Chapter 11 Current Liabilities and Payroll Accounting
MULTIPLE CHOICE 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.
A)
True
B)
False
2)
Obligations not due within one year or the company’s operating cycle, whichever is longer, are
reported as current liabilities.
A)
True
B)
False
3)
All expected future payments are liabilities.
A)
True
B)
False
4)
A single liability cannot be divided between current and noncurrent liabilities.
A)
True
B)
False
5)
A company cannot have a liability if the amount of the obligation is unknown.
A)
True
B)
False
6)
A liability may exist even if there is uncertainty about whom to pay, when to pay, or how much to
pay.
A)
True
B)
False
7)
Trade accounts payable are amounts owed to suppliers for products or services purchased on credit.
A)
True
B)
False
8)
Unearned revenues are current liabilities.
A)
True
B)
False
9)
Sales Taxes Payable is debited and Cash is credited when companies send sales taxes collected
from customers to the government.
A)
True
B)
False
10)
Vacation benefits is an example of a known liability.
A)
True
B)
False
11)
A contingent liability is a potential obligation that depends on a future event arising from a past
transaction or event.
A)
True
B)
False
12)
Payroll is an example of a contingent liability for the employer.
A)
True
B)
False
13)
The full disclosure principle requires the reporting of contingent liabilities that are reasonably
possible.
A)
True
B)
False
14)
Uncertainties from the development of new competing products are not contingent liabilities.
A)
True
B)
False
15)
Debt guarantees are usually disclosed as a contingent liability.
A)
True
B)
False
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.
A)
True
B)
False
17)
A potential lawsuit claim is disclosed when the claim can be reasonably estimated and it is
reasonably possible.
A)
True
B)
False
18)
A high value for the times interest earned ratio means that a company is a lower risk borrower.
A)
True
B)
False
19)
The times interest earned ratio is calculated by dividing interest expense by income before interest
expense and income taxes.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
23)
Promissory notes cannot be transferred from party to party because they are nonnegotiable.
A)
True
B)
False
24)
A note payable can be used to extend the payment due on an account payable.
A)
True
B)
False
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.
A)
True
B)
False
26)
Required payroll deductions include income taxes, Social Security taxes, pension and health
contributions, union dues, and charitable giving.
A)
True
B)
False
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.
A)
True
B)
False
28)
The amount of FICA tax that employers must pay is twice the amount of the FICA taxes withheld
from their employees.
A)
True
B)
False
29)
The state unemployment tax rates applied to an employer are adjusted according to an employer’s
merit rating.
A)
True
B)
False
30)
A high merit rating for state unemployment taxes means that an employer has high employee
turnover or seasonal hiring.
A)
True
B)
False
31)
Employers must keep individual earnings reports for each employee.
A)
True
B)
False
32)
Deposits of amounts payable to the federal government may be paid through federal depository
banks.
A)
True
B)
False
33)
FUTA requires employers to pay a federal unemployment tax on all salary or wages paid to each
employee.
A)
True
B)
False
34)
The Form W-2 must be given to employees before January 31 following the year covered by the
Form W-2.
A)
True
B)
False
35)
Payments of FUTA are made quarterly to a federal depository bank if the total amount due exceeds
$500.
A)
True
B)
False
36)
A known obligation of an uncertain amount that can at least be reasonably estimated is reported as
an estimated liability.
A)
True
B)
False
37)
Accrued vacation benefits are a form of estimated liability for an employer.
A)
True
B)
False
38)
A liability is incurred when income is earned because income tax expense is created by earning
income.
A)
True
B)
False
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.
A)
True
B)
False
40)
Employers can use a wage bracket withholding table to compute federal income taxes withheld
from each employee’s gross pay.
A)
True
B)
False
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.
A)
True
B)
False
42)
Companies with many employees rarely use a special payroll bank account from which to pay
employees.
A)
True
B)
False
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.
A)
True
B)
False
44)
An employee earnings report is a cumulative record of each employee’s hours worked, gross
earnings, deductions, and net pay.
A)
True
B)
False
45)
When the number of withholding allowances claimed on Form W-4 increases, the amount of
income tax withheld decreases.
A)
True
B)
False
46)
All of the following statements regarding liabilities are true except:
A)
Unearned future wages to be paid to employees should be recorded as liabilities.
B)
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.
C)
Information about liabilities is more useful when the balance sheet identifies them as either
current or long term.
D)
Liabilities can involve uncertainty in whom to pay.
E)
A liability is a probable future payment of assets or services.
47)
Obligations to be paid within one year or the company’s operating cycle, whichever is longer, are:
A)
Current assets.
B)
Bills.
C)
Earned revenues.
D)
Operating cycle liabilities.
E)
Current liabilities.
48)
Obligations not expected to be paid within the longer of one year or the company’s operating cycle
are reported as:
A)
Current liabilities.
B)
Long-term liabilities.
C)
Bills.
D)
Operating cycle liabilities.
E)
Current assets.
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 be aware of an obligation but not know how much will be required to settle
it.
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 can create a liability with a known amount even when the holder of the note may
not be known until the maturity date.
E)
A company only records liabilities when it knows whom to pay, when to pay, and how much
to pay.
50)
In order to be reported, liabilities must:
A)
Involve an outflow of cash.
B)
Always have a definite date for payment.
C)
Be for a specific amount.
D)
Sometimes be estimated.
E)
Be certain.
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)
May depend on some future event occurring.
D)
Are definitely determinable.
E)
Are measurable.
52)
Accounts payable are:
A)
Amounts owed to suppliers for products and/or services purchased on credit.
B)
Always payable within 30 days.
C)
Long-term liabilities.
D)
Estimated liabilities.
E)
Not usually due on specific dates.
53)
Amounts received in advance from customers for future products or services:
A)
Are liabilities.
B)
Are revenues.
C)
Require an outlay of cash in the future.
D)
Are not allowed under GAAP.
E)
Increase income.
54)
When a company is obligated for sales taxes payable, it is reported as a(n):
A)
Business expense.
B)
Estimated liability.
C)
Current liability.
D)
Long-term liability.
E)
Contingent liability.
55)
Which of the following do not apply to unearned revenues?
A)
Also called collections in advance.
B)
Amounts received in advance from customers for future delivery of products or services.
C)
Also called prepayments.
D)
Also called deferred revenues.
E)
Amounts to be received in the future from customers for delivery of products or services in
the current period.