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Chapter 09 Reporting and Analyzing Current Liabilities Answer Key
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.
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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.
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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.
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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.
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12.
Payroll is an example of a contingent liability for the employer.
13.
The full disclosure principle requires inclusion of information about contingent liabilities
that are reasonably possible in the notes to the financial statements.
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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.
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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.
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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.
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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.
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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.
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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.
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30.
A high merit rating for state unemployment taxes means that an employer probably 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.
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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.
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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.
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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.
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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.
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Multiple Choice Questions
46.
All of the following statements regarding liabilities are true
except
:
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47.
Obligations to be paid within one year or the company’s operating cycle, whichever is
longer, are:
48.
Obligations not expected to be paid within the longer of one year or the company’s
operating cycle are reported as:
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Topic: Defining Liabilities
49.
All of the following statements regarding uncertainty in liabilities are true
except
:
50.
In order to be reported, liabilities must: