Problem Set – Current Liabilities – Test Bank | 10th

View Product website:

https://selldocx.com/docx/problem-set-current-liabilities-test-bank-10th-1046

Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) Liabilities due within one year (or the company’s operating cycle if longer), are ________________________.

2) _________________ are probable future payments of assets or services that a company is presently obligated to make as a result of past transactions or events.

3) ______________________ are amounts received in advance from customers for future products or services.

4) ______________ are amounts owed to suppliers for products or services purchased on credit.

5) A ___________________ is a potential obligation that depends on a future event arising from a past transaction or event.

6) Contingent liabilities are recorded if the future event is _______________ and the amount owed can be _______________.

7) Banks authorized to accept deposits of amounts payable to the federal government are _________________________________.

8) A _____________________ usually shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for each pay period.

9) Times interest earned is computed by dividing income before interest expense and income taxes by _______________________.

10) The difference between the amount borrowed and the amount repaid is referred to as _______________.

11) A _______________________ is a written promise to pay a specified amount on a stated future date within one year.

12) The total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes is called ___________________.

13) Gross pay minus all deductions is called ____________________.

14) The more _______________________ allowances an employee claims, the less federal income tax the employer will deduct from pay.

15) Employer payroll taxes are an added _______________ beyond the wages and salaries earned by employees.

16) A _____________________ is a seller’s obligation to replace or fix a product or service that fails to perform as expected within a specified period.

17) Vacation benefits are a type of _______________ liability.

18) To compute the amount of tax withheld from an employee’s pay, employers can use a __________________________ table.

19) Companies with many employees often use a special ____________________ account to pay employees.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
20) Define liabilities and explain the difference between current and long-term liabilities.

21) What are known liabilities? Cite at least two examples of known liabilities.

22) Describe contingent liabilities and how to account for and/or report them.

23) Describe employer responsibilities for reporting payroll taxes. (To the extent possible, reference the form to be filed for each tax.)

24) Explain how to calculate times interest earned and how it is used to analyze a company’s risk.

25) What is a short-term note payable? Explain the accounting issues related to notes payable.

26) Explain the responsibilities of and the accounting by employers for deductions from employee payroll.

27) Identify and explain the types of employer payroll taxes.

28) What are estimated liabilities? Cite at least two examples and explain why they are classified as estimated liabilities.

29) Identify and discuss the factors involved in computing federal income taxes withheld from employees.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
30) A company had income before interest expense and income taxes of $185,900, and its interest expense is $55,000. Calculate the company’s times interest earned ratio.

31) A company’s income before interest expense and income taxes is $302,560, and its interest expense is $62,000. Calculate the company’s times interest earned ratio.

32) A company’s income before interest expense and income taxes in Year 1 and Year 2 is $225,000 and $252,000, respectively. Its interest expense was $45,000 for both years. Calculate the company’s times interest earned ratio, and comment on its level of risk.

33) A company’s income before interest expense and income taxes in Year 1 and Year 2 is $487,500 and $425,000, respectively. Its interest expense was $125,000 for both years. Calculate the company’s times interest earned ratio, and comment on its level of risk.

34) Floral Depot’s income before interest expense and income taxes was $5,900 million, and interest expense was $40 million. Calculate Floral Depot’s times interest earned.

35) Kelso had income before interest expense and income taxes of $570 million and interest expense of $38 million. Calculate Kelso’ times interest earned.

36) SaveMart had income before interest expense and income taxes of $12,508 million and interest expense of $1,060 million. Valueland had income before interest expense and income taxes of $3,534 million and interest expense of $1,140 million. Calculate the times interest earned for each company and comment on the results.

37) On November 1, Casey’s Snowboards signed a $12,000, 90-day, 5% note payable to cover a past due account payable.

a. What amount of interest expense on this note should Casey’s Snowboards report on year-end December 31?
b. Prepare Casey’s journal entry to record the issuance of the note payable.
c. Prepare Casey’s adjusting journal entry at the end of the year.
d. Prepare Casey’s journal entry to record the payment of the note on January 30 of the following year.

