Chapter 08 – Current Liabilities and Fair Value Accounting
TRUE/FALSE
1. Working capital equals current assets plus current liabilities.
2. Payables turnover is measured in number of days.
3. The payables turnover is the number of times, on average, that accounts payable are paid in an
accounting period.
4. The days’ payable shows how long, on average, a company takes to pay its accounts payable.
5. All liabilities involve an obligation of one sort or another.
6. Because failure to record a liability generally leads to failure to record an expense, it usually results in
an overstatement of income.
7. Because accounting measures should be verifiable, liabilities should not be estimated.
8. A liability must never be classified as current if it is due in more than one year.
9. The classification of a liability as current or long-term is important because it may affect the
evaluation of a company’s liquidity.
10. If an accrued liability for salaries is not recorded, income for the following period will be overstated.
11. Liabilities generally arise from past transactions.
12. At the time a company signs a contract to pay an employee a certain salary in the future, it records a
liability.
13. Lines of credit from the bank need not be disclosed in the financial statements or in the notes.
14. To determine the payables turnover, one first calculates the days’ payable.
15. Only the unused portion of a line of credit is recognized as a liability.
16. The costs associated with coupons and rebates are usually reflected in contra-revenue accounts.
17. Interest on a promissory note is recognized when the note is issued.
18. The term wages refers to the compensation of employees who are paid at a monthly or yearly rate.
19. Unearned revenue is an example of a definitely determinable liability.
20. Commercial paper consists of secured loans that are sold to the public.
21. For notes payable whose interest is stated separately, the adjusting entry would consist of a debit to
Interest Expense and a credit to Interest Payable.
22. The declaration of dividends is solely the decision of the corporation’s stockholders.
23. The current portion of long-term debt is classified as a current liability only if it is due within the next
year and is to be paid from current assets.
24. There is no limit to the amount of income subject to the Medicare tax.
25. There is no limit to the amount of income subject to the FUTA tax.
26. Product warranties are an expense of the period in which the product must be repaired or replaced.
27. Commercial paper normally is issued by companies with poor credit ratings.
28. When a business sells an item and collects a state sales tax on it, a current liability to the state arises.
29. If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a
current liability.
30. Accrued liabilities often arise as a result of the passage of time.
31. Unearned revenue arises from the acceptance of payment in advance for a service to be performed.
32. The product warranty liability is an example of an estimated liability.
33. Current liabilities are classified as either definitely determinable liabilities or contingent liabilities.
34. A liability for dividends exists only when the board of directors declares them.
35. Wages are compensation of employees at a yearly or monthly rate.
36. The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal
Unemployment Tax Payable and State Unemployment Tax Payable.
37. The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.
38. Social security and Medicare taxes are borne entirely by the employer.
39. Gross earnings minus deductions equals take-home pay.
40. Both the employee and the employer must bear the tax burden for unemployment benefits.
41. The federal and state unemployment tax rates are identical.
42. The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to
Social Security Tax Payable and Medicare Tax Payable.
43. An estimated liability is not a definite obligation of the firm because the amount cannot be definitely
determined.
44. The amount of property tax payable is usually an estimated liability for a portion of the year.
45. Vacation pay is charged properly as an expense in the month in which the employee takes a vacation.
46. A liability rarely is established for product warranties because of uncertainty as to the amount of the
liability.
47. If the amount of a liability cannot be exactly determined, it should not be recorded.
48. Product warranties are an expense of the period in which the related product is sold.
49. Property Taxes Expense is recorded only in the month it is paid.
50. Promotional costs, such as coupons and rebates, should be recorded as an expense with a related
liability.
51. A commitment is a legal obligation that does not meet the technical requirements for recognition as a
liability.
52. A contingent liability is not entered into the accounting records under any circumstances.
53. A contingent liability is recognized when the amount can be reasonably estimated and the likelihood of
loss is probable.
54. The most common examples of commitments are leases and purchase agreements.
55. A contingent liability is recognized when any likelihood of loss exists and the amount can be
reasonably estimated.
56. A contingent liability is a liability that may materialize in the future because of something that
happened in the past.
57. Potential vacation pay should be accounted for as a commitment.
58. Lawsuits against a company in connection with an industrial accident would not be disclosed in the
notes to the financial statements as a contingent liability until the lawsuits have been settled.
59. When a company discounts a note receivable at the bank, it has a contingent liability.
60. A contingent liability eventually becomes either a true liability or no liability at all.
61. When compound interest is used, interest accumulates less quickly than when simple interest is used.
62. The annual interest earned on an amount deposited into a bank account will increase each year when
simple interest is used.
63. The annual interest earned on an amount deposited into a bank account will be the same each year
when compound interest is used.
64. All factors in a future value table must be greater than or equal to 1.000.
65. An ordinary annuity is a series of equal payments made at the end of equal intervals of time.
66. The higher the interest rate, the lower the present value factor.
67. All factors in a present value of a single sum table are less than 1.000.
68. The lower the interest rate, the lower the future value factor.
69. Future value refers to an amount received or paid now at a given rate of interest that is equivalent to
another amount received or paid sometime in the future.
70. Decision makers rely on the future values, rather than on the present values, of future cash flows.
71. The theoretical value of an asset is the present value of the expected benefits.
72. In a deferred payment arrangement, interest is charged only if it is stated.
73. An asset purchased according to a deferred payment plan should be recorded based on the total cash
paid.
74. A company wishes to make deposits at the end of each of the next four years to accumulate a fund of
$60,000. The annual contributions equal $60,000 multiplied by the appropriate present value of an
ordinary annuity factor.
75. If the net present value of a proposed investment is negative, it means that the investment should not
be made.
76. Assets purchased under a deferred payment plan should be recorded at the future value of the
installment payments.
MULTIPLE CHOICE
1. Which of the following is not a component of the operating cycle?
a.
Sales to customers
b.
Collection of accounts receivable
c.
Recognition of depreciation
d.
Purchases from suppliers
2. All of the following are measures of liquidity except
a.
the quick ratio.
b.
return on assets.
c.
the current ratio.
d.
working capital.
3. Which of the following most likely would be classified as a current liability?
a.
Mortgage payable
b.
Dividends payable
c.
Five-year notes payable
d.
Bonds payable
4. A liability is recognized when
a.
the exact due date is known.
b.
it is paid for.
c.
an obligation has arisen.
d.
the exact amount of the liability is known.
5. Days’ payable is the shortest in which of the following industries?
a.
Grocery stores
b.
Computers
c.
Machinery
d.
Auto and home supply
6. On January 2, 2010, Lester Company, a calendar-year company, issued $40,000 of notes payable, of
which $10,000 is due on January 2 for each of the next four years. The proper balance sheet
presentation on December 31, 2010, is
a.
Current Liabilities, $40,000.
b.
Current Liabilities, $10,000; Long-Term Liabilities, $30,000.
c.
Long-Term Liabilities, $40,000.
d.
Current Liabilities, $30,000; Long-Term Liabilities, $10,000.
7. Which of the following most likely is an example of an accrued liability?
a.
Salaries payable
b.
Accounts payable
c.
Current portion of long-term debt
d.
Sales tax payable
8. Current liabilities are debts that are expected to be satisfied within
a.
one year or the normal operating cycle, whichever is shorter.
b.
one year or the normal operating cycle, whichever is longer.
c.
one year.
d.
the normal operating cycle.
9. Failure to record a liability probably will
a.
result in an overstated net income.
b.
result in overstated total liabilities and stockholders’ equity.
c.
have no effect on net income.
d.
result in overstated total assets.
10. Which of the following typically would not be done to satisfy a current liability?
a.
Use long-term assets to satisfy the liability
b.
Render a service to satisfy the liability
c.
Use current assets to satisfy the liability
d.
Take on another current liability to satisfy the liability
11. Which of the following descriptions would not fit the definition of a liability?
a.
Obligation to deliver services already paid for
b.
Result of past transaction
c.
Future obligation for future salary payments
d.
Present obligation for future payment
12. Usually, failure to record a liability means failure to record a(n)
a.
revenue.
b.
note.
c.
expense.
d.
asset.
13. Which of the following does not represent a liability?
a.
An obligation for estimated income taxes payable
b.
Interest that has accrued on a bank loan
c.
An obligation to pay for goods purchased, payable one year after purchase
d.
An obligation for future purchases of goods
14. The payables turnover is measured
a.
in days.
b.
as a percentage.
c.
in dollars.
d.
in times.
15. To find the days’ payable,
a.
divide 365 by the payables turnover.
b.
multiply the payables turnover by 365.
c.
divide the payables turnover by 365.
d.
subtract 365 from the payables turnover.
16. Sales Tax Payable is an example of a(n)
a.
estimated liability.
b.
contingent liability.
c.
trade liability.
d.
definitely determinable liability.
17. A company receives $100, of which $4 is for sales tax and $6 is for excise tax. The journal entry to
record the sale is:
a.
Cash 90
Sales 90
b.
Excise Tax expense 6
Sales Tax expense 4
Cash 90
Sales 100
c.
Sales 100
Cash 100
d.
Cash 100
Sales Tax Payable 4
Excise tax payable 6
Sales 90
18. All of the following are classified as definitely determinable liabilities except
a.
sales tax payable.
b.
estimated property tax payable.
c.
the current portion of long-term debt.
d.
unearned revenue.
19. A company receives $180 for a sale, of which $10 is for sales tax. The journal entry to record the sale
is:
a.
Sales Tax expense 10
Cash 170
Sales 180
b.
Cash 170
Sales 170
c.
Cash 180
Sales 180
d.
Cash 180
Sales Tax Payable 10
Sales 170
20. Use this information to answer the following question.
The transactions below pertain to Broyer Company, whose fiscal year ends September 30.
Sept.
10
Received cash for a 90-day, 12 percent, $25,000 note payable. Interest is in
addition to the face value.
30
Made end-of-year adjusting entry to accrue interest expense.
The entry to record the September 10 transaction (amounts rounded) is:
a.
Cash 740
Notes Payable 740
b.
Cash 24,260
Accounts receivable 24,260
c.
Cash 24,260
Notes Payable 24,260
d.
Cash 25,000
Notes Payable 25,000
21. Use this information to answer the following question.
The transactions below pertain to Broyer Company, whose fiscal year ends September 30.
Sept.
10
Received cash for a 90-day, 12 percent, $25,000 note payable. Interest is in addition to
the face value.
30
Made end-of-year adjusting entry to accrue interest expense.
The September 30 adjusting entry, rounded to the nearest dollar, to accrue the interest expense on the
note payable is:
a.
Interest Expense 164
Cash 164
b.
Cash 164
Interest Expense 164
c.
Interest Expense 164
Interest Payable 164
d.
Interest Expense 164
Notes Payable 164
22. What would be the adjusting entry for a note payable whose interest is not included in the face amount
of the note?
a.
Debit Interest Receivable and credit Interest Income.
b.
Debit Interest Expense and credit Cash.
c.
Debit Interest Expense and credit Interest Payable.
d.
Debit Cash and credit Notes Payable.
23. Which of the following most likely is a definitely determinable liability during interim periods?
a.
Estimated property tax payable
b.
Accrued interest payable
c.
Estimated product warranty liability
d.
Estimated income taxes payable
24. Dividends Payable is an example of a(n)
a.
contingent liability.
b.
definitely determinable liability.
c.
estimated liability.
d.
long-term liability.
25. Which of the following businesses most likely would have a large Unearned Revenue account balance
at all times?
a.
Dry cleaners
b.
Realtor
c.
Magazine publisher
d.
Department store
26. Which of the following taxes is not subject to a maximum amount per employee per year?
a.
State unemployment tax
b.
Federal unemployment tax
c.
Social security tax
d.
Medicare tax
27. All of the following can be employee payroll withholdings except
a.
state income taxes.
b.
medical insurance premium payments.
c.
charitable contributions.
d.
federal unemployment tax.
28. Which of the following is a tax borne by the employer but not the employee?
a.
State income tax
b.
FUTA tax
c.
Medicare tax
d.
Social security tax
29. An employee has gross earnings of $600 and withholdings of $45.90 for social security and Medicare
taxes and $60 for income taxes. The employer pays $45.90 for social security and Medicare taxes and
$4.80 for FUTA. The total cost of this employee to the employer is
a.
$650.70.
b.
$600.00.
c.
$696.60.
d.
$604.80.
30. Payroll Taxes and Benefits Expense includes all of the following except
a.
federal income taxes.
b.
social security taxes.
c.
Medicare taxes.
d.
unemployment taxes.
31. Use this information to answer the following question.
The following totals for the month of November were taken from the payroll register of Levine
Company:
Salaries expense
$12,000
Social security and Medicare taxes withheld
550
Income taxes withheld
2,500
Medical insurance deductions
250
Life insurance deductions
200
Salaries subject to federal and state unemployment taxes of 6.2 percent
4,000
The journal entry to record the monthly payroll on November 30 would include a
a.
debit to Salaries Expense for $12,000.
b.
debit to Salaries Payable for $12,000.
c.
credit to Salaries Payable for $12,000.
d.
debit to Salaries Expense for $8,500.
32. Use this information to answer the following question.
The following totals for the month of November were taken from the payroll register of Levine
Company:
Salaries expense
$12,000
Social security and Medicare taxes withheld
550
Income taxes withheld
2,500
Medical insurance deductions
250
Life insurance deductions
200
Salaries subject to federal and state unemployment taxes of 6.2 percent
4,000
The entry to record the payment of net payroll would include a
a.
debit to Salaries Payable for $12,000.
b.
debit to Salaries Payable for $7,950.
c.
debit to Salaries Payable for $8,500.
d.
credit to Cash for $9,050.
33. Use this information to answer the following question.
The following totals for the month of November were taken from the payroll register of Levine
Company:
Salaries expense
$12,000
Social security and Medicare taxes withheld
550
Income taxes withheld
2,500
Medical insurance deductions
250
Life insurance deductions
200
Salaries subject to federal and state unemployment taxes of 6.2 percent
4,000
The entry to record the accrual of employer’s payroll taxes would include a debit to Payroll Taxes and
Benefits Expense for
a.
$1,248.
b.
$550.
c.
$798.
d.
$248.
34. Use this information to answer the following question.
The following totals for the month of November were taken from the payroll register of Levine
Company:
Salaries expense
$12,000
Social security and Medicare taxes withheld
550
Income taxes withheld
2,500
Medical insurance deductions
250
Life insurance deductions
200
Salaries subject to federal and state unemployment taxes of 6.2 percent
4,000
The amount of liabilities relating to payroll, other than Salaries Payable, is
a.
$4,178.
b.
$3,748.
c.
$3,628.
d.
$4,298.
35. Use this information to answer the following question.
The following totals for the month of November were taken from the payroll register of Levine
Company:
Salaries expense
$12,000
Social security and Medicare taxes withheld
550
Income taxes withheld
2,500
Medical insurance deductions
250
Life insurance deductions
200
Salaries subject to federal and state unemployment taxes of 6.2 percent
4,000
The entry to record the accrual of federal unemployment tax (assume FUTA tax of .8 percent) would
include a
a.
credit to Federal Unemployment Tax Payable for $32.
b.
debit to Federal Unemployment Tax Payable for $32.
c.
debit to FUTA Tax Expense for $32.
d.
credit to Payroll Taxes and Benefits Expense for $32.
36. Use this information to answer the following question.
Baker Company has the following information for the pay period of January 1-15, 2010. Payment
occurs on January 20.
Gross payroll
$16,000
Federal income taxes withheld
$1,800
Social security and Medicare rate
7.65%
Federal unemployment tax rate
.8%
State unemployment tax rate
5.4%
Salaries Payable would be recorded for
a.
$12,976.
b.
$10,760.
c.
$14,200.
d.
$11,984.
37. Use this information to answer the following question.
Gross payroll
$16,000
Federal income taxes withheld
$1,800
Social security and Medicare rate
7.65%
Federal unemployment tax rate
.8%
State unemployment tax rate
5.4%
Payroll Taxes and Benefits Expense would be recorded for
a.
$1,224.
b.
$2,216.
c.
$4,016.
d.
$992.
38. Use this information to answer the following question.
Baker Company has the following information for the pay period of January 1-15, 2010. Payment
occurs on January 20.
Gross payroll
$16,000
Federal income taxes withheld
$1,800
Social security and Medicare rate
7.65%
Federal unemployment tax rate
.8%
State unemployment tax rate
5.4%
The entry to record the payroll would include a
a.
debit to Salaries Payable for the net amount.
b.
credit to State Unemployment Tax Payable.
c.
debit to Salaries Expense for the amount paid to the employees.
d.
debit to Salaries Expense for the gross payroll.
39. Use this information to answer the following question.
Gross payroll
$16,000
Federal income taxes withheld
$1,800
Social security and Medicare rate
7.65%
Federal unemployment tax rate
.8%
State unemployment tax rate
5.4%
The entry to record the payroll taxes expense would include a credit to
a.
Salaries Payable.
b.
Federal Income Taxes Payable.
c.
Social Security Tax Payable.
d.
Cash.
40. Use this information to answer the following question.
Baker Company has the following information for the pay period of January 1-15, 2010. Payment
occurs on January 20.
Gross payroll
$16,000
Federal income taxes withheld
$1,800
Social security and Medicare rate
7.65%
Federal unemployment tax rate
.8%
State unemployment tax rate
5.4%
The entry on January 20 would be a debit to
a.
Salaries Payable and a credit to Cash.
b.
Salaries Payable and a credit to Salaries Expense.
c.
Salaries Expense and a credit to Cash.
d.
Salaries Expense and a credit to Salaries Payable.
41. All of the following are estimated liabilities except
a.
liability for vacation pay.
b.
payroll liabilities.
c.
product warranty liability.
d.
property tax liability.
42. During July, Audio City sold 200 radios for $50 each. Each radio had cost Audio City $30 to purchase
and carried a two-year warranty. If 5 percent typically need to be replaced over the warranty period
and one actually is replaced during July, the entry to record the Product Warranty Expense is:
a.
Product Warranty Expense 30
Estimated Product Warranty Liability 30
b.
Product Warranty Expense 150
Cash 150
c.
Product Warranty Expense 300
Estimated Product Warranty Liability 300
d.
Estimated Product Warranty Liability 600
Product Warranty Expense 600
43. Total payroll for a given week is $12,000. If 70 percent of the company’s employees typically qualify
to receive two weeks’ paid vacation per year, assuming 50 working weeks, the entry to record the
estimated liability for vacation pay for the week is: