1) How are liabilities classified on the balance sheet?
A) paid and unpaid
B) current and long-term
C) current and unfunded
D) definitely determinable and estimated
2) Current liabilities are liabilities that ________.
A) must be satisfied within two years
B) must be paid from revenues
C) must be of a definite amount
D) are to be settled within one year
3) Estimated liabilities are ________.
A) obligations of an exact amount
B) obligations of an uncertain amount
C) always current liabilities
D) always long-term liabilities
4) Definitely determinable liabilities are ________.
A) obligations of an exact amount
B) obligations of an uncertain amount
C) always current liabilities
D) always long-term liabilities
5) ABC Company borrows $15,000 from a local bank for six months at 9% annual interest.
Which statement below is TRUE?
A) It is a definitely determinable liability.
B) It is a long-term liability.
C) It is an estimated liability.
D) Interest expense of $225 will be recorded each month the loan is outstanding.
6) Liabilities are ________.
A) recorded only when the exact amount of the obligation is determined
B) usually not disclosed until they are settled
C) recorded even if the exact amount is not known
D) recorded in the period the obligation is due
7) Which of the following is NOT a definitely determinable liability?
A) Salary payable
B) Accounts payable
C) Unearned revenue
D) Accumulated depreciation
8) Beau Brentley earned $60,000 from his job at Bridgestone Tires. He had 15% of his gross pay
withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and 1.45%
withheld for Medicare taxes. What was Beau’s net pay?
A) $48,200
B) $46,410
C) $48,000
D) $60,000
9) Beau Brentley earned $60,000 in 2011 from his job at Bridgestone Tires. He had 15% of his
gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and
1.45% withheld for Medicare taxes. What amount will Bridgestone Tires report as salary
expense for 2011?
A) $60,000
B) $64,590
C) $46,410
D) $69,160
10) Beau Brentley earned $60,000 in 2011 from his job at Bridgestone Tires. He had 15% of his
gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and
1.45% withheld for Medicare taxes. What amount will Bridgestone Tires report as payroll tax
expense when it pays these taxes?
A) $13,590
B) $4,590
C) $27,180
D) $9,160
11) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
What is Homer’s gross pay?
A) $5,000
B) $4,250
C) $3,940
D) $3,867.50
12) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
What is Homer’s net pay?
A) $5,000
B) $4,250
C) $3,940
D) $3,867.50
13) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
How much of Homer’s December salary will be included in Salary expense on Springfield
Power’s income statement for the year ended December 31, 2011?
A) $5,000
B) $4,250
C) $3,940
D) $3,867.50
14) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
How much payroll tax expense will Springfield Power record when it pays these taxes?
A) $750
B) $382.50
C) $1,132.50
D) $765
15) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
How much cash will Springfield Power pay the government for FICA because of Homer’s
December earnings?
A) $750
B) $382.50
C) $620
D) $310
16) In December 2011, Homer Simpson worked for Springfield Power and earned $5,000.
Federal income tax withholding is 15%. The FICA rate is 6.2% and the Medicare tax is 1.45%.
How much cash will Springfield Power pay the government for Medicare tax because of
Homer’s December earnings?
A) $72.50
B) $145
C) $620
D) $310
17) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is
Bob’s gross pay?
A) $1,000
B) $823.50
C) $900
D) $923.50
18) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is
Bob’s net pay?
A) $1,000
B) $823.50
C) $900
D) $923.50
19) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How
much payroll tax expense for Bob’s December salary will be reported on Scrooge & Marley’s
income statement for the year ended December 31, 2010?
A) $76.50
B) $176.50
C) $153.00
D) $306.00
20) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How
much of Bob’s December salary will be included in Salary expense on Scrooge & Marley’s
income statement for the year ended December 31, 2010?
A) $1,000
B) $823.50
C) $900
D) $923.50
21) In December, 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How
much cash will Scrooge & Marley pay the government for FICA because of Bob’s December
earnings?
A) $62.00
B) $124.00
C) $14.50
D) $29.00
22) In December 2010, Bob Cratchit worked for Scrooge & Marley and earned $1,000. Federal
income tax withholding is 10%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How
much cash will Scrooge & Marley pay the government for Medicare tax because of Bob’s
December earnings?
A) $62.00
B) $124.00
C) $14.50
D) $29.00
23) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is B. Rich’s
gross pay?
A) $12,000
B) $12,765
C) $13,385
D) $10,000
24) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. What is B. Rich’s net
pay?
A) $10,000
B) $8,000
C) $7,235
D) $6,615
25) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much of B.
Rich’s December salary will be included in Salary expense on Payless’ income statement for the
year ended December 31, 2011?
A) $10,000
B) $7,235
C) $8,000
D) $12,000
26) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much payroll
tax expense for B. Rich’s December salary will Payless record when it pays these taxes?
A) $2,765
B) $765
C) $3,170.45
D) $1,240
27) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much cash will
Payless pay the government for FICA because of B. Rich’s December earnings?
A) $1,240
B) $2,765
C) $765
D) $1,530
28) In December 2011, B. Rich worked for Payless, Inc. and earned $10,000. Federal income tax
withholding is 20%. The FICA rate is 6.2% and the Medicare tax is 1.45%. How much cash will
Payless pay the government for Medicare tax because of B. Rich’s December earnings?
A) $765
B) $145
C) $290
D) $1,530
29) Liabilities are recorded once the amount is definitely determinable.
30) Salary payable is considered an estimated liability.
31) An employee’s gross pay is recorded as an expense on the employer’s books.
32) The amount withheld for FICA (Social Security) is first recorded as a liability on the
employer’s books.
33) Employers are required by law to withhold from their employees’’earnings.
34) Interest is the cost of using someone else’s money.
35) What are definitely determinable liabilities and estimated liabilities?
36) Identify each of the items below as a(n):
∙ definitely determinable liability
∙ estimated liability
a. amount of warranty obligations
b. amount owed on outstanding loans
c. amount owed to employees for work performed
d. amount owed to suppliers for inventory purchases
e. amount owed for employee payroll taxes
37) Indicate with an “X” whether each description results in the reporting of a current liability,
long-term liability, or neither on the company’s Balance Sheet. Assume a December 31, 2011
yearend.
Current
Long-term
Neither
1.
Amount owed to employees for
work performed in the last week of
December 2011.
2.
Amount of loan payment due in
2012.
3.
The estimated amount owed for
utilities; the exact amount will not be
known until January 2012 when the
bill is received.
4.
A three-year note payable due in
January 2014.
38) Indicate with an “X” whether each description results in the reporting of a definitely
determinable liability, an estimated liability or neither on the company’s Balance Sheet. Assume
a December 31, 2011 yearend.
Definitely
determinable
Estimated
Neither
1.
Amount owed to employees for
work performed in the last week of
December 2011.
2.
Amount of loan payment due in
2012.
3.
The estimated amount owed for
utilities; the exact amount will not be
known until January 2012 when the
bill is received.
4.
A three-year note payable due in
January 2014.
39) Indicate with an “X” whether each description results in the reporting of a current liability,
long-term liability, or neither on the company’s balance sheet. Assume a December 31, 2011
yearend.
Current
Long-term
Neither
1.
The company has debt obligations
due in two years.
2.
Amount owed to suppliers for
merchandise purchased.
3.
Amount accrued for outside legal
fees owed. The bill with the exact
amount will not be received until
2012.
4.
Employees have earned $4,000 in
the last 3 days of 2011. They will not
be paid until January 2012.
5.
On December 31, the company
purchased merchandise on account
with terms FOB destination; the
merchandise is in transit at yearend.
40) Indicate with an “X” whether each description results in the reporting of a definitely
determinable liability, an estimated liability or neither on the company’s balance sheet. Assume a
December 31, 2011 yearend.
Definitely
determinable
Estimated
Neither
1.
The company has debt obligations
due in two years.
2.
Amount owed to suppliers for
merchandise purchased.
3.
Amount accrued for outside legal
fees owed. The bill with the exact
amount will not be received until
2012.
4.
Employees have earned $4,000 in
the last 3 days of 2011. They will not
be paid until January 2012.
5.
On December 31, the company
purchased merchandise on account
with terms FOB destination; the
merchandise is in transit at yearend.
41) The following data comes from the payroll department of LoJack Corporation for the last
pay period of 2011. Employees will not be paid until 2012.
Gross employee earnings
$330,000
Federal income taxes withheld
$48,000
FICA Social Security taxes withheld
$20,460
Medicare taxes withheld
$4,785
Required:
1. Determine the amount the balance sheet will report as Wages payable.
2. Determine the amount the income statement will report as Wages expense from this pay
period.
3. What type of liability is Wages payable?
4. To what party must the company pay the FICA taxes?
5. Why does LoJack have to withhold taxes from its employees?
42) Explain how payroll affects the liabilities of a firm.
43) Albert, the accountant, has been asked by his boss to calculate the net pay for each of
Pinnock Company’s three employees. Albert has gathered the following information about
payroll for the period:
Larry
Curly
Moe
Gross pay
$50,000
$20,000
$35,000
Federal income taxes withheld
$7,500
$3,000
$4,000
Required: Calculate the net pay for each of the employees. Assume that FICA (Social Security)
taxes are withheld at the rate of 6.2% of gross pay and that Medicare taxes are withheld at the
rate of 1.45% of gross pay.
44) Robert, the accountant, has to calculate the net pay for each of Dotson Company’s three
employees. Robert has gathered the following information about payroll for the period:
Ken
Barbie
Skipper
Gross pay
$60,000
$40,000
$38,000
Federal income taxes withheld
$8,500
$5,500
$4,500
Required: Calculate the net paycheck for each of the employees. Assume that FICA (Social
Security) taxes are withheld at the rate of 6.2% of gross earnings and that Medicare taxes are
withheld at the rate of 1.45% of gross earnings.
Skipper
Gross pay
$60,000
$40,000
$38,000
Federal income taxes withheld
$8,500
$5,500
$4,500
FICA withheld (.062)
Medicare withheld (.0145)
Net pay
$46,910
$31,440
$30,593
45) Payless, Inc’s gross payroll was $100,000 for the current pay period. Federal income tax
(FIT) withheld totals $20,000. The FICA (Social Security) rate is 6.2% and the Medicare rate is
1.45%.
Part A: Show the effect of paying its employees (do not record the employer’s payroll taxes):
Shareholders’ equity
Assets
Liabilities
CC
Retained
earnings
Part B: How much cash will Payless, Inc. have to pay to the government for Federal income
taxes, Social Security, and Medicare on the gross payroll of $100,000?
46) Identify each of the liabilities listed below using the following code:
a. definitely determinable liability
b. estimated liability
_______ 1. purchased merchandise on account
_______ 2. had the employees work all month but won’t pay them until next month
_______ 3. owes the bank interest on an outstanding loan
_______ 4. withheld $9,000 from the employees’ earnings for payroll taxes
_______ 5. sold 1,000,000 units during the current period and agreed to fix or replace each unit
sold if it did not last two years or completely satisfy the customer
_______ 6. borrowed money from a local bank
1,450 Medicare taxes payable
Learning Objective 7-2
1) Brooke’s Bike Company sold $3,780 worth of mountain bikes in June. Warranty expense is
estimated to be 2% of sales. During June, Brooke’s Bikes replaced two faulty parts under
warranty. The parts cost a total of $100. The warranty expense for June was ________.
A) $65.60
B) $75.60
C) $100
D) $175.60
2) Brook’s Bike Company sold 80 mountain bikes during May. The company offered a one-year
warranty. Future warranty expense was estimated to be $25 per bike. During May, the company
spent $115 on parts and labor to repair three bikes that were under warranty. The warranty
expense for May was ________.
A) $115
B) $345
C) $2,000
D) $2,115
3) In November, Mayberry Repair Shop spent $395 on parts to fix appliances under warranty.
The $395 will be a reduction to ________.
A) Warranty liability
B) Warranty expense
C) Parts expense
D) Allowance for uncollectible accounts
4) Warranty expense is recognized when products are sold. This is required by the ________.
A) revenue recognition principle
B) matching principle
C) full disclosure principle
D) going concern principle
5) In its first month of business, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for
$10 each on account. Fish Nets estimates that 1% of its sales will be uncollectible and that
warranty costs will be approximately $100 on its sales. Fish Nets’ financial statements should
include ________.
A) Bad debts expense of $800 and Warranty expense of $100 on its income statement
B) Allowance for uncollectible accounts of $(80) and nothing for the warranties on its balance
sheet
C) Bad debts expense of $80 and Warranty expense of $100 on its income statement
D) Allowance for uncollectible accounts of $(80) and Unearned warranty of $100 on its balance
sheet
6) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account.
Fish Nets estimates that warranty costs will be approximately $100 on these sales. The actual
warranty cost for the sales made in May was $30 in June and $50 in July. Fish Nets should
________.
A) record Warranty expense of $100 in May
B) record Warranty expense of $30 in June
C) report Allowance for uncollectible accounts of $(100) in May
D) report Allowance for uncollectible accounts of $(30) in June
7) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account.
Fish Nets estimates that warranty costs will be approximately $100 on these sales. What effect
will the warranty adjusting entry have on Fish Nets’ current ratio?
A) It will cause the current ratio to increase.
B) It will cause the current ratio to decrease.
C) It will have no effect on the current ratio because the entry will cause the current assets to
increase by $100 and the current liabilities to decrease by $100.
D) It will have no effect on the current ratio because no adjusting entry is made for estimated
warranty costs.
8) Companies are required to recognize warranty expense at the time of sale due to the matching
principle.
9) Brooke’s Bike Company sold 225 mountain bikes in October. The future estimated warranty
cost for the bikes is $25 per bike. The warranty period is one year. The amount of warranty
expense for October is $468.75
10) Companies are required to recognize warranty expense in the period the goods are returned
for repairs.
11) How should companies estimate and report warranty expense?
12) Matt’s Rug Company began business on January 1, 2011.
Part A: Show the effect of the following events on the accounting equation:
Shareholders’ equity
Matt’s Rug Company:
Assets
Liabilities
CC
Retained
earnings
1
had sales of $100,000 in
2011, all on account. The
cost of goods sold was
$60,000.
2
expects that warranty
expenses will be 6% of sales.
3
pays $4,000 cash for
warranty obligation
Part B: Write in the amount (even if $0) as of or for the Year Ended December 31, 2011. Write
in the one financial statement where the line item is found.
Amount
Financial Statement
1.
Warranty expense
2.
Estimated warranty liability
3.
Sales
4.
Cash paid for warranty
obligations