38) On June 1, Jasper Company signed a $25,000, 120-day, 6% note payable to cover a past due account payable.

a. What is the total amount of interest to be paid on this note?
b. Prepare Jasper Company’s general journal entry to record the issuance of the note payable.
c. Prepare Jasper Company’s general journal entry to record the payment of the note on September 29.

39) On September 15, SkateWorld borrowed $70,000 cash from Mutual Bank by signing a 6%, 60-day note payable.

a. Prepare SkateWorld’s journal entry to record the issuance of the note payable.
b. Prepare SkateWorld’s journal entry to record the payment of the note at maturity.

40) On December 1, Williams Company borrowed $45,000 cash from Second National Bank by signing a 90-day, 9% note payable.

a. Prepare Williams’ journal entry to record the issuance of the note payable.
b. Prepare Williams’ journal entry to record the accrued interest due at December 31.
c. Prepare Williams’ journal entry to record the payment of the note on March 1 of the next year.

41) A company borrowed $60,000 by signing a 60-day, 5% note payable from its bank. Compute the total cash payment due on the note’s maturity date.

42) Calculate the total amount of FICA withholding for an employee whose pay is $2,400 for the first pay period of the year. The tax rate for FICA—Social Security is 6.2% and the tax rate for FICA—Medicare is 1.45%.

43) An employee earns $8,500 for the current period. The cumulative earnings of previous pay periods are $100,900. Social security tax applies to the first $132,900 of employee earnings. Calculate the total and individual amounts to be withheld for social security (6.2%), Medicare (1.45%) and federal income tax (15%).

44) A company has three employees. Total salaries for the month of January were $8,000. The federal income tax rate for all employees is 15%. The FICA—social security tax rate is 6.2% and the FICA—Medicare tax rate is 1.45%. Calculate the amount of employee taxes withheld and prepare the company’s journal entry to record the January payroll assuming these were the only deductions.

45) A company has 90 employees and a weekly payroll of $117,000. The FICA—social security tax withheld totals $7,254 and the FICA—Medicare tax withheld totals $1,696.50. The total withholding for federal income tax is $16,500. Prepare the journal entry to accrue this week’s salaries expense and withholdings.

46) Santa Barbara Express has 4 sales employees, each of whom earns $5,000 per month and is paid on the last working day of the month. Each employee’s wages are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $110 for each employee.

a. Prepare the general journal entry to accrue the monthly sales salaries expense at January 31.
b. The employer payroll taxes for Santa Barbara Express include FICA taxes, federal unemployment taxes of 0.6% of the first $7,000 paid each employee, and state unemployment taxes of 5.4% of the first $7,000 paid to each employee. Prepare the journal entry to record the employer’s payroll taxes at January 31 for Santa Barbara Express. (Assume that none of the employees has reached the unemployment limit of $7,000.)

47) The payroll records of a company provided the following data for the weekly pay period ended December 7:

The FICA social security tax rate is 6.2% and the FICA Medicare tax rate is 1.45% on all of this week’s wages paid to each employee. The federal and state unemployment tax rates are 0.6% and 5.4%, respectively, on the first $7,000 paid to each employee. Prepare the journal entries to (a) accrue the payroll and (b) record payroll taxes expense.

48) A company’s payroll for the week ended May 15 included earned salaries of $20,000. All of that week’s pay is subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45%. In addition, the company withholds the following amounts for this weekly pay period: $900 for medical insurance, $3,400 for federal income taxes, and $180 for union dues.

a. Prepare the general journal entry to accrue the payroll.
b. The company is subject to state unemployment taxes at the rate of 5.4% and federal unemployment taxes at the rate of 0.6%. By May 15, some employees had earned over $7,000, so only $11,000 of the $20,000 weekly gross pay was subject to unemployment tax. Prepare the general journal entry to accrue the employer’s payroll tax expense.

49) A company’s employees had the following earnings records at the close of the current payroll period:

The company’s payroll taxes expense on each employee’s earnings includes: FICA Social Security taxes of 6.2% on the first $132,900 of earnings plus 1.45% FICA Medicare on all wages; 0.6% federal unemployment taxes on the first $7,000; and 5.4% state unemployment taxes on the first $7,000. Compute the employer’s total payroll taxes expense for the current pay period.

