Chapter 10 Liabilities Questions and Answers

Chapter 10: Liabilities 1. For investors, the ______ provide independent, easy-to-use measurements of relative credit risk. credit rating agencies 2. _________________ _______________ on a classified balance sheet report the obligations that will be paid or met within the company's operating cycle or within 1 year, whichever is longer. (Enter one word per blank.) Current liabilities 3. Acme Enterprises began the new year owing its suppliers $3,000 for merchandise purchased last year. Acme then sold half of this merchandise for $5,000 on account. Two weeks later, Acme paid its suppliers $1,000 and bought another $4,000 of merchandise on account. Acme now has an Accounts Payable balance of ______. $6,000; Accounts Payable balance = $3,000 - 1,000 + 4,000 = $6,000. 4. The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.)  debit to Accounts Payable  credit to Cash 5. Accrued Liabilities are ______. current liabilities resulting from adjusting entries that record amounts incurred but not yet paid 6. For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are ______. (Check all that apply.)  Standard & Poor's  Moody's 7. Net pay is calculated by ______. subtracting payroll deductions from gross pay 8. Which of the following are current liabilities? (Check all that apply.)  Salaries and Wages Payable  Accounts Payable  Note Payable due in 3 months 9. Employees' gross earnings differ from their net pay because of ______. (Select all that apply.)  FICA taxes  payroll deductions  federal and state income taxes 10. Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______. $100,000; A liability is first recorded at $100,000, representing the amount of cash a creditor would accept to immediately settle the liability, which excludes interest charges. Interest arises only when time passes. 11. A liability is first recorded at $100,000, representing the amount of cash a creditor would accept to immediately settle the liability, which excludes interest charges. Interest arises only when time passes.  debit to Inventory of $500  credit to Accounts Payable of $500 12. The law requires ______ to pay FICA taxes. both employee and employer 13. If a company forgets to record the journal entry to accrue interest expense, then its net income is too ______ and its liabilities are too ______. high; low 14. John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income tax $58; and State income tax $10. What is John's net pay? $486.10; Net pay = $600 - $37.20 - $8.70 - $58 - $10 = $486.10. 15. Employees' gross earnings differ from their net pay because of ______. payroll deductions 16. John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record the payroll deductions? Current liabilities increase $113.90.; The deductions of $113.90 (=$37.20 + 8.70 + 58 + 10) are current liabilities to the company and represent the amount the company owes and must pay on behalf of the employee. 17. True or false: Your employer is allowed to keep the amounts deducted from your gross pay. False 18. Accruing a liability always involves recording both a(n)______ and a liability. expense; Reason: Accrued Liabilities represent the amount of unpaid expenses, not assets. Accrued liabilities include unpaid wages, interest, etc. 19. Which accounts are credited when the journal entry to pay employees is recorded? (Select all that apply.)  Withheld Income Tax Payable  FICA Payable  Cash 20. Which of the following are not required payroll deductions from an employees' gross earnings? (Check all that apply.)  State unemployment tax (SUTA)  Charitable contributions  Federal unemployment tax (FUTA) 21. John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal income tax $58; and State income tax $10. Assuming that John gets paid in cash and payroll deductions will be paid the following month, how would ABC record his gross pay? Salaries and Wages Expense increases $600. 22. Which of these payroll taxes are paid only by the employer? (Check all that apply.)  SUTA  FUTA 23. Which accounts are credited when Payroll Tax Expense is debited? (Select all that apply.)  Unemployment Tax Payable  FICA Payable 24. Accruing a liability always involves ______ expenses and ______ liabilities. increasing; increasing; Reason: Accrued Liabilities represent the amount of unpaid expenses, not assets. Accrued liabilities include unpaid wages, interest, etc. and are recorded with a debit to an expense and a credit to Accrued Liabilities. 25. John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20; Medicare $8.70; Federal Income Tax $58; and State Income Tax $10. Assuming the payroll deductions are paid in the following month, ABC would record John's pay with a journal entry that includes a ______. (Check all that apply.)  credit to Cash of $486.10  credit to FICA (Social Security and Medicare) Payable of $45.90  debit to Salaries and Wages Expense of $600  credit to State and Federal Income Tax Payable of $68 26. What does the IRS call a corporate income tax return? Form 1120 27. The journal entry to record employer payroll taxes affects ______. liabilities and stockholders' equity 28. Texable, Inc. is required to match $45,900 for its portion of FICA and to pay $4,700 for federal and state unemployment taxes. The entry to record Texable's payroll taxes includes ______. (Select all that apply.)  credit to Unemployment Tax Payable of $4,700  debit to Payroll Tax Expense for $50,600  credit to FICA Payable for $45,900 29. The entry to record the issuance of a note for cash was recorded with a debit to Cash and a credit to Notes Receivable instead of Notes Payable. The effect of recording this entry causes ______. (Select all that apply.)  assets to be understated  liabilities to be understated 30. What are the key events with notes payable? (Check all that apply.)  Establishing the note  Recording principal paid  Recording interest paid  Accruing interest incurred but not paid 31. Which accounts are credited when the journal entry to pay employees is recorded? (Select all that apply.)  Withheld Income Tax Payable  FICA Payable  Cash 32. The following 12%, $1,000 notes have varying periods to maturity but all were issued on December 1. Which of the following are the correct calculations of interest for these notes on December 31 of this same year? (Select all that apply.)  A 3-month note's interest equals $1,000 x 12% x 1/12  A 2-year note's interest equals $1,000 x 12% x 1/12  A 4-month note's interest equals $1,000 x 12% x 1/12 33. US corporations pay federal taxes on ______. (Select all that apply.)  income  payroll 34. On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, ABC's adjusting entry at December 31 would include a ______. debit to Interest Expense of $1,000; Interest Expense=$50,000 x 0.06 x (4/12) =$1,000. The interest rate, 6%, is an annual rate, not a 9-month rate. In the current year, 4/12 of 6% will be expensed and the remaining 5/12 (for a total of 9/12) will be expensed in the following year. 35. As of December 31, $110 of interest had been accrued on a 12%, 1-year, $1,000 note payable. On January 31, the entry to record the payment of the note's principal and interest requires a ______. (Select all that apply.)  $110 debit to Interest Payable  $1,120 credit to Cash  $1,000 debit to Notes Payable  $10 debit to Interest Expense 36. The entry to record the initial borrowing of cash by issuing a promissory note includes a debit to ______ and a credit to ______. Cash; Notes Payable 37. Deli Llama operates in a state with a sales tax. What will be the effect if it records a cash sale to a customer? (Select all that apply.)  Liabilities will increase.  Assets will increase.  Stockholders' equity will increase. 38. _________________ ________________ is a liability that represents the amount the company owes to others as a result of issuing a promissory note. Notes Payable 39. What kind of account is Deferred Revenue? Liability account 40. On November 30, Burrows, Inc. issued 2 notes payable at 6% per year for $10,000 each. One is a 3-month, 6%, note and the other is a 6-month, 6% note. The amount of interest owed at December 31 will be ______. the same amount for both notes 41. On November 1, ABC Corp. borrowed $100,000 cash on a 1-year note payable with a 6% annual rate that requires ABC to pay all the interest as well as the principal on October 31 of the following year. Assuming the November 1 transaction was properly recorded, how would the December 31, year-end adjusting entry affect the accounting equation? Liabilities increase and stockholders' equity decreases. 42. If an entry is recorded that debits Interest Payable and Interest Expense and credits Cash, what must be the case? Interest incurred from the current and prior period is being paid. 43. The entry to record the cash sale of a $100 pair of jeans in a state that requires charging a 5% sales tax will include a ______. (Select all that apply.)  $100 credit to Sales Revenue  $105 debit to Cash  $5 credit to Sales Tax Payable 44. ABC Airlines collected $300 for a round-trip ticket from Chicago to Los Angeles in advance. The entry to record after the flight occurs includes a debit to ______ for $300. Deferred Revenue and a credit to Service Revenue 45. Crowdfunding is a ______. way for small business ventures to raise funds from large numbers of individuals over the Internet 46. On November 1, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 of the following year. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, ABC's year end, would include a ______. (Check all that apply.)  debit to Interest Expense of $1,000  credit to Interest Payable of $1,000 47. On November 1, ABC Corp. borrowed $100,000 cash on an 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31 in the following year. The last adjusting journal entry was made on December 31, ABC's year end. The entry to record the payment on October 31 would include a ______. (Check all that apply.)  debit to Interest Expense of $5,000  debit to Interest Payable of $1,000  credit to Cash of $106,000  debit to Note Payable of $100,000 48. A ______ agreement is where people/companies pledge money to a venture which which will collect the funds only if the venture reaches funding goal. presale 49. Sales taxes are recorded by the retailer as ______. Sales Tax Payable 50. ___________________ is a popular way for small business ventures to raise funds from large numbers of individuals of the Internet. (Enter one word per blank.) Crowdfunding 51. XYZ borrowed $50,000 on December 31, 2020. Half of the loan will be repaid in in the following year and the remainder will be paid in the year after that, which is longer than XYZ's operating cycle. On its balance sheet at December 31, 2020, XYZ will show ______. (Check all that apply.)  current portion of long-term debt of $25,000  long-term debt of $25,000 52. From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n) _______________. (Enter one word per blank.) investment or asset 53. The stated rate is the rate used to determine the ______. interest payment 54. A presale arrangement is a funding model where ______. money is pledged to a venture which will be collected only if the venture reaches a predetermined funding goal 55. When a company records a debit to Bonds Payable and a credit to Cash, it is the bonds' ______. maturity date 56. Current portion of Long-Term Debt reports the amount of ______ and is reported on the ______. long-term debt that is reclassified because it is due within the year; balance sheet 57. ___________________ are financial instruments, traded on established exchanges, that specify future payments a company promises to make in exchange for receiving a sum of money now. (Enter one word per blank.) Bonds 58. The issue price of a bond is ______. (Select all that apply.)  based on a present value calculation  based on what the market is willing to pay 59. The _______________ rate on a bond is the rate used to determine the interest payments. (Enter one word per blank.) stated or coupon 60. The issue price of 1,000, 5%, $1,000 bonds issued at 92.10 equals ______. $921,000; The bonds are selling at 92.10 which means the issuance price is 92.1% of the face value or $1,000,000 (=1,000 x $1,000 x 92.1%). 61. On the maturity date, the bondholders of $100,000 of bonds that were issued at a $90,000 will receive ______. $100,000 in cash plus the interest owed 62. Today's Fashions has a debt that has been properly reported as a long-term liability before this year. Part of this debt is due this year. If Today's Fashions continues to report the current position of the debt as a long-term liability, then ______. the current ratio will be overstated 63. If a bond's stated rate is 6% and the market rate is 4%, this bond will sell at ______. a premium 64. A bond's issue price is determined by the ______. investors 65. The stated rate ______. remains the same throughout the life of the bonds 66. Market rates of interest ______. fluctuate due to changes in economic events 67. A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______. 101.000; Bond prices are quoted as a percent of the face value. Thus, these bonds sold at 101% or 101.000 of their face value. 68. The _____________ ______________ is the payment made when a bond matures. face value 69. If a company receives $100,000 cash in exchange for issuing 100 bonds at $1,000, the bonds were issued at ______. face value 70. If a bond's stated rate is 4% and the market rate is 6%, this bond will sell at ______. a discount 71. True or false: The bond issue price is determined by the company issuing the bonds. False 72. A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______. premium 73. After a company has issued its bonds, the daily fluctuations of market rates of interest ______. are not considered transactions and thus not recorded in the company's accounting records 74. Which of the following statements is true about Lilly's $1,000 bond price? Lilly's $1,000 bonds sold for $1,072.60 each. ; The bond price is a percent, thus the bond price equals $1,072.60 (=$1,000 x 107.26%). 75. GenZ, Inc. debited Cash and credited Bonds Payable for $100,000. Which of the following is an appropriated description for this transaction? Issued 100, $1,000 bonds at face value 76. The entry to record the issuance of bonds at face value includes a debit to Cash and a credit to _____________ ____________. (Enter one word per blank.) Bonds Payable 77. Match when bonds sell at face value, a premium or a discount. Premium stated rate is greater than the market rate of interest Discount stated rate is less than the market rate of interest Face Value stated rate equals the market rate of interest 78. True or false: Companies issue bonds at a discount when the bond's stated interest rate is lower than the market interest rate. True 79. ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price? The issue price will be above the bond's face value. 80. XYZ Company is in the process of issuing bonds. Based on XYZ's credit rating, the bonds have a stated interest rate of 4%, which is 2% below the current market rate. What effect will the two interest rates have on the bond issue price? The issue price will be below the bond's face value. 81. If ABC Company issues 100 of its $1,000 bonds at a price of 110.00, i.e., $1,100 each, the journal entry to record the transaction includes ______. a credit to Premium on Bonds Payable of $10,000; Debit to Cash =100 x $1,000 x 110% = $110,000 82. If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a debit to ______. Cash and a credit to Bonds Payable of $100,000 83. The discount on a bonds payable becomes ______. additional interest expense over the life of the bonds 84. Bond premium is the amount by which a bond's issue price ______ its face value. exceeds 85. Bond carrying value equals Bonds Payable ______. (Check all that apply.)  minus Discount on Bonds Payable  plus Premium on Bonds Payable 86. The normal balance for Discount on Bonds Payable is a ______. debit 87. A company recorded the issuance of its bonds with a debit to Cash for $107,260 and a credit to Bonds Payable for $100,000, and a ______ on Bonds Payable for $7,260. credit to Premium 88. True or false: Interest Expense is a non-operating item and reported below Income from Operations on the income statement. True 89. When recording the adjusting entry to accrue the interest owed on a bond that was issued at face value, the debit to Interest Expense will be ______. equal to the credit to Interest Payable 90. Bonds are issued at a discount when the bond's stated interest rate is ______ the market interest rate. lower than 91. Bond _____________ is the process that causes the balance in Premium on Bonds Payable to decline each period. (Enter one word per blank.) amortization 92. The carrying value of bonds payable equals ______. bonds payable minus any discount on bonds payable 93. A bond discount is ______. a result of the interest payments being less than the cost of borrowing 94. On the maturity date, the journal entry to record the payment of $1,000,000 of bonds payable that were issued at a $70,000 discount includes a ______. (Select all that apply.)  debit to Bonds Payable of $1,000,000