61
157) Gift cards.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
158) Long-term debt maturing within one year of the balance sheet date.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
159) Social Security and Medicare.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
62
160) Interest expense is recorded in the period interest is incurred rather than in the period
interest is paid.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
161) Loss is reasonably possible and amount is reasonably estimable.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
162) Incurred on a note payable.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
63
163) Notes issued by one company to another company with maturities normally ranging up to
270 days.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
164) Classifying liabilities as either current or long-term helps investors and creditors assess this.
Difficulty: 2 Medium
Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred
Revenues; Current Portion of Long-Term Debt; Contingencies – General; Analysis – Acid-Test
Ratio
Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account
for notes payable and interest expense.; 08-03 Account for employee and employer payroll
liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the
appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability
ratios.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
64
Match the following:
A) Disclosure of a contingent liability
B) Deferred revenues
C) Current portion of long-term debt
D) Recording a contingent liability
E) Notes payable
165) A written promise to repay the amount borrowed plus interest.
Difficulty: 2 Medium
Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies –
General
Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the
accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for
contingencies.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
166) Loss is reasonably possible and amount is reasonably estimable.
Difficulty: 2 Medium
Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies –
General
Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the
accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for
contingencies.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
167) Debt that will be paid within one year of the balance sheet date.
Difficulty: 2 Medium
Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies –
General
Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the
accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for
contingencies.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
65
168) Loss is probable and amount is reasonably estimable.
Difficulty: 2 Medium
Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies –
General
Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the
accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for
contingencies.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
169) A liability that requires the sacrifice of something other than cash.
Difficulty: 2 Medium
Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies –
General
Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the
accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for
contingencies.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
66
170) Match (by letter) the correct reporting method for each of the items listed below.
Reporting Method
C. Current liability
L. Long-term liability
D. Disclosure note only
N. Not reported
Item
_____ 1. Accounts payable.
_____ 2. A contingent liability that is probable of occurring within one year
of the balance sheet date and is reasonably estimable.
_____ 3. A contingent liability that is reasonably possible of occurring within
one year of the balance sheet date and is reasonably estimable.
_____ 4. Current portion of long-term debt.
_____ 5. Sales tax collected from customers.
67
171) Match (by letter) the correct reporting method for each of the items listed below.
Reporting Method
C. Current liability
L. Long-term liability
D. Disclosure note only
N. Not reported
Item
_____ 1. Notes payable due in more than one year of the balance sheet date.
_____ 2. Customer advances.
_____ 3. Commercial paper.
_____ 4. Unused line of credit.
_____ 5. A contingent liability that is probable of occurring within one year
of the balance sheet date but cannot be estimated.
68
172) On November 1, Vacation Destinations borrows $1.5 million and issues a six-month, 8%
note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate
adjusting entry for interest expense at December 31, the end of the reporting period.
69
173) On September 1, 2021, Allied Moving Corp. borrows $100,000 cash from First National
Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied’s year-
end is December 31.
1. Record the note payable by Allied Moving Corp.
2. Record the appropriate adjusting entry for the note by Allied Moving Corp.
on December 31, 2021.
3. Record the payment of the note at maturity.
70
174) On November 1, 2021, Dual Systems borrows $200,000 to expand operations. Dual
Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual Systems’
year-end is December 31.
1. Record the issuance of the note by Dual Systems.
2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2021.
3. Record the payment of the note by Dual Systems at maturity on April 30, 2022.
71
175) Assume that on July 1, 2021, Togo’s Sandwiches issues a $2 million, one-year note. Interest
is payable at maturity. Determine the amount of interest expense that should be recorded in a
year-end adjusting entry under each of the following independent assumptions:
Interest Rate
Fiscal Year-End
1.
8%
31 December
2.
9%
30 September
3.
6%
31 October
4.
7%
31 January
176) The following selected transactions relate to liabilities of Food Emporium whose fiscal year
ends on December 31.
January 26
Negotiated a line of credit with City Bank that can be renewed
annually upon bank approval. The amount available under the line of
credit is $1 million at the bank’s prime rate.
March 1
Arranged a six-month bank loan of $400,000 with City Bank under the
line of credit agreement. Interest at the prime rate of 8% is payable at
maturity.
September 1
Paid the 8% note at maturity.
No Journal Entry
Cash
Notes Payable
(Issuance of notes payable)
Notes Payable
Interest Expense [(400,000 × .08) × 6/12]
Cash
(Payment of notes payable and interest)
73
177) Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000
per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum
base amount and a 1.45% Medicare tax with no maximum. Unemployment taxes are 6.2% of the
first $7,000 earned per employee.
1. Assuming the Social Security base amount is $128,400, compute how much will be withheld
during the year for Coach Smith’s Social Security and Medicare.
2. Through what month will Social Security be withheld?
3. What additional amount will the employer need to pay, assuming unemployment taxes of
6.2%?
74
178) Accurate Reports has 50 employees each working 40 hours per week and earning $25 an
hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are
7.65% of the first $128,400 earned per employee and 1.45% thereafter. Unemployment taxes are
3.8% of the first $7,000 earned per employee.
1. Compute the total salaries expense, the total withholdings from employee salaries, and the
actual payroll payment (salaries payable) for the first week of January.
2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.
179) During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in
January are $76,500 for the employee portion of FICA, $210,000 for federal and state income
tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue
Shield). The company incurs an additional $38,000 for federal and state unemployment tax, and
$30,000 for the employer portion of health insurance.
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
76
180) Midwest Shipping pays employees at the end of each month. Payroll information is listed
below for January, the first month of the fiscal year. Assume that none of the employees exceeds
the Federal unemployment tax maximum salary of $7,000 in January.
Salaries $800,000
Federal and state income taxes withheld 160,000
Federal unemployment tax rate 0.80%
State unemployment tax rate (after FUTA deduction) 3.00%
Social Security (FICA) tax rate 7.65%
Record salaries expense and payroll tax expense for the January pay period.
77
181) On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million
for customized computer equipment to be completed on August 1. The remaining $750,000
payment is received upon delivery of the product on August 1. The equipment had a total
production cost of $700,000. What journal entries should Compusoft record on July 8 and
August 1? Assume Compusoft uses the perpetual inventory system.
78
182) T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of
about 60,000. Assume the stadium sells out all six home games before the season begins and the
athletic department collects $30.6 million in ticket sales.
1. What was the average price per season ticket and average price per individual game ticket
sold?
2. Record the advance collection of $30.6 million in ticket sales.
3. Record the revenue recognized after the first home game is completed.
Answer:
79
183) During November, Wireless, Inc., makes a $1,600 credit sale excluding sales tax. The state
sales tax rate is 5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax
payable.
184) On April 1, 2021, the Electronic Superstore borrows $22 million of which $4 million is due
in 2022. Show how the company would report the $22 million debt on its December 31, 2021
balance sheet.
80
185) Consultants notify management of Generic Drug that a prescription medication poses a
potential health risk. Legal counsel indicates that a product recall is probable and is estimated to
cost the company between $5 and $8 million. How will this affect the company’s income
statement and balance sheet this period?
186) Decorative Concrete produces a concrete overlay for residential and commercial concrete
flooring. Customers have complained that one of the products results in excessive cracking. The
likelihood the company will incur a loss on this product is probable and the amount of the loss is
estimated to be somewhere between $1.5 and $3 million.
1. Should this contingent liability be reported, disclosed in a note only, or both? Explain.
2. What loss, if any, should Decorative Concrete report in its income statement?
3. What liability, if any, should Decorative Concrete report in its balance sheet?
4. What entry, if any, should be recorded?
Answer: