CHAPTER 8: LIABILITIES AND STOCKHOLDERS’ EQUITY
1. Liabilities that are due and payable beyond one year or paid out of noncurrent assets are
termed long-term liabilities.
a. True
b. False
2. 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 $12,750. The product
warranty expense of $12,750 should be recorded in the year the related product sale is made.
a. True
b. False
3. Obligations that depend on future events and are based on past transactions are contingent
liabilities.
a. True
b. False
4. Obligations that depend on past events and that are based on future transactions are contingent
liabilities.
a. True
b. False
5. In order to record a contingent liability, the liability must be probable and reasonably
estimated.
a. True
b. False
6. The total earnings of an employee for a payroll period is referred to as the net pay.
a. True
b. False
7. The total earnings of an employee for a payroll period is referred to as gross pay.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
8. Most employers are required to withhold a portion of the earnings of each employee for FICA
tax.
a. True
b. False
9. If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an
employee are $75,200, earnings subject to social security tax are $106,800, and the tax rate is
7.5%, the employer’s social security tax on the $800 gross earnings paid on the last day of the
year is $60.
a. True
b. False
10. Most employers are required to withhold federal unemployment taxes from employee
earnings.
a. True
b. False
11. FICA tax is a payroll tax that is paid by both the employee and the employer.
a. True
b. False
12. FICA tax is a payroll tax that is paid only by employers.
a. True
b. False
13. Federal unemployment compensation tax is a tax that is paid only by employers.
a. True
b. False
14. Medicare taxes are withheld from an employee’s pay only till the employee has earned a
specific amount each year.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
15. Medicare taxes are paid only by employee.
a. True
b. False
16. 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.
a. True
b. False
17. Federal unemployment compensation tax becomes an employer’s liability at the time the
employees are paid.
a. True
b. False
18. FICA tax becomes a liability to the federal government at the time the employees are paid.
a. True
b. False
19. 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.
a. True
b. False
20. During the first year of operations, employees earned vacation pay of $50,000. The vacations
will be taken during the second year. The vacation pay expense should be recorded in the first
year of operations.
a. True
b. False
21. A bond is simply a form of an interest-bearing note.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
22. The prices of bonds are quoted on bond exchanges as a percentage of the bonds’ face value.
a. True
b. False
23. When a corporation issues bonds, it executes a contract with the bondholders known as a bond
indenture.
a. True
b. False
24. When a corporation issues bonds, it executes a contract with the bondholders known as a bond
debenture.
a. True
b. False
25. When the market rate of interest is more than the contract rate of a bond, the bond will sell for
a discount.
a. True
b. False
26. If the market rate of interest is 6% and a corporation’s bonds bear interest at 7%, the bonds will
sell at a discount.
a. True
b. False
27. If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will
sell at a premium.
a. True
b. False
28. If the market rate of interest is 7% and a corporation’s bonds bear interest at 8%, the bonds will
sell at a premium.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
29. If the market rate of interest is 9% and a corporation’s bonds bear interest at 7%, the bonds will
sell at a premium.
a. True
b. False
30. Bonds are sold at face value when the contract rate is equal to the market rate of interest.
a. True
b. False
31. The two main sources of stockholders’ equity are investments contributed by stockholders and
net income retained in the business.
a. True
b. False
32. Paid-in capital and retained earnings are the two major categories of stockholders’ equity for a
corporation.
a. True
b. False
33. The par value of common stock is rarely equal to its market value on the date the stock is
issued.
a. True
b. False
34. For accounting purposes, stated value is treated the same way as par value.
a. True
b. False
35. The issuance of common stock affects both paid-in capital and retained earnings.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
36. Preferred stockholders must receive their current-year dividends before the common
stockholders can receive any dividends.
a. True
b. False
37. The main source of paid-in capital is from issuing stock.
a. True
b. False
38. The amount of capital paid-in by the stockholders of the corporation is called legal capital.
a. True
b. False
39. If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the
number of outstanding shares is 35,000.
a. True
b. False
40. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are reacquired, the
number of outstanding shares is 19,500.
a. True
b. False
41. If 50,000 shares are authorized, 35,000 shares are issued, and 1,000 shares are reacquired, the
number of outstanding shares is 36,000.
a. True
b. False
42. If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the
number of outstanding shares is 33,000.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
43. Treasury stock is a contra-equity account.
a. True
b. False
44. Cash dividends are not paid on shares of treasury stock.
a. True
b. False
45. The declaration of a cash dividend decreases a corporation’s stockholders’ equity and decreases
its assets.
a. True
b. False
46. The declaration of a cash dividend decreases a corporation’s stockholders’ equity and increases
its liabilities.
a. True
b. False
47. One of the conditions for paying a cash dividend is formal action by the board of directors.
a. True
b. False
48. One of the conditions for paying a cash dividend is sufficient retained earnings.
a. True
b. False
49. If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury
stock, a cash dividend of $1 per share would amount to $13,500.
a. True
b. False
50. A 10% stock dividend will increase the book value per share.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
51. The declaration and issuance of a stock dividend does not affect the total amount of a
corporation’s assets, liabilities, or stockholders’ equity.
a. True
b. False
52. The declaration of a stock dividend decreases a corporation’s stockholders’ equity and
decreases its liabilities.
a. True
b. False
53. Before a stock dividend can be declared or paid, there must be sufficient cash.
a. True
b. False
54. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues
a 4-for-1 stock split, the number of shares outstanding after the split will be 40,000.
a. True
b. False
55. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues
a 5-for-1 stock split, the number of shares outstanding after the split will be 2,000.
a. True
b. False
56. The primary purpose of a stock split is to reduce the number of shares outstanding in order to
encourage more investors to enter the market for the company’s shares.
a. True
b. False
57. The reduction in the par or stated value of common stock, accompanied by the issuance of a
proportionate number of additional shares, is called a stock split.
a. True
b. False
Chapter 8: Liabilities and Stockholders’ Equity
58. A corporation has 10,000 shares of $100 par value stock outstanding that has a current market
value of $160. If the corporation issues a 4-for-1 stock split, the market value of the stock will
fall to approximately $32.
a. True
b. False
59. A corporation has 10,000 shares outstanding of $25 par value and a current market value of
$100 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock will
fall to approximately $20.
a. True
b. False
60. Bonds payable due in 2020 are reported on the balance sheet as long-term liabilities.
a. True
b. False
61. If paid-in capital in excess of par—preferred stock is $80,000, preferred stock is $500,000,
paid-in capital in excess of par—common stock is $50,000, common stock is $1,000,000, and
retained earnings is $230,000, the total stockholders’ equity is $1,860,000.
a. True
b. False
62. Earnings per common share is one factor that influences the decision to use debt financing or
equity financing.
a. True
b. False
63. The ratio of liabilities to total assets is also called the debt ratio.
a. True
b. False
64. Liabilities due beyond one year are classified as .
a. current liabilities
b. long-term liabilities
c. contingent liabilities
d. fixed liabilities
Chapter 8: Liabilities and Stockholders’ Equity
65. 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.
66. What are current liabilities?
a. Liabilities that are due and payable within two years.
b. Liabilities that are due and to be paid out of current assets within one year.
c. Liabilities that are due but not payable for more than one year.
d. Liabilities that are payable if a possible subsequent event occurs.
67. Which of the following will be classified as a current liability?
a. Two-year notes payable
b. Bonds payable
c. Mortgage loan
d. Unearned rent
68. A current liability is a debt that is reasonably expected to be paid:
a. between 6 months and 18 months.
b. out of currently recognized revenues.
c. within one year.
d. out of cash currently on hand.
69. On March 15, Silver Co. issued a $80,000, 5%, 90-day note payable to Gold Co. How much
will Silver Co. have to pay at maturity? (Assume 360 days in a year)
a. $84,000
b. $79,000
c. $80,000
d. $81,000
70. Where is interest expense listed on the income statement?
a. Other expense section
b. Cost of merchandise sold
c. Operating expenses
d. Interest expense is listed on the balance sheet, not the income statement.
Chapter 8: Liabilities and Stockholders’ Equity
71. As interest is recorded on an interest-bearing note, the Interest Expense account is:
a. decreased; the Interest Payable account is increased.
b. increased; the Interest Payable account is increased.
c. increased; the Notes Payable account is decreased.
d. increased; the Notes Payable account is increased.
72. Income tax based on taxable income may differ from the income tax based on “Income before
Taxes” on the income statement. Which of the following could be a reason for this difference?
a. A business may use MACRS depreciation for tax reporting and straight-line for financial
reporting purposes.
b. Tax payments may not equal the tax due.
c. Taxable income is based on Generally Accepted Accounting Principles.
d. All of these could be reasons for the difference.
73. Which of the following is a characteristic of deferred income tax payable?
a. Deferred income tax payable is often generated due to timing differences.
b. Deferred income tax payable may be either a current or long-term liability.
c. Deferred income tax payable represents the deferred payment of taxes to later years through
tax planning techniques.
d. All of these are characteristics of deferred income tax payable.
74. The cost of a product warranty should be included as an expense in the:
a. period the cash is collected for a product sold on account.
b. future period when the cost of repairing the product is paid.
c. period of the sale of the product.
d. future period when the product is repaired or replaced.
75. liabilities may arise from past transactions if certain events occur in the future.
a. Current
b. Noncurrent
c. Long-term
d. Contingent
Chapter 8: Liabilities and Stockholders’ Equity
76. The total earnings of an employee during a payroll period, including bonuses and overtime
pay, is referred to as:
a. take-home pay.
b. pay net of taxes.
c. net pay.
d. gross pay.
77. Gross earnings for a payroll period less payroll deductions are referred to as:
a. overtime pay.
b. bonus pay.
c. gross pay.
d. net pay.
78. An employee receives an hourly rate of $27, with time and a half for all hours worked in
excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46;
federal income tax withheld, $350; cumulative earnings for year prior to current week,
$99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5%
on all earnings. What is the gross pay for the employee?
a. $798.85
b. $873.77
c. $1,242.00
d. $1,323.00
79. An employee receives an hourly rate of $27, with time and a half for all hours worked in
excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46;
federal income tax withheld, $350; cumulative earnings for year prior to current week,
$99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5%
on all earnings. What is the net pay for the employee?
a. $798.85
b. $873.77
c. $953.16
d. $1,223.77
Chapter 8: Liabilities and Stockholders’ Equity
80. An employee receives an hourly rate of $30, with time and a half for all hours worked in
excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46;
federal income tax withheld, $300; cumulative earnings for year prior to current week,
$90,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5%
on all earnings. What is the net pay for the employee?
a. $1,147.95
b. $1,059.75
c. $1,470.00
d. $1,359.75
81. Prior to the last weekly payroll period of the calendar year, the cumulative earnings of
employees A and B are $106,150 and $91,000, respectively. Their earnings for the last
completed payroll period of the year are $850 each. Social security tax rate is 6% on
maximum of $106,800. All earnings are subject to Medicare tax of 1.5%. Assuming that the
payroll will be paid on December 29, what will be the employer’s total FICA tax for this
payroll period on the two salary amounts of $850 each?
a. $127.50
b. $115.50
c. $76.50
d. $63.75
82. Payroll taxes levied against employees become liabilities:
a. on the first of the following month.
b. at the time the liability for the employees’ wages is paid.
c. when earned by the employee.
d. at the end of an accounting period.
83. The par value per share of common stock represents:
a. the minimum selling price of the stock established by the articles of incorporation.
b. the minimum amount the stockholder will receive when the corporation is liquidated.
c. the monetary amount assigned to each share of stock in the articles of incorporation.
d. the amount of dividends per share to be received each year.
84. Most employers are required to withhold from employees for:
a. both federal and state unemployment compensation.
b. only federal unemployment compensation tax.
c. only federal income tax.
d. only state unemployment compensation tax.
Chapter 8: Liabilities and Stockholders’ Equity
85. Most employers are levied a tax on payrolls for:
a. sales tax.
b. medical insurance premiums.
c. federal unemployment compensation tax.
d. union dues.
86. A is a contract between the corporation issuing the bonds and the bondholders.
a. bond debenture
b. bond premium
c. bond indenture
d. bond discount
87. The market interest rate related to a bond is also called the:
a. stated interest rate.
b. effective interest rate.
c. contract interest rate.
d. straight-line rate.
88. When the contract rate of interest on bonds is less than the market rate of interest, the bonds
sell at:
a. a premium.
b. their face value.
c. their maturity value.
d. a discount.
89. If bonds are issued at a premium, the stated interest rate is:
a. higher than the market rate of interest.
b. lower than the market rate of interest.
c. too low to attract investors.
d. adjusted to a higher rate of interest.