes.
D. Unemployment taxes.
E. Employee deductions.
98. Which of the following is not true regarding the unemployment insurance program?
A. It requires withholding from the employee wages
B. It is administered by each state.
C. It provides unemployment benefits to qualified workers.
D. It adjusts rates paid by employers based on their merit rating.
E. It is a joint federal and state program.
99. The current FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both taxes are applied
to the first $7,000 of an employee’s pay. Assume that an employee earned total wages of
$9,900. What is the amount of total unemployment taxes the employer must pay on this
employee’s wages?
A. $336.00.
B. $420.00.
C. $534.60.
D. $594.00.
E. $0.00.
100. The current FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both taxes are
applied to the first $7,000 of an employee’s pay. Assume that an employee earned total wages
of $2,900 in the current period and had cumulative pay for prior periods of $5,800. What is
the amount of unemployment taxes the employer must pay on this employee’s wages for the
current period?
A. $420.00.
B. $348.00.
C. $72.00.
D. $174.00.
E. $0.00.
101. An employee earned $43,300 working for an employer in the current year. The current
rate for FICA Social Security is 6.2% payable on earnings up to $117,000 maximum per year
and the rate for FICA Medicare 1.45%. The employer’s total FICA payroll tax for this
employee is:
A. $8,950.50.
B. $5,638.05.
C. $3,312.45.
D. $2,684.60.
E. $0, since the FICA tax is only deducted from an employee’s pay.
102. An employee earned $128,500 working for an employer in the current year. The current
rate for FICA Social Security is 6.2% payable on earnings up to $117,000 maximum per year
and the rate for FICA Medicare 1.45%. The employer’s total FICA payroll tax for this
employee is:
A. $9,117.25.
B. $9,830.25.
C. $879.75.
D. $8,950.50.
E. $0, since the FICA tax is only deducted from an employee’s pay.
103. An employee earned $62,500 during the year working for an employer. The FICA tax
rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current
FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both unemployment taxes are applied
to the first $7,000 of an employee’s pay. What is the amount of total unemployment taxes the
employee must pay?
A. $101.50
B. $56.00
C. $378.00
D. $434.00
E. $0.00
104. Gary Marks is paid on a monthly basis. For the month of January of the current year, he
earned a total of $8,288. FICA tax for Social Security is 6.2% and the FICA tax for Medicare
is 1.45%. The FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both unemployment
taxes are applied to the first $7,000 of an employee’s pay. The amount of Federal Income Tax
withheld from his earnings was $1,375.17. What is the amount of the employer’s payroll taxes
expenses for this employee?
A. $2,009.21
B. $1,131.31
C. $2,506.48
D. $420.00
E. $1,054.04
105. Triston Vale is paid on a monthly basis. For the month of January of the current year, he
earned a total of $5,210. FICA tax for Social Security is 6.2% and the FICA tax for Medicare
is 1.45%. The FUTA tax rate is 0.6%, and the SUTA tax rate is 5.4%. Both unemployment
taxes are applied to the first $7,000 of an employee’s pay. The amount of Federal Income Tax
withheld from his earnings was $885.70. What is the amount of the employer’s payroll taxes
expenses for this employee?
A. $1,284.27
B. $312.60
C. $398.57
D. $711.17
E. $1,596.87
106. An estimated liability:
A. Is an unknown liability of a certain amount.
B. Is a known obligation of an uncertain amount that can be reasonably estimated.
C. Is a liability that may occur if a future event occurs.
D. Can be the result of a lawsuit.
E. Is not recorded until the amount is known for certain.
107. Estimated liabilities commonly arise from all of the following except:
A. Warranties.
B. Vacation benefits.
C. Income taxes.
D. Employee benefits.
E. Unearned revenues.
108. Employees earn vacation pay at the rate of one day per month. During the month of July,
25 employees qualify for one vacation day each. Their average daily wage is $100 per day.
What is the amount of vacation benefit expense to be recorded for the month of July?
A. $25
B. $100
C. $250
D. $2,500
E. $25,000
109. Employees earn vacation pay at the rate of one day per month. During the month of June,
10 employees qualify for one vacation day each. Their average daily wage is $150 per day.
Which of the following is the necessary adjusting journal entry to record the June vacation
benefits?
A. Debit Vacation Benefits Expense $1,500; credit Prepaid Vacation Benefits $1,500.
B. Debit Vacation Benefits Expense $1,500; credit Vacation Benefits Payable $1,500.
C. Debit Payroll Tax Expense $1,500; credit Payroll Taxes Payable $1,500.
D. Debit Prepaid Vacation Benefits $1,500; credit Vacation Benefits Payable $1,500.
E. Debit Vacation Benefits Payable; credit Vacation Benefits Expense $1,500.
110. Employee vacation benefits:
A. Are estimated liabilities.
B. Are contingent liabilities.
C. Are recorded as an expense when the employee takes a vacation.
D. Are recorded as an expense when the employee retires.
E. Increase net income.
111. A company sold $12,000 worth of bicycles with an extended warranty. It estimates that
2% of these sales will result in warranty work. The company should:
A. Consider the warranty expense a remote liability since the rate is only 2%.
B. Recognize warranty expense at the time the warranty work is performed.
C. Recognize warranty expense and liability in the year of the sale.
D. Consider the warranty expense a contingent liability.
E. Recognize warranty liability when the company purchases the bicycles.
112. A company sold $12,000 worth of bicycles with an extended warranty. It estimates that
2% of these sales will result in warranty work. The current period’s entry to record the
warranty expense is:
A. Debit Warranty Expense $240; credit Cash $240.
B. Debit Prepaid Warranties $240; credit Warranty Expense $240.
C. Debit Estimated Warranty Liability $240; credit Cash $240.
D. Debit Sales Allowances $240; credit Estimated Warranty Liability $240.
E. Debit Warranty Expense $240; credit Estimated Warranty Liability $240.
113. The deferred income tax liability:
A. Results from the income tax expense reported on the income statement differing from the
amount of income taxes payable to the government.
