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Exam 8: Current Liabilities

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Question 1

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Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $800,000 and $13,000, respectively. 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 5% of sales. 3. Record the reduction in warranty liability and the reduction in cash of $13,000 incurred during the year. 4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?

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1. Yes, it's probable that cos...

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Question 2

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A company is said to be liquid if it has sufficient cash to pay currently maturing debts.

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B) False

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Question 3

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Sales taxes collected by a company on behalf of the state and local government are recorded by:

FICA taxes are paid only by the employee.

Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs.

Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What entry, if any, should be recorded?

Explain why we record interest in the period in which we incur it rather than in the period we pay it.

Listed below are several terms and phrases associated with current liabilities. Pair each item in the first column (by number) with the item in the second column that is most appropriately associated with it.

On September 1, 2012, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2013. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2012. In recording the payment of the note plus accrued interest at maturity on March 1, 2013, Daylight Donuts would

When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable.

Which of the following is true regarding FICA taxes?

Universal Travel, Inc. borrowed $500,000 on November 1, 2012, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2013. In connection with this note, Universal Travel, Inc. should record interest expense in 2013 in the amount of:

Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions.

We record gain contingencies when the gain is probable and can be reasonably estimated.

A contingent liability should be accrued on a company's financial statements only if the likelihood of a loss occurring is:

We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount can be reasonably estimated.

Which of the following are not included in an employer's payroll tax expense?

If a company borrows from another company rather than from a bank, the note is referred to as commercial paper.

Mike Gundy is a college football coach making a salary of $2,400,000 a year ($200,000 per month) . Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the FICA maximum base amount is $106,800, through what month will Social Security be withheld?

Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the Federal unemployment tax maximum salary of $7,000 in January. $\begin{array} { l r } \text { Salaries } & \$ 800,000 \\\text { Federal and state income taxes withheld } & 160,000 \\\text { Federal unemployment tax rate } & 0.80 \% \\\text { State unemployment tax rate (after FUTA deduction) } & 3.00 \% \\\text { Social Security (FICA) tax rate } & 7.65 \%\end{array}$ Record salaries expense and payroll tax expense for the January pay period.