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Exam 9: Accounting for Current Liabilities and Payroll

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Question 21

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How would the adjusting entry to record interest expense on December 31, 2013 affect the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

E) None of the above
F) B) and C)

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Question 22

Multiple Choice

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On October 1, 2013, Beacon Corporation borrowed $10,000 from First Bank by signing a one-year, 6% note. On December 31, 2013 Beacon failed to make the adjusting entry to accrue the related interest. This error will cause:

A) Net income for 2013 to be overstated and liabilities for 2013 to be overstated.
B) Net income for 2013 to be understated and net income for 2014 to be overstated.
C) Net income for 2014 to be understated and liabilities for 2013 to be understated.
D) Net income for 2013 to be understated and liabilities for 2013 to be overstateD.The entry that should have been made would have increased interest expense (decreasing net income) and increased interest payable (increasing liabilities) in 2013. Neglecting to make that entry would understate 2013 liabilities and overstate 2013 net income. It would also cause Beacon to recognize all 12 months of interest expense in 2014 instead of just 9 months, which would cause 2014 net income to be understated.

E) B) and C)
F) A) and D)

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Question 23

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Montana Mining is the defendant in a $2 million lawsuit involving damage to the environment. Montana's attorneys have advised the company that the outcome of the lawsuit is probable, and the likely settlement will be $750 thousand.

Warren Company borrowed $20,000 on September 1, 2013 from the National Bank. Warren agreed to pay interest annually at the rate of 6% per year. The note issued by Warren carried an 18-month term. Based on this information the amount of interest expense appearing on Warren's 2013 income statement would be

A classified balance sheet is one that distinguishes between operating and non-operating assets.

A company with a high current ratio should be concerned that it is not maximizing its earnings potential.

Montana Mining is the defendant in a $2 million lawsuit involving damage to the environment. Montana's attorneys have advised the company that the outcome of the lawsuit is reasonably possible, but not probable.

The amortization of the discount on a note payable has what effect on a company's financial statements?

Why does the recording of a taxable sale increase a company's liabilities?

Peyton Company made its remittance to the state sales tax authority.

Indicate whether each of the following statements is true or false. _____ a) The amount of federal tax withheld from an employee's salary depends on the employee's gross pay and the number of withholding allowances the employee claims. _____ b) Withheld taxes are recorded in the payroll tax expense account. _____ c) An employer will submit $7,500 in FICA taxes for an employee who earns $50,000 annually. _____ d) A voluntary deduction, such as a charitable contribution, creates a liability when it is withheld from employee pay. _____ e) If an employer records gross pay of $1,200 and withholds $350 of that amount, they will recognize $850 in salary expense.

Indicate whether each of the following is true or false. Peyton Company borrowed money from its bank in July 2013. The accrual of interest on the loan at the end of 2013 _____ a) does not affect cash flows. _____ b) involves recognition of interest expense. _____ c) decreases income for 2013. _____ d) involves recognition of a liability. _____ e) records a cash payment for interest.

The amount of net income on the 2014 income statement would be:

The current ratio is calculated, total current assets divided by total assets.

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000. The company's current ratio is:

On April 1, 2014, Jordan Company repaid a $10,000, one-year, 6% note and interest to Community Bank. Interest on the note had been accrued on December 31, 2013.

The Chang Company provides a one-year warranty on all merchandise it sells. In 2013, the company recorded sales of $300,000. It estimated that the warranty costs on these sales would amount to $3,000. In July 2014, Chang paid $150 to satisfy a warranty claim. Indicate whether each of the following statements is true or false. _____ a) Chang's adjusting entry recording warranties at the end of 2013 reduced total assets and total equity. _____ b) Chang's adjusting entry recording the warranties at the end of 2013 increased Chang's total liabilities. _____ c) The July 2014 entry reduced total assets and net income for 2014. _____ d) The July 2014 entry reduced Chang's total liabilities. _____ e) The adjusting entry recorded at the end of 2013 decreased Chang's revenue for the year.

On December 31, 2013, Kissimmee Co. paid $50,000 to the Sunshine Bank to pay off the face value of a discount note that Kissimmee had issued a year before. Show the effects of the payment and recognition of 2013 interest on the note.

The following transactions apply to Baker Corporation. 1) Issued common stock for $20,000 cash. 2) Provided services to customers for $16,000 on account. 3) Borrowed $15,000 on September 1 at 8% interest with a one year term. 4) Purchased land for $16,000 cash. 5) Paid $11,000 for operating expenses. 6) Collected $14,000 cash from customers. 7) Recorded interest on the note payable at year end. 8) Paid $2,000 dividends to stockholders. Required: a) Identify the effect on the statement of cash flows for each of the above transactions. b) Classify the above accounting events into one of four types of transactions (asset source, asset use, asset exchange, claims exchange).

When a warranty repair job is completed, what is the effect on the accounting equation?