B. Is a contingent liability.
C. Can result in a deferred income tax asset.
D. Is never recorded.
E. Is recorded whether or not the difference between taxable income and financial accounting
income is permanent or temporary.
114. A company estimates that warranty expense will be 4% of sales. The company’s sales for
the current period are $185,000. The current period’s entry to record the warranty expense is:
A. Debit Warranty Expense $7,400; credit Sales $7,400.
B. Debit Warranty Expense $7,400; credit Estimated Warranty Liability $7,400.
C. Debit Estimated Warranty Liability $7,400; credit Warranty Expense $7,400
D. Debit Estimated Warranty Liability $7,400; credit Cash $7,400.
E. No entry is recorded until the items are returned for warranty repairs.
115. A company has a selling price of $1,800 each for its printers. Each printer has a 2 year
warranty that covers replacement of defective parts. It is estimated that 2% of all printers sold
will be returned under the warranty at an average cost of $150 each. During November, the
company sold 30,000 printers, and 400 printers were serviced under the warranty at a total
cost of $55,000. The balance in the Estimated Warranty Liability account at November 1 was
$29,000. What is the company’s warranty expense for the month of November?
A. $26,000
B. $45,000
C. $55,000
D. $60,000
E. $90,000
116. Springfield Company offers a bonus plan to its employees and the amount of the
employee bonuses for the current year is estimated to be $32,500 to be paid during January of
the following year. The journal entry on December 31 to record the bonuses is:
A. Debit Estimated Bonus Payable $32,500; credit Cash $32,500.
B. Debit Employee Bonus Expense $32,500; credit Bonus Payable $32,500.
C. No entry since the bonuses are not paid until January.
D. Debit Employee Bonus Expense $32,500; credit Prepaid Employee Bonus $32,500.
E. Debit Unearned Bonuses $32,500; credit Bonus Payable $32,500
117. A payroll register does not include:
A. Pay period dates.
B. Hours worked.
C. Gross pay and net pay.
D. Deductions.
E. Employer tax expenses.
118. The wage bracket withholding table is used to:
A. Compute social security withholding.
B. Compute Medicare withholding.
C. Compute federal income tax withholding.
D. Prepare the W-4.
E. Compute unemployment taxes.
119. A table that shows the amount of federal income tax to be withheld from an employee’s
pay is the:
A. Form 941.
B. Tax table.
C. Wage bracket withholding table.
D. W-2.
E. W-4.
120. Companies may use a special bank account solely for the purpose of paying employees,
by depositing an amount equal to the total employees’ net pay into the account each pay
period and drawing the employees’ payroll checks on the account. This account is a(n):
A. Federal depository bank account.
B. Employee’s Individual Earnings account.
C. Employees’ bank account.
D. Payroll register account.
E. Payroll bank account.
121. If a company uses a special payroll bank account:
A. The company does not need to issue paychecks.
B. The company draws one check for the entire payroll on the regular bank account and
deposits it in the payroll bank account.
C. The company must use a federal depository bank for the payroll bank account.
D. There is no need for a payroll register.
E. There is no need to issue W-2’s.
122. Cantrell Company is required by law to collect and remit sales taxes to the state. If
Cantrell has $8,000 of cash sales that are subject to an 8% sales tax, what is the journal entry
to record the cash sales?
A. Debit Cash $8,000; credit Sales $7,360; credit Sales Taxes Payable $640.
B. Debit Sales Taxes Payable $640; debit Cash $7,360; credit Sales $8,000.
C. Debit Cash $8,000; credit Sales $8,000; and record the taxes when paid.
D. Debit Cash $8,640; credit Sales $8,000; credit Sales Taxes Payable $640.
E. Debit Accounts Receivable $8,640; credit Sales $8,000; credit Sales Taxes Payable $640.
123. Furniture World is required by law to collect and remit sales taxes to the state. If
Furniture World has $78,000 of cash sales that are subject to a 6% sales tax, what is the
journal entry to record the cash sales?
A. Debit Cash $82,680; credit Sales $78,000; credit Sales Taxes Payable $4,680.
B. Debit Sales Taxes Payable $4,680; debit Cash $73,220; credit Sales $78,000.
C. Debit Cash $78,000; credit Sales $78,000; and record the taxes when paid.
D. Debit Cash $78,000; credit Sales $73,320; credit Sales Taxes Payable $4,680.
E. Debit Accounts Receivable $82,680; credit Sales $78,000; credit Sales Taxes Payable
$4,680.
124. All of the following statements regarding long-term liabilities are true except?
A. Liabilities not expected to be paid within the longer of one year or the company’s operating
cycle are reported as long-term liabilities.
B. Long-term liabilities include long-term notes payable, warranty liabilities, lease liabilities,
and bonds payable.
C. Liabilities that do not have a fixed due date, but are payable on demand, are reported as
long-term liabilities.
D. Long-term liabilities can be reported on the balance sheet in a single total or in multiple
categories.
E. A single long-term liability can be divided between current and noncurrent sections on the
balance sheet.
125. On April 12, Hong Company agrees to accept a 60-day, 10%, $4,500 note from Indigo
Company to extend the due date on an overdue account. What is the journal entry needed to
record the transaction by Indigo Company?
A. Debit Notes Payable $4,500; credit Accounts Payable $4,500.
B. Debit Accounts Payable $4,500; credit Notes Payable $4,500.
C. Debit Accounts Receivable $4,500; credit Notes Payable $4,500.
D. Debit Cash $4,500; credit Notes Payable $4,500.
E. Debit Sales $4,500; credit Notes Payable $4,500.
126. On April 12, Hong Company agrees to accept a 60-day, 10%, $4,500 note from Indigo
Company to extend the due date on an overdue account. What is the journal entry needed to
record the payment of the note by Indigo Company on the maturity date?
A. Debit Notes Payable $4,500; debit Interest Expense $75; credit Cash $4,575.
B. Debit Notes Payable $4,500; credit Interest Expense $75, credit Cash $4,425.
C. Debit Cash $4,575; credit Interest Revenue $75; credit Notes Payable $4,500.
D. Debit Notes Payable $4,500; debit Interest Expense $112; credit Cash $4,612.
E. Debit Cash $4,575; credit Interest Revenue $75; credit Notes Receivable $4,500.
127. On May 22, Jarrett Company borrows $7,500 from Fairmont Financing, signing a 90-
day, 8%, $7,500 note. What is the journal entry needed to record the transaction by Jarrett
Company?
A. Debit Cash $7,500; credit Accounts Payable $7,500.
B. Debit Accounts Payable $7,500; credit Notes Payable $7,500.
C. Debit Cash $7,650; credit Notes Payable $7,650.
D. Debit Cash $7,500; credit Notes Payable $7,500.
E. Debit Notes Receivable $7,500; credit Cash $7,500.
128. . On May 22, Jarrett Company borrows $7,500 from Fairmont Financing, signing a 90-
day, 8%, $7,500 note. What is the journal entry needed to record the payment of the note by
Jarrett Company on the maturity date?
A. Debit Notes Payable $7,500; credit Interest Expense $150; credit Cash $7,350.
B. Debit Notes Payable $7,500; credit Cash $7,500.
C. Debit Notes Payable $7,650; credit Cash $7,650.
D. Debit Notes Payable $7,500; debit Interest Expense $150; credit Cash $7,650.
E. Debit Cash $7,650; credit Interest Revenue $150; credit Notes Receivable $7,500.
129. An employee earns $5,500 per month working for an employer. The FICA tax rate for
Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current FUTA tax
rate is 0.6%, and the SUTA tax rate is 4.4%. Both unemployment taxes are applied to the first
$7,000 of an employee’s pay. The employee has $182 in federal income taxes withheld. The
employee has voluntary deductions for health insurance of $150 and contributes $75 to a
retirement plan each month. What is the amount of net pay for the employee for the month of
January?
A. $4,827.00
B. $4,672.25
C. $4,628.25
D. $4,386.25
E. $4,430.25
130. An employee earned $4,600 in February working for an employer. The FICA tax rate for
Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The employee has $644
in federal income taxes withheld and has voluntary deductions for health insurance of $50 and
contributes 10% of gross pay to a retirement plan each month. The employer pays the $200
remainder of the health insurance premium and an equal amount of contribution to the
retirement fund. What is the amount of net pay for the employee for the month of February?
A. $3,094.10
B. $3,496.00
C. $3,604.10
D. $3,446.00
E. $2,634.10
131. An employee earns $5,500 per month working for an employer. The FICA tax rate for
Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current FUTA tax
rate is 0.6%, and the SUTA tax rate is 4.4%. Both unemployment taxes are applied to the first
$7,000 of an employee’s pay. The employee has $182 in federal income taxes withheld. The
employee has voluntary deductions for health insurance of $150 and contributes $75 to a
retirement plan each month. What is the amount the employer should record as payroll taxes
expense for the employee for the month of January?
A. $420.75
B. $464.75
C. $602.75
D. $841.50
E. $695.75
132. An employee earned $4,600 in February working for an employer. Cumulative earnings
of the previous pay periods are $4,800. The FICA tax rate for Social Security is 6.2% and the
FICA tax rate for Medicare is 1.45%. The current FUTA tax rate is 0.6%, and the SUTA tax
rate is 4.4%. Both unemployment taxes are applied to the first $7,000 of an employee’s pay.
What is the amount the employer should record as payroll taxes expense for the month of
February?
A. $581.90
B. $110.00
C. $351.90
D. $461.90
E. $230.00
133. All of the following statements regarding FICA taxes are true except:
A. FICA taxes are deducted from the employee.
B. Employers must pay withheld FICA taxes to the IRS.
C. The amount of FICA deducted from the employee is credited to a liability account.
D. A self-employed person is exempt from FICA taxes.
E. An employer must pay FICA taxes equal to the amount withheld from the employee.
134. Athena Company provides employee health insurance that costs $5,000 per month. In
addition, the company contributes an amount equal to 5% of the employees’ $120,000 gross
salary to a retirement program. The entry to record the accrued benefits for the month would
include a:
A. Debit to Medical Insurance Payable $5,000.
B. Debit to Employee Retirement Program Payable $6,000.
C. Debit to Employee Benefits Expense $11,000.
D. Credit to Employee Benefits Expense $11,000.
E. Debit to Payroll Taxes Expense $11,000.
135. Athena Company’s salaried employees earn two weeks of vacation per year. It pays
$858,000 in total employee salaries for 52 weeks but its employees work only 50. Record
Athena Company’s weekly journal entry to record the vacation expense:
A. Debit Vacation Benefits Expense $16,500; credit Vacation Benefits Payable $16,500.
B. Debit Vacation Benefits Expense $17,160; credit Vacation Benefits Payable $17,160.
C. Debit Vacation Benefits Expense $17,875; credit Vacation Benefits Payable $17,875.
D. Debit Vacation Benefits Payable $17,160; credit Vacation Benefits Expense $17,160.
E. Debit Vacation Benefits Payable $16,500; credit Vacation Benefits Expense $16,500.
136. All of the following statements related to current liabilities for U.S. GAAP and IFRS are
true except:
A. The definitions and characteristics of current liabilities are broadly similar for both U.S.
GAAP and IFRS.
B. The term provision is typically used under IRFS to refer to what is titled liability under
U.S. GAAP.
C. Because tax regulatory systems of countries are different, the approach to recording taxes
is totally different.
D. When there is little uncertainty surrounding current liabilities, both require companies to
record them in a similar manner.
E. When there is a known current obligation that involves an uncertain amount, but one that
can be reasonable estimated, both require similar treatment.
137. All of the following statements related to recording warranty expense are true except:
A. Recording estimated warranty expense complies with the full disclosure principle.
B. Warranty expense should be recorded in the period when the warranty service is
performed.
C. Recording estimated warranty expense complies with the matching principle.
D. The seller reports a warranty obligation as a liability.
E. Warranty costs are probable and the amount can be estimated.
138. During August, Boxer Company sells $356,000 in merchandise that has a one year
warranty. Experience shows that warranty expenses average about 5% of the selling price.
The warranty liability account has a credit balance of $12,800 before adjustment. Customers
returned merchandise for warranty repairs during the month that used $9,400 in parts for
repairs. The entry to record the estimated warranty expense for the month is:
A. Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800.
B. Debit Warranty Expense $5,000; credit Estimated Warranty Liability $5,000.
C. Debit Warranty Expense $14,400; credit Estimated Warranty Liability $14,400.
D. Debit Estimated Warranty Liability $9,400; credit Warranty Expense $9,400.
E. Debit Estimated Warranty Liability $17,800; credit Warranty Expense $17,800.
139. During August, Boxer Company sells $356,000 in merchandise that has a one year
warranty. Experience shows that warranty expenses average about 5% of the selling price.
The warranty liability account has a credit balance of $12,800 before adjustment. Customers
returned merchandise for warranty repairs during the month that used $9,400 in parts for
repairs. The entry to record the customer warranty repairs is:
A. Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800.
B. Debit Warranty Expense $9,400; credit Estimated Warranty Liability $9,400.
C. Debit Warranty Expense $14,400; credit Estimated Warranty Liability $14,400.
D. Debit Estimated Warranty Liability $9,400; credit Parts Inventory $9,400.
E. Debit Estimated Warranty Liability $17,800; credit Parts Inventory $17,800.
140. During June, Vixen Fur Company sells $850,000 in merchandise that has a one year
warranty. Experience shows that warranty expenses average about 3% of the selling price.
Customers returned $14,000 of merchandise for warranty replacement during the month. The
entry to record the estimated warranty provision at the end of the month is:
A. Debit Warranty Expense $11,500; credit Estimated Warranty Liability $11,500.
B. Debit Warranty Expense $14,000; credit Estimated Warranty Liability $14,000.
C. Debit Warranty Expense $25,500; credit Estimated Warranty Liability $25,500.
D. Debit Estimated Warranty Liability $14,000; credit Warranty Expense $14,000.
E. Debit Estimated Warranty Liability $11,500; credit Warranty Expense $11,500.
141. During June, Vixen Fur Company sells $850,000 in merchandise that has a one year
warranty. Experience shows that warranty expenses average about 3% of the selling price.
Customers returned $14,000 of merchandise for warranty replacement during the month. The
entry to settle the customer warranties is:
A. Debit Warranty Expense $11,500; credit Estimated Warranty Liability $11,500.
B. Debit Estimated Warranty Liability $25,500; credit Warranty Expense $25,500.
C. Debit Warranty Expense $14,000; credit Estimated Warranty Liability $14,000.
D. Debit Estimated Warranty Liability $11,500; credit Merchandise Inventory $11,500.
E. Debit Estimated Warranty Liability $14,000; credit Merchandise Inventory $14,000.
142. If a company has advance subscription sales totaling $45,000 for the upcoming year
when four quarterly journals will mailed to customers, the receipt of cash would be
journalized as:
A. Debit Cash $45,000; credit Unearned Revenue $45,000.
B. Debit Unearned Revenue $45,000; credit Sales $45,000.
C. Debit Cash $45,000, credit Sales $45,000.
D. Debit Sales $45,000, credit Unearned Revenue $45,000.
E. Debit Prepaid Subscriptions $45,000, credit Sales $45,000.
143. A company has advance subscription sales totaling $45,000 for the upcoming year when
four quarterly journals will mailed to customers. When the company mails the first quarterly
journal to customers, it should record:
A. Debit Prepaid Subscriptions $33,750; credit Unearned Revenue $33,750.
B. Debit Unearned Revenue $45,000; credit Cash $45,000.
C. Debit Cash $11,250, credit Sales $11,250.
D. Debit Unearned Revenue $11,250, credit Sales $11,250.
E. Debit Prepaid Subscriptions $11,250, credit Sales $11,250.
144. Carson Company faces a probable loss on a pending lawsuit where the amount of the
loss is estimated to be $500,000. The journal entry to recognize the potential loss is:
A. Debit Prepaid Legal Expense $500,000; credit Contingent Legal Liability $500,000.
B. Debit Legal Expense $500,000; credit Lawsuit Payable $500,000.
C. Debit Contingent Legal Expense $500,000, credit Contingent Legal Liability $500,000.
D. Debit Lawsuit Payable $500,000, credit Contingent Legal Liability $500,000.
E. No journal entry is required.
145. On December 1, Watson Enterprises signed a $24,000, 60-day, 4% note payable as
replacement of an account payable with Erikson Company. What amount of interest expense
is accrued at December 31 on the note?
A. $0
B. $80
C. $320
D. $960
E. $160
146. On December 1, Watson Enterprises signed a $24,000, 60-day, 4% note payable as
replacement of an account payable with Erikson Company. What is the journal entry that
should be recorded upon signing the note?
A. Debit Accounts Receivable $24,000; credit Notes Receivable $24,000
B. Debit Accounts Payable $24,000; credit Notes Payable $24,000.
C. Debit Accounts Payable $24,160; credit Notes Payable $24,160
D. Debit Notes Payable $24,000; debit Interest Expense $160; credit Accounts Payable
$24,160
E. Debit Notes Payable $24,000; debit Interest Expense $160; credit Cash $24,160
147. On September 1, Knack Company signed a $50,000, 90-day, 5% note payable with
Central Savings Bank. What is the journal entry that should be recorded by Knack upon
maturity of the note?
A. Debit Interest Expense $625; credit Interest Payable $625.
B. Debit Notes Payable $50,000; credit Interest Revenue $625; credit Cash $49,375
C. Debit Cash $50,625; credit Notes Receivable $50,625.
D. Debit Notes Payable $50,625; credit Cash $50,625.
E. Debit Notes Payable $50,000; debit Interest Expense $625; credit Cash $50,625.
148. A company’s has fixed interest expense of $52,000, income taxes expense of $121,000,
and net income of $281,000. The company’s times interest earned ratio equals:
A. 8.73.
B. 5.40.
C. 7.73.
D. 2.33.
E. 0.11.
149. Match each of the following terms with the appropriate definitions.
a. Employee benefits f. Gross pay
b. Short-term note payable g. Times interest earned
c. Payroll bank account h. Warranty
d. Federal depository bank i. Deferred income tax liability
e. Payroll register j. Current liabilities
_____ 1. A record for a pay period that shows the pay period dates, regular and
overtime hours worked, gross pay, net pay and deductions.
_____ 2. Obligations due within one year or the company’s operating cycle, whichever
is longer.
_____ 3. A special bank account used solely for paying employees; each pay period an
amount equal to the total employees’ net pay is deposited and the employees’
payroll checks are drawn on that account.
_____ 4. A seller’s obligation to replace or correct a product or service that fails to
perform as expected within a specified period.
_____ 5. Total compensation earned by an employee.
_____ 6. Compensation provided to employees beyond salaries and wages, such as
premiums for medical insurance and contributions to pension plans.
_____ 7. Payments of income taxes that are deferred until future years because of
temporary differences between GAAP and tax accounting rules.
_____ 8. A bank authorized to accept deposits of amounts payable to the federal
government, including payroll taxes.
_____ 9. A calculation of a company’s risk of its ability to pay interest when due.
_____10. 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.
150. Match each of the following terms a through j with the appropriate definitions 1 – 10.
a. FUTA taxes
b. Contingent liability
c. Merit rating
d. Long-term liability
e. Estimated liability
f. Net pay
g. Wage bracket withholding table
h. Warranty
i. Withholding allowance
j. FICA taxes
_____ 1. A measure provided by a state to employers that reflects a company’s stability
in employing workers.
_____ 2. Taxes that fund Social Security and Medicare, assessed on both employer and
employees under the Federal Insurance Contributions Act.
_____ 3. Known obligations of an uncertain amount that can be reasonably estimated.
_____ 4. Obligations of a company requiring payment in more than one year or
operating cycle.
_____ 5. Gross pay less all tax and voluntary deductions.
_____ 6. A table of amounts of income tax to be withheld from employees’ wages.
_____ 7. A potential obligation that depends on a future event arising from a past
transaction.
_____ 8. A seller’s obligation to replace or correct a product or service that fails to
perform as expected within a specified period.
_____ 9. A number indicated on an employee’s Form W-4 that is used to reduce the
amount of federal income tax withheld from an employee’s pay.
_____10. Payroll taxes on employers assessed by the federal government to support the
federal unemployment insurance program.
1. C; 2. J; 3. E; 4. D; 5. F; 6. G; 7. B; 8. H; 9. I; 10. A
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 09-C1
Learning Objective: 09-C2
Learning Objective: 09-C3
Learning Objective: 09-P2
Learning Objective: 09-P3
Learning Objective: 09-P4
Learning Objective: 09-P5
Topic: Defining Liabilities
Topic: Known Liabilities
Topic: Contingent Liabilities
Topic: Payroll Liabilities
Topic: Payroll Expenses
Topic: Estimated Liabilities
Topic: Payroll Reports, Records and Procedures
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
09-68
151. Classify each of the following items as either:
A. Current liability
B. Long-term liability
C. Not a liability
1. 60-day promissory note
2. Payment of a 4-year term loan due this year
3. Salaries payable
4. Debt guarantees
5. FICA taxes payable
6. Income taxes payable
7. Payment of a 30-year term loan due this year
8. Payment of a 30-year term loan due next year. (The company’s operating cycle is 2
months.)
9. Warranty work completed this year
10. Accounts payable
1. A; 2. A; 3. A; 4. C; 5. A; 6. A; 7. A; 8. B; 9. C; 10. A
Blooms: Understand
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 09-C1
Learning Objective: 09-C2
Learning Objective: 09-C3
Topic: Defining Liabilities
Topic: Known Liabilities
Topic: Contingent Liabilities
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
09-69
152. Classify each of the following items as either:
A. Estimated liability
B. Contingent liability
C. Known liability
1. Lawsuit against the company
2. Warranty on products sold this year
3. Accounts payable
4. Income taxes payable
5. Vacation benefits
6. Accrued wages payable
7. Debt guarantees
8. Sales taxes payable
9. Payroll taxes payable
10. Unearned revenues
1. B; 2. A; 3. C; 4. A; 5. A; 6. C; 7. B; 8. C; 9. C; 10. C
Blooms: Understand
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 09-C1
Learning Objective: 09-C2
Learning Objective: 09-C3
Topic: Defining Liabilities
Topic: Known Liabilities
Topic: Contingent Liabilities
Short Answer Questions
153. Define liabilities and explain the difference between current and long-term liabilities.
154. What are known current liabilities? Cite at least two examples of known current
liabilities.
155. Describe contingent liabilities and how to account for and/or report them.
156. Describe employer responsibilities for reporting payroll taxes. (To the extent possible,
reference the form to be filed for each tax.)
157. Explain how to calculate times interest earned and how it is used to analyze a company’s
risk.
158. What is a short-term note payable? Explain the accounting issues related to notes
payable.
159. Explain the responsibilities of and the accounting by employers for deductions from
employee payroll.
160. Identify and explain the types of employer payroll taxes.
161. What are estimated liabilities? Cite at least two examples and explain why they are
classified as estimated liabilities.
162. Identify and discuss the factors involved in computing federal income taxes withheld
from employees.
163. A company had income before interest expense and income taxes of $186,000, and its
interest expense is $55,000. Calculate the company’s times interest earned ratio.
164. A company’s income before interest expense and income taxes is $302,400, and its
interest expense is $62,000. Calculate the company’s times interest earned ratio.
165. A company’s income before interest expense and income taxes in 2014 and 2015 is
$225,000 and $250,000, respectively. Its interest expense was $45,000 for both years.
Calculate the company’s times interest earned ratio, and comment on its level of risk.
166. A company’s income before interest expense and income taxes in 2014 and 2015 is
$487,500 and $427,000, respectively. Its fixed interest expense was $125,000 for both years.
Calculate the company’s times interest earned ratio, and comment on its level of risk.
167. Floral Depot’s income before interest expense and income taxes was $5,900 million, and
interest expense was $38 million. Calculate Floral Depot’s times interest earned.
168. Kelso had income before interest expense and income taxes of $570 million and interest
expense of $37 million. Calculate Kelso’ times interest earned.
169. SaveMart had income before interest expense and income taxes of $12,581 million and
interest expense of $1,063 million. Valueland had income before interest expense and income
taxes of $3,596 million and interest expense of $1,143 million. Calculate the times interest
earned for each company and comment on the results.
170. On November 1, Casey’s Snowboards signed a $12,000, 90-day, 5% note payable to
cover a past due account payable.
a. What amount of interest expense on this note should Casey’s Snowboards report on year-
end December 31?
b. Prepare Casey’s journal entry to record the issuance of the note payable.
c. Prepare Casey’s adjusting journal entry at the end of the year
d. Prepare Casey’s journal entry to record the payment of the note on February 1 of the
following year.
171. On June 1, Jasper Company signed a $25,000, 120-day, 6% note payable to cover a past
due account payable.
a. What is the total amount of interest to be paid on this note?
b. Prepare Jasper Company’s general journal entry to record the issuance of the note payable.
c. Prepare Jasper Company’s general journal entry to record the payment of the note on
September 29.
172. On September 15, SkateWorld borrowed $70,000 cash from Mutual Bank by signing a
6%, 60-day note payable.
a. Prepare SkateWorld’s journal entry to record the issuance of the note payable.
b. Prepare SkaetWorld’s journal entry to record the payment of the note at maturity.
173. On December 1, Williams Company borrowed $45,000 cash from Second National Bank
by signing a 90-day, 9% note payable.
a. Prepare Williams’ journal entry to record the issuance of the note payable.
b. Prepare Williams’ journal entry to record the accrued interest due at December 31.
c. Prepare Williams’ journal entry to record the payment of the note on March 1 of the next
year.
174. A company borrowed $60,000 by signing a 60-day, 5% note payable from its bank.
Compute the total cash payment due on the note’s maturity date.
175. Calculate the total amount of FICA withholding for an employee whose pay is $2,400
for the first pay period of the year. The tax rate for FICA—Social Security is 6.2% and the tax
rate for FICA—Medicare is 1.45%..
176. An employee earns $9,450 for the current period. The cumulative earnings of previous
pay periods is $110,000. Social security tax applies to the first $117,000 of employee
earnings. Calculate the total and individual amounts to be withheld for social security (6.2%),
Medicare (1.45%) and federal income tax (15%).
177. A company has three employees. Total salaries for the month of January were $8,000.
The federal income tax rate for all employees is 15%. The FICA—social security tax rate is
6.2% and the FICA—Medicare tax rate is 1.45%. Calculate the amount of employee taxes
withheld and prepare the company’s journal entry to record the January payroll assuming
these were the only deductions.
178. A company has 90 employees and a weekly payroll of $117,000. The FICA—social
security tax withheld totals $7,254 and the FICA—Medicare tax withheld totals $1,696.50.
The total withholding for federal income tax is $16,500. Prepare the journal entry to accrue
this week’s salaries expense and withholdings.
179. Santa Barbara Express has 4 sales employees, each of whom earns $5,000 per month and
is paid on the last working day of the month. Each employee’s wages are subject to FICA
social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each
employee also includes federal income tax of 16% and monthly medical insurance premiums
of $110 for each employee.
a. Prepare the general journal entry to accrue the monthly sales salaries expense at January 31.
b. The employer payroll taxes for Santa Barbara Express include FICA taxes, federal
unemployment taxes of 0.6% of the first $7,000 paid each employee, and state unemployment
taxes of 4.0% of the first $7,000 paid to each employee. Prepare the journal entry to record
the employer’s payroll taxes at January 31 for Santa Barbara Express. (Assume that none of
the employees has reached the unemployment limit of $7,000.)
180. The payroll records of a company provided the following data for the weekly pay period
ended December 7:
Earnings
to End of
Federal Medical
Previous
Gross Income
Insurance
Union
United
Employee Week Pay Taxes Deduction Dues Way
Ronald Arthur $ 54,000 $1,200 $216 $125 $15 $15
John Baines
40,500
900
162
125
15
30
Ted Carter 45,000 1,000 180 150 -0- 20
The FICA social security tax rate is 6.2% and the FICA Medicare tax rate is 1.45% on all of
this week’s wages paid to each employee. The federal and state unemployment tax rates are
0.8% and 5.4%, respectively, on the first $7,000 paid to each employee. Prepare the journal
entries to (a) accrue the payroll and (b) record payroll taxes expense.
181. A company’s payroll for the week ended May 15 included earned salaries of $20,000. All
of that week’s pay is subject to FICA social security taxes of 6.2% and Medicare taxes of
1.45%. In addition, the company withholds the following amounts for this weekly pay period:
$900 for medical insurance, $3,400 for federal income taxes, and $180 for union dues.
a. Prepare the general journal entry to accrue the payroll.
b. The company is subject to state unemployment taxes at the rate of 2% and federal
unemployment taxes at the rate of 0.6%. By May 15, some employees had earned over
$7,000, so only $11,000 of the $20,000 weekly gross pay was subject to unemployment tax.
Prepare the general journal entry to accrue the employer’s payroll tax expense.
182. A company’s employees had the following earnings records at the close of the current
payroll period:
Employees
Earning
through
Prior Pay
Period
Earning this
Pay Period
F. Argent.... $11,300 $3,900
A. Garza....... 6,100 2,500
L.
Hong..........
9,500 3,100
R. Levinson... 4,800 1,400
J. Young....... 10,000 3,000
The company’s payroll taxes expense on each employee’s earnings includes: FICA Social
Security taxes of 6.2% on the first $117,000 of earnings plus 1.45% FICA Medicare on all
wages; 0.6% federal unemployment taxes on the first $7,000; and 2.5% state unemployment
taxes on the first $7,000. Compute the employer’s total payroll taxes expense for the current
pay period.