50) An employer has an employee benefit package that includes employer-paid health insurance and an employer-paid retirement program. The March payroll included contributions of $5,500 for health insurance, and 10% of the employees’ $120,000 gross salaries for the employee retirement program. Prepare the journal entry to record these employee benefits.

51) Apple Incorporated sold a laptop (that costs $600) for $1,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Apple expects warranty costs to be 5% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the laptop requires on-site repairs that are completed on the same day. The repair costs $47 for materials taken from the Repair Parts Inventory. These are the only repairs required in Year 2 for this laptop.

1. How much warranty expense does the company report for this laptop in Year 1?
2. How much is the estimated warranty liability for the laptop as of December 31 of Year 1?
3. How much is the estimated warranty liability for the laptop as of December 31 of Year 2?
4. Prepare journal entries to record (a) the laptop’s sale; (b) the adjustment to recognize the warranty expense on December 31 of Year 1; and (c) the repairs that occur on January 5 of Year 2.

52) On September 1, Helpful Hardware sells a mower (that costs $290) for $600 cash with a one-year warranty that covers parts. Warranty expense is estimated to be 9% of sales and is recorded at the time of the sale. On January 24 of the following year, the mower is brought in for repairs covered under the warranty requiring $45 in materials taken from the Repair Parts Inventory. Prepare the September 1 journal entry to record the mower sale (and cost of sale) and the January 24 entry to record warranty repairs.

53) On September 1, Helpful Hardware sells a snow blower (that costs $450) for $800 cash with a one-year warranty that covers parts. Warranty expense is estimated to be 7% of sales and is recorded at the time of the sale. On January 24 of the following year, the snow blower is brought in for repairs covered under the warranty requiring $48 in materials taken from the Repair Parts Inventory. Prepare the September 1 journal entry to record the snow blower sale (and cost of sale) and the January 24 entry to record warranty repairs.

54) Early Company offers its employees a bonus equal to a percentage of the company’s net income. The estimated bonus for the year is $15,686. Prepare the general journal entry to record the estimated employee bonus plan expense.

55) A company’s employer payroll tax rates are 0.6% for federal unemployment taxes, 5.4% for state unemployment taxes, 6.2% for FICA social security taxes on earnings up to $132,900, and 1.45% for FICA Medicare taxes on all earnings. Compute the W-2 Wage and Tax Statement information required below for the following employees:

56) The following are selected accounts from MJKB Consulting’s adjusted trial balance for the year ended December 31. Prepare the liabilities section of its classified balance sheet.

57) A company’s payroll information for the month of May follows:

On May 31 the company issued Check Number 4625 payable to the Payroll Bank Account to pay for the May payroll. It issued payroll checks to the employees after depositing the check. The federal and state unemployment tax rates are 0.6% and 5.4%, respectively, on the first $7,000 paid to each employee. The portion of May wages and salaries subject to these taxes were $6,000.

(1) Prepare the journal entry to record (accrue) the employer’s payroll for May.
(2) Prepare the journal entry to record payment of the May payroll.
(3) Prepare the journal entry to record the employer’s payroll taxes.

58) Cardinal Company sells merchandise for $24,000 cash on March 31. The sales tax law requires Cardinal to collect 8.5% sales tax on every dollar of merchandise sold. Record the entry for the sale and its applicable sales tax.

59) Star Recreation receives $48,000 cash in advance ticket sales for 12 home games. Record the advance ticket sales on April 30. Record the revenue earned for the first home game played on August 14.

60) On January 31, Ransom Company’s payroll register showed that its employers earned $30,350 of office salaries and $82,750 of sales salaries. Withholdings from the employees’ salaries include FICA Social Security taxes as the rate of 6.2%, FICA Medicare taxes at the rate of 1.45%, $16,960 of federal income taxes, $3,350 of medical insurance deductions (which represents 50% of the total cost of the employee medical insurance), and $4,210 of 401(k) retirement contribution deductions. Ransom Company pays the other 50% of the employee insurance cost and matches the employee 401(k) contributions. Several employees earned more than $7,000 for the period which reduced salaries subject to unemployment to $104,000. No employees exceeded the FICA-Social Security taxable wage base.

