Financial and Managerial Accounting, 8e (Wild)
Chapter 9 Accounting for Current Liabilities
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) Liabilities 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 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 (or accounts payable) are amounts owed to suppliers for products or
services purchased on credit.
8) Unearned revenues are amounts received in advance from customers for future products or
services.
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) Contingent liabilities that are reasonably possible are disclosed in the notes.
14) Uncertainties from the development of future competing products are not contingent
liabilities.
15) Debt guarantees are usually disclosed in the financial statement notes as a contingent
liability.
16) A contingent liability is a potential obligation that is based on uncertainties surrounding
future technologies and natural disasters.
17) A potential lawsuit claim is disclosed in the notes when the claim cannot 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, depreciation, and income taxes.
20) The risk of a company not being able to pay its 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 stated future
date within five years or the operating cycle, whichever is more reasonable.
23) A note payable cannot be sold or transferred under any circumstance.
24) A company can replace an overdue account payable with a note payable.
25) If the end of an accounting period occurs between the signing of a note payable and its
maturity date, interest expense should not be accrued until the note is paid.
26) Required payroll deductions include 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
income and the number of withholding allowances claimed by the employee.
28) The amount of FICA tax that employers must pay is exactly 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 keep employee earnings reports which include a cumulative record of an
employee’s hours worked, gross earnings, deductions, and net pay.
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 the first $1 million in 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 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) Potential 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. Without all three, a liability cannot be recorded.
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) Can arise from agreements or contracts.
C) Are measurable.
D) Can arise form laws.
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) Amounts received in advance from customers for future services.
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) Sales taxes payable is reported as a(n):
A) Estimated liability.
B) Contingent liability.
C) Current liability.
D) Business expense.
E) Long-term asset.
55) Which of the following do not apply to unearned revenues?
A) May also be called deferred revenues.
B) Amounts received in advance from customers for future delivery of products or services.
C) Gift cards are an example.
D) Result from prepayments for concert tickets.
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 Ticket sales payable.
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 (very unlikely).
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 an unearned revenue.
61) In the accounting records of a defendant, lawsuits:
A) Are known 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.
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 expense.
C) A company’s profitability.
D) The relation between income and assets.
E) The relation between assets and liabilities.
64) Interest expense is not:
A) Incurred on current liabilities.
B) Reported on the income statement.
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 depreciation and 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.