ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 9
Reporting & Analyzing Current Liabilities
Dr. Fred Barbee
Part I: Multiple-Choice Questions
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1. Obligations due to be paid within one year or the company's operating cycle, whichever is longer, are:
a.  Current Assets
b.  Current Liability
c.  Earned Revenue
d.  Operating Cycle Liabilities
e.  Bills
2. Known liabilities:
a.  Include accounts payable, notes payable, and payroll.
b.  Are obligations set by agreements, contracts, or laws.
c.  Measurable.
d.  Definitely determinable.
e.  All of the above.
3. Liabilities:
a.  Must be certain.
b.  Must sometimes be estimated.
c.  Must be for a specific amount.
d.  Must always have a definite date for payment.
e.  Must involve an outflow of cash.
4. Contingent liabilities can be:
a.  Probable.
b.  Remote.
c.  Reasonably Possible.
d.  Estimable.
e.  All of the above.
5. A short-term note payable.
a.  Is a written promise to pay a specified amount on a specified future date within one year or the operating cycle, whichever is longer.
b.  Is a contingent liability.
c.  An estimated liability.
d.  Is not negotiable.
e.  Cannot be used to extend the payment period for an account payable.
6. A company signed a $30,000 (face value) noninterest-bearing 60-day, 12% note payable at the bank. The company should prepare a journal entry that includes a:
a.  Credit to Notes Payable for $30,600
b.  Credit to Notes Payable for $29.400.
c.  Debit to Cash for $30,600.
d.  Debit to Cash for $30,000.
e.  Debit to Cash for $29,400.
7. An employee earned $47,000 during the year working for an employer. The FICA tax for social security is 6.2% and the FICA tax for Medicare is 1.45%. The employee's share of FICA taxes is:
a.  $681.50
b.  $2,914.00
c.  $3,595.50
d.  $7,191.00
e.  Zero, since the employees's pay exceeds the FICA limit.
8. Employers:
a.  Pay FICA taxes in equal amount to the FICA taxes withheld from the employees.
b.  Withhold employees' FICA taxes.
c.  Pay FICA taxes equal to the employee rate.
d.  Pay unemployment taxes to both the state and federal governments.
e.  All of the above.
9. An estimated liability:
a.  Is an unknown liability of a certain amount.
b.  Is a known obligation of an uncertain amount.
c.  Is a liability that may occur if a future event occurs.
d.  Can be the result of a lawsuit.
e.  Is not recorded until the amount is known for certain.
10. A company sold $12,000 worth of trampolines with an extended warranty. It estimates that 2% of these sales will result in warranty work. The company should:
a.  Consider the warranty expense a remote liability since the rate is only 2%.
b.  Recognize warranty expense at the time the warranty work is performed.
c.  Recognize warranty expense and liability at the time of sale.
d.  Consider the warranty expense a contingent liability.
e.  Recognize warranty liability when the company purchases the trampolines.

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Part II: Short Problems

Short Problem #1

Classify each of the following items as either:

  1. Estimated Liability
  2. Contingent Liability
  3. Current Liability that is neither a nor b.
  1. ____ Lawsuit against the company.
  2. ____ Warranty on products sold this year.
  3. ____ Accounts payable.
  4. ____ Income taxes payable.
  5. ____ Vacation benefits.
  6. ____ Accrued wages payable.
  7. ____ Debt guarantees.
  8. ____ Property taxes payable
  9. ____ Payroll taxes payable.
  10. ____ Unearned revenues.

Short Problem #2

On December 1, 2002 Expo Company borrowed $45,000 cash from First National Bank. The terms of the note were 90 days at 9%.

  1. Prepare the journal entry for Expo to record the notes issuance.







  2. Prepare the journal entry for Expo to record the accrued interest due as of December 31, 2002.







  3. Prepare the journal entry for Expo to record the payment of the note on March 1, 2003.







Short Problem #3

A company sells its product subject to a warranty that covers the cost of parts for repairs during the six months after the date of sale. Warranty costs are estimated to be 6% of sales. During the month of June, the company performed warranty work and used $12,000 worth of parts to do the warranty work. Sales for June amounted to $450,000.

  1. Record the warranty expense for the month of June.







  2. Record the costs of the warranty work completed in June.







  3. If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31, what is the account balance at June 30?







Part III: Problems

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

Employees
Earnings Through
Prior Pay Period
Earnings this
Pay Period
D. Adams
$11,300
$3,900
J. Hess
6,100
2,500
R. Lui
9,500
3,100
T. Morales
4,800
1,400
L. Vang
10,000
3,000

The company's payroll taxes expense on each employee's earnings includes: FICA Social Security taxes of 6.2% on the first $76,200 plus 1.45% FICA Medicare on all wages; 0.8% federal unemployment taxes on the first $7,000; and 2.5% state unemployment taxes on the first $7,000. Compute the employer's total payroll taxes expense for the current pay period.

         

Last Modified November 14, 2002