1. Prepare the journal entry to record Ransom Company’s January 31 payroll expenses and liabilities.
2. Prepare the journal entry to record Ransom Company’s employer payroll taxes resulting from the January 31 payroll. Ransom’s merit rating reduces its state unemployment (SUTA) to 5.4% of the first $7,000 paid each employee. The federal unemployment tax (FUTA) rate is 0.6%.
3. Prepare the journal entry to record Ransom’s additional employee expenses.

61) General Company entered into the following transactions involving short-term notes payable. On May 14, General purchased $40,000 merchandise on account from Steller Company, terms are n/30. General uses the perpetual inventory system. On May 29, General replaced the May 14 account payable with a 60-day, $36,000 note bearing 8% annual along with paying $4,000 in cash. On July 28, General paid the amount due on the note at maturity.

Prepare journal entries for all the preceding transactions and events.

62) Logitech Company pays its employees for two weeks of vacation each year. The company estimated and must expense $9,160 of accrued vacation benefits for the year. Prepare the year-end adjusting entry to record accrued vacation benefits.

63) Hollow Company provides you with following information for two of its employees. The company is subject to the following taxes.

Compute amounts for each of these four taxes as applied to each employee’s gross earnings for November.

64) Deacon Company provides you with following information related to payroll transactions for the month of May. Prepare journal entries to record the transactions for May.

a. Recorded the May payroll using the payroll register information given above.
b. Recorded the employer’s payroll taxes resulting from the May payroll. The state unemployment tax rate is 5.4% of the first $7,000 paid each employee. Only $42,000 of the current month’s salaries are subject to unemployment taxes. The federal rate is 0.6%.
c. Issued a check to Reliant Bank in payment of the May FICA and employee taxes.
d. Issued a check to the state for the payment of the SUTA taxes for the month of May.
e. Issued a check to Reliant Bank in payment of the employer’s quarterly FUTA taxes for the first quarter in the amount of $1,020.

65) Sparks Company entered into the following transactions involving short-term notes payable. On June 18, Sparks purchased $25,000 merchandise from Equip Company, terms 2/10, n/30. Sparks uses the perpetual inventory system. On July 19, Sparks replaced the June 18 account payable with a 60-day, $12,000 note bearing 4% annual interest in addition to paying $13,000 in cash. Sparks paid the amount due on the note at maturity.

1. Determine the maturity date for the note.
2. Prepare journal entries for Sparks for all the preceding transactions and events.

66) Richardson Fields receives $31,680 cash in advance ticket sales for 11 home soccer games. Record the advance ticket sales on March 31. Record the revenue earned for the first game played on August 17.

Answer Key

Test name: John Wild Ch09 Problem Material

1) current liabilities

2) Liabilities

3) Unearned revenues

4) Trade accounts payable or Accounts payable

5) contingent liability

6) [probable, reasonably estimated]

7) federal depository banks

8) payroll register

9) interest expense

10) interest

11) short-term note payable

12) gross pay

13) net pay

14) withholding

15) expense

16) warranty

17) estimated

18) wage bracket withholding

19) payroll bank

20) Liabilities are probable future payments of assets or services a company is presently obligated to make as a result of past transactions or events. Current liabilities are obligations due within one year or the company’s operating cycle, whichever is longer. Long-term liabilities are obligations due beyond one year or the company’s operating cycle, whichever is longer.

21) Known liabilities are measurable obligations that arise from agreements, contracts, or laws. Known liabilities include accounts payable, notes payable, sales taxes payable, unearned revenues, and payroll liabilities.

22) Contingent liabilities are potential obligations that depend on future events arising from past transactions or events. If the likelihood of the event is probable and the amount is reasonably estimated, the obligation is recorded as a liability. If the future event is reasonably possible or probable but not estimable, the information about the contingent liability is disclosed in the notes to the financial statements. If the future event is remote, the item is not recorded or disclosed.

