Multiple Choice: Chapter Twelve
1. Typical current liabilities include:
a. Prepayments by customers.
b. Travel advances to employees.
c. The principal portion of a mortgage note that is due beyond one year or the operating cycle, whichever is longer.
d. Accumulated depreciation.
Answera. Prepayments by customers should be reported as a current liability entitled Unearned Revenue. Travel advances to employees is a current asset. The principal portion of a mortgage note which will be paid within (not beyond!) one year or the operating cycle, whichever is longer, is reported as a current liability. Accumulated depreciation is a contra asset.
2. Contingent liabilities should be recorded in the accounts when:
a. It is probable that the future event will occur.
b. The amount of the liability can be reasonably estimated.
c. Both (a) and (b).
d. Either (a) or (b).
3. On June 1, Whit Corporation purchased a truck for $30,000. To pay for the truck, Whit issued and recorded a six-month note payable for $31,500. No other entry was recorded for the note until payment on December 1. The journal entry to record payment of the note would include:
a. A debit to Interest Expense for $1,500.
b. A debit to Discount on Notes Payable for $1,500.
c. A debit to Notes Payable for $30,000.
d. A debit to Cash for $31,500.
4. The Discount on Notes Payable:
a. Is a contra liability account.
b. Is a contingent liability account.
c. Should be reported as an asset because of its debit balance.
d. Is amortized to reduce interest expense over the life of the note payable.
Answera. Discount on Notes Payable is subtracted from the related Notes Payable, and is therefore a contra liability. The discount is not "contingent." Amortization of a discount increases interest expense.
5. If the journal entry to record an accrued liability were accidentally recorded twice, it would:
a. Understate income for the year.
b. Overstate income for the year.
c. Have no effect on income for the year.
d. Understate accrued liabilities at the end of the year.
Answera. The error would cause an expense to be overstated (via the extra debit), as well as overstating the related payable (via the extra credit). Therefore, income would be understated and liabilities would be overstated.
6. Landry paid $5,000 cash for warranty service work. If a Warranty Liability account had been previously established, the proper journal entry to record the service work would be:
a. Sales 5,000 Cash 5,000 b. Warranty Expense 5,000 Warranty Liability 5,000 c. Warranty Expense 5,000 Cash 5,000 d. Warranty Liability 5,000 Cash 5,000
Answerd. At the time warranty service is performed, the previously recorded liability should be reduced by the amount of the expenditure. The expense should have already been recorded in an earlier period.
7. The employee's withholding allowance certificate is popularly referred to as a:
c. Form 1040.
d. Payroll register.
Answerb. The W-4 is the withholding allowance certificate prepared at the time an employee is hired. The W-2 is the annual wage and tax statement furnished to an employee, the form 1040 is an individual's federal income tax return, and the payroll register is basically a special journal maintained by an employer for recording payroll related transactions.
8. The FICA tax is levied on:
a. Employees only.
b. Employers only.
c. Both employees and employers.
d. Earnings in excess of base amounts
9. Burgundy Drug Store paid $137,000 in salaries during 20X1. Salary expense for the year was $148,500 and salaries payable at the end of 20X1 amounted to $17,300. What was the amount of salaries payable as of January 1, 20X1?
Answera. $5,800. Burgundy expensed $11,500 more than it paid ($148,500 - $137,000), resulting in an increase in salaries payable. The ending salaries payable minus the increase in salaries payable yields the beginning amount ($17,300 - $11,500 = $5,800).
10. The gross payroll for Zurich Corporation was $100,000. Federal income tax withheld from employee paychecks amounted to $24,000, state income tax withheld amounted to $3,000, Social Security amounted to $8,500 (both the employee and employer portion), and Medicare amounted to $3,500 (both the employee and employer portion). Furthermore, employees elected to have $1,000 of insurance and charitable contributions withheld from their paychecks. How much was net pay?
Answerc. $66,000. Net pay equals gross pay ($100,000) minus various withholdings attributable to the employees ($24,000 + $3,000 + ($8,500/2) + ($3,500/2) + $1,000). The $8,500 and $3,500 are divided by 2 because the cost is borne equally by both the employee and employer.