1 Employee pay subject to unemployment taxes:
Argent $0 + Garza $900 + Hong $0 + Levinson $1,400 + Young $0 = $2,300
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 09-P3
Topic: Payroll Expenses
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McGraw-Hill Education.
09-89
183. An employer has an employee benefit package that includes employer-paid health
insurance and an employer-paid retirement program. During March, the employer paid $5,500
for health insurance, and contributed to the employee retirement program 10% of the
employees’ $120,000 gross salaries. Prepare the journal entry to record these employee
benefits.
184. A company sells its product subject to a warranty that covers the cost of parts for repairs
during the six months after the date of sale. Warranty costs are estimated to be 5% of sales.
During the month of July, the company performed warranty work and used $11,000 of parts to
perform the warranty work. Sales for July were $450,000.
1. Record the warranty expense for the month of July.
2. Record the costs of the warranty work completed in June.
3. If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31,
what is the account balance at June 30?
1. Warranty Expense ($450,000 * .05)………………… 22,500
Estimated Warranty Liability……………………. 22,500
2. Estimated Warranty Liability……………………….. 11,000
Parts Inventory…………………………………... 11,000
3. $10,000 + $22,500 – $11,000 = $21,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 09-P4
Topic: Estimated Liabilities
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
09-90
185. A company sells tablet computers for $1,300 each. The price includes a two-year
warranty. During the current year, the company sells 400 tablets. On the basis of past
experience, the warranty costs are estimated to be $280 per tablet. The actual warranty costs
(paid in cash) by the company during the current year were $65,000. Prepare general journal
entries to record the (a) estimated warranty expense and (b) warranty repair costs during
current year.
186. A company sells sofas with a 6-month warranty. In January, the company sold 100,000
sofas at $1,750 each; and 500 sofas needed repairs during that same month. The total repairs
amounted to $85,000 costs from the upholstery materials inventory. It is estimated that 2% of
all units sold will need repairs under warranty at an estimated cost of $200 per unit. Prepare
the journal entries to record (a) estimated warranty expense for January and (b) warranty
repair costs for January.
187. Early Co. offers its employees a bonus equal to 2% of the company’s net income. The
estimated net income for the year is expected to be $800,000. Prepare the general journal
entry to record the estimated employee bonus plan expense.
188. A company’s employer payroll tax rates are 0.6% for federal unemployment taxes, 5.4%
for state unemployment taxes, 6.2% for FICA social security taxes on earnings up to
$117,000, and 1.45% for FICA Medicare taxes on all earnings. Compute the W-2 Wage and
Tax Statement information required below for the following employees:
Employee Gross Earnings Federal Income Taxes Withheld
A. Baylor $114,000 $17,600
C. Jasmine 52,000 8,200
A. Baylor C. Jasmine
W-2 Information: ________ ________
Federal Income Tax Withheld………….. ________ ________
Wages, Tips, Other Compensation……... ________ ________
Social Security Tax Withheld…………... ________ ________
Social Security Wages………………….. ________ ________
Medicare Tax Withheld………………… ________ ________
Medicare Wages………………………… ________ ________
189. The payroll records of a company provided the following data for the current weekly pay
period ended March 12.
Earnings
to End of
Federal Medical
Previous
Gross
Income
Insurance
Union United
Employees Week Pay Taxes Deduction Dues Way
D. Hui……. $ 5,800 $800 $120 $35 $10 $10
B. Kim…….
6,850
1,100
180
35
10 15
C. Sly…... 12,900 1,440 404 35 10 40
Assume that the Social Security portion of the FICA taxes is 6.2% on the first $117,000 and
the Medicare portion is 1.45% of all wages paid to each employee for this pay period. The
federal and state unemployment tax rates are 0.8% and 5.4%, respectively, on the first $7,000
paid to each employee. Calculate the net pay for each employee.
190. A company’s payroll information for the month of May follows:
Administrative salaries ............................................
$4,000
Sales salaries..............................................................
5,500
FICA-Social Security taxes withheld......................
589
FICA-Medicare taxes withheld................................
138
Federal income taxes withheld................................
1,300
Medical insurance premiums withheld...................
415
Union dues withheld................................................. 205
On May 31 the company issued Check No. 4625 payable to the Payroll Bank Account to pay
for the May payroll. It issued payroll checks to the employees after depositing the check.
(1) Prepare the journal entry to record (accrue) the employer’s payroll for May. (2) Prepare
the journal entry to record payment of the May payroll. The federal and state unemployment
tax rates are 0.6% and 5.4%, respectively, on the first $7,000 paid to each employee. The
wages and salaries subject to these taxes were $6,000. (3) Prepare the journal entry to record
the employer’s payroll taxes.
191. Cardinal Company sells merchandise for $24,000 cash on March 31 (cost of merchandise
is $12,300). The sales tax law requires Cardinal to collect 8.5% sales tax on every dollar of
merchandise sold. Record the entry for the sale and its applicable sales tax.
192. Star Recreation receives $48,000 cash in advance ticket sales for 12 home games.
Record the advance ticket sales on April 30. Record the revenue earned for the first home
game played on August 14.
193. On January 31, Ransom Company’s payroll register showed that its employers earned
$30,320 of office salaries and $82,750 of sales salaries. Withholdings from the employees’
salaries include FICA Social Security taxes as the rate of 6.2%, FICA Medicare taxes at the
rate of 1.45%, $16,960 of federal income taxes, $3,350 of medical insurance deductions
(which represents 50% of the total cost of the employee medical insurance), and $4,210 of
401(k) retirement contribution deductions. Ransom Company pays the other 50% of the
employee insurance cost and matches the employee 401(k) contributions. Several employees
earned more than $7,000 for the period which reduced salaries subject to unemployment to
$104,000. No employees exceeded the FICA-Social Security taxable wage base.