23) Employers are required to report FICA taxes and federal income tax withholding to the federal government using Form 941. Federal unemployment taxes are reported annually on Form 940. Employers also have responsibilities to report state unemployment taxes. Annual earnings and deduction information are reported to each employee and to the federal government on Form W-2.

24) The times interest earned ratio is calculated by dividing a company’s income before interest expense and income taxes by interest expense. The ratio measures a company’s ability to pay interest. A low ratio indicates that the default risk on liabilities is high.

25) A short-term note payable is a written promise to pay a specified amount on a stated future date within one year. Short-term notes payable are negotiable, and can be transferred from party to party. Notes payable must be recorded on the date they are signed. When the note is paid, interest is paid in addition to the principal amount. If the end of the accounting period occurs between the signing of a note payable and its maturity date accrued but unpaid interest is recorded.

26) Employers are responsible for collecting employee federal income taxes and employee Social Security and Medicare taxes from employees. The employers record these amounts as current liabilities and send the amounts to the federal government to discharge their obligation. Payroll deductions can also include nontax voluntary deductions such as insurance and contributions to retirement plans. All payroll deductions are considered to be liabilities until the amounts are transmitted to the designated organization.

27) Employers are required to contribute an equal amount of FICA taxes for Social Security and Medicare as are withheld from employees’ pay. In addition, employers must contribute to both federal and state unemployment compensation programs. The federal program is called FUTA (Federal Unemployment Tax Act) and the state programs are called SUTA (State Unemployment Tax Act). The amount of unemployment tax that employers pay is based on their merit ratings. The merit rating reflects a company’s stability in employing workers.

28) Estimated liabilities are known obligations of an uncertain amount that can be reasonably estimated. Warranties and some employee benefits such as bonuses and vacations are common types of estimated liabilities. Warranties are estimated liabilities because the obligation to repair defective merchandise exists at the time of sale. The amount of potential warranty work can be estimated based on past sales. Employee benefits are generated as employees earn their wages.

29) The amount of federal income tax withheld for each employee depends on (1) an employee’s earnings level and (2) the number of withholding allowances claimed by the employee. This amount can be determined by using a wage bracket withholding table.

30) Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense<br>Times Interest Earned Ratio = $185,900/$55,000 = 3.38

31) Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense<br>Times Interest Earned Ratio = $302,560/$62,000 = 4.88

32) Year 1: 5.0<br>Year 2: 5.6<br><br>Risk analysis: The income before interest expense has increased, but the interest expense appears fixed. Consequently, the company's risk has decreased over the 2-year period. The company is improving on its ability to pay interest expense.<br><br>Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense<br>Times Interest Earned Ratio = $225,000/$45,000 = 5.0 (Year 1)<br>Times Interest Earned Ratio = $252,000/$45,000 = 5.6 (Year 2)

33) Year 1: 3.9; Year 2: 3.4

Risk analysis: The income before interest expense has decreased, but the interest expense appears fixed. Consequently, the company’s level of risk of not being able to pay its liabilities has increased over the 2-year period.

Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense
Times Interest Earned Ratio = $487,500/$125,000 = 3.9 (Year 1)
Times Interest Earned Ratio = $425,000/$125,000 = 3.4 (Year 2)

34) Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense<br>Times Interest Earned Ratio = $5,900 million/$40 million = 147.5

35) Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense<br>Times Interest Earned Ratio = $570/$38 = 15.0

36) SaveMart times interest earned = 11.8; Valueland times interest earned = 3.1

SaveMart’s times interest earned is almost four times that of Valueland’s. Neither company appears to have a very high risk of default on debt, but SaveMart appears to have much lower risk than Valueland.

Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense
Times Interest Earned Ratio = $12,508/$1,060 = 11.8 (SaveMart)
Times Interest Earned Ratio = $3,534/$1,140 = 3.1 (Valueland)

37) a. Interest expense = $12,000 × 0.05 × 60/360 = $100