1. Prepare the journal entry to record Ransom Company’s January 31 payroll expenses and
liabilities.
2. Prepare the journal entry to record Ransom Company’s employer payroll taxes resulting
from the January 31 payroll. Ransom’s merit rating reduces its state unemployment (SUTA) to
4% of the first $7,000 paid each employee. The federal unemployment tax (FUTA) rate is
0.6%.
3. Prepare the journal entry to record Ransom’s additional employee expenses.
194. General Co. entered into the following transactions involving short-term notes payable.
On May 14, General purchased $40,000 merchandise from Steller Co., terms are 2/15, n/30.
General uses the perpetual inventory system. On May 29, General replaced the May 14
account payable with a 60-day, $36,000 note bearing 8% annual along with paying $4,000 in
cash. On July 28, General paid the amount due on the note at maturity.
Prepare journal entries for all the preceding transactions and events.
195. Drake Company pays its employees for two weeks of vacation each year. The total
annual cost of the vacation benefit is $109,920. Prepare the journal entry to record the
monthly accrued vacation expense.
196. Hollow Company provides you with following information for two of its employees. The
company is subject to the following taxes.
Tax Rate Applied To
FICA—Social Security 6.20% First $117,000
FICA—Medicare 1.45% All gross pay
FUTA 0.60% First $7,000
SUTA 3.20% First $7,000
Compute amounts for each of these four taxes as applied to each employee’s gross earnings
for November.
Gross Pay through October Gross Pay for November
a. $6,400 $2,000
b. $112,000 $9,400
197. Deacon Company provides you with following information related to payroll
transactions for the month of May. Prepare journal entries to record the transactions for May.
a.
Recorded the May payroll using the payroll register information given above.
b. Recorded the employer’s payroll taxes resulting from the May payroll. The company had a
merit rating that reduces its state unemployment tax rate to 3.5% of the first $7,000 paid each
employee. Only $42,000 of the current months salaries are subject to unemployment taxes.
The federal rate is 0.6%.
c. Issued a check to Reliant Bank in payment of the May FICA and employee taxes.
d. Issued a check to the state for the payment of the SUTA taxes for the month of May.
e. Issued a check to Reliant Bank in payment of the employer’s quarterly FUTA taxes for the
first quarter in the amount of $1,020.
Answer:
a. Office Salaries Expense 38,000
Sales Salaries Expense 26,000
FICA—Social Security Taxes Payable 3,968
FICA—Medicare Taxes Payable 928
Employee Federal Income Taxes Payable 5,600
Salaries Payable 53,504
b. Payroll Taxes Expense 6,618
FICA—Social Security Taxes Payable 3,968
FICA—Medicare Taxes Payable 928
State Unemployment Taxes Payable 1,470
Federal Unemployment Taxes Payable 252
c. FICA—Social Security Taxes Payable 7,936
FICA—Medicare Taxes Payable 1,856
Employee Federal Income Taxes Payable 5,600
Cash 15,392
d. State Unemployment Taxes Payable 1,470
Cash 1,470
e. Federal Unemployment Taxes Payable 1,020
Cash 1,020
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
09-101
Office
Salaries
Sales Salaries Social Security
Taxes
Medicare
Taxes
Federal Income
Taxes
$38,000 $26,000 $3,968 $928 $5,600
198. Sparks Company entered into the following transactions involving short-term notes
payable. On June 18, Sparks purchased $25,000 merchandise from EquipCo., terms 2/10,
n/30. Sparks uses the perpetual inventory system. On July 19, Sparks replaced the June 18
account payable with a 60-day, $12,000 note bearing 4% annual interest in addition to paying
$13,000 in cash. Sparks paid the amount due on the note at maturity.
1. Determine the maturity date for the note.
2. Prepare journal entries for all the preceding transactions and events.
1. Maturity date: September 17 (12 days in July, 31 days in August, 17 days in September)
6/18 Merchandise Inventory 25,000
Accounts Payable 25,000
7/16 Accounts Payable 25,000
Notes Payable 12,000
Cash 13,000
9/17 Notes Payable 12,000
Interest Expense (12,000 * .04 * 60/360) 80
Cash 12,080
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 09-P1
Topic: Short-term Notes Payable
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
09-102
199. Richardson Fields receives $31,680 cash in advance ticket sales for 11 home soccer
games. Record the advance ticket sales on March 31. Record the revenue earned for the first
game played on August 17.
200. Obligations due within one year or the company’s operating cycle, whichever is longer,
are ________________________.
201. _________________ are probable future payments of assets or services that a company
is presently obligated to make as a result of past transactions or events.
202. ______________________ are amounts received in advance from customers for future
products or services.
203. ______________ are amounts owed to suppliers for products or services purchased on
credit.
204. A ___________________ is a potential obligation that depends on a future event arising
from a past transaction or event.
205. Contingent liabilities are recorded in the accounts if the future event is
_______________ and the amount owed can be _______________.
206. Banks authorized to accept deposits of amounts payable to the federal government,
including amounts due for payroll taxes are _________________________________.
207. A _____________________ shows the pay period dates, hours worked, gross pay,
deductions, and net pay of each employee for every pay period.
208. Times interest earned is computed by dividing income before interest expense and
income taxes by _______________________.
209. The difference between the amount borrowed and the amount repaid is referred to as
_______________.
210. 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.
211. The total compensation an employee earns including wages, salaries, commissions,
bonuses, and any compensation earned before deductions such as taxes is called
___________________.
212. Gross pay less all deductions is called ____________________.
213. The more _______________________ allowances an employee claims, the less federal
income tax the employer will deduct from pay.
214. Employer payroll taxes are an added employee _______________ beyond the wages and
salaries earned by the employees.
215. A _____________________ is a seller’s obligation to replace or correct a product or
service that fails to perform as expected within a specified period.
216. Vacation benefits are a type of _______________ liability.
217. To compute the amount of tax withheld from an employee’s pay, employers can use a
__________________________ table.
218. Companies with many employees often use a special ____________________ account to
pay employees.
