Current Liabilities
Medium Practice Test
Introduction to Accounting
Current Liabilities
Medium Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Short term liabilities are recorded in accordance with
a. the matching principle
b. the historical cost principle
c. either a. or b.
d. the materiality principle
Check Your Answer
C. Short term liabilities are recorded at the fair market value on the date the liability occurs; the goods or services are provided. This is the historical cost principle. Liabilities are also recorded when an expense has been incurred and not paid (a.). All liabilities are generally recorded, regardless of how small, to ensure that payment is made (d).
2. Which of the following is true?
a. current liabilities are paid within one year or less of incurring the obligation
b. liquidity refers to the company’s ability to meet long term obligations
c. current liabilities have an affect on liquidity
d. both a. & c.
Check Your Answer
D. Liquidity refers to whether or not the company has enough cash on hand to meet current obligations. Current liabilities that are paid within one year affect liquidity.
3. Which of the following is a liability of the employer up until the date payment is
made?
a. employee income taxes withheld
b. employer’s share of FICA
c. employee health insurance withheld
d. all of the above
Check Your Answer
D. All of the items listed are items the company is obligated to pay. Withholdings are a liability until paid.
4. A contingent liability that is probable and can not be reasonably estimated is
a. reported in the footnotes
b. reported as a liability
c. reported as an expense
d. reported as a liability and reported in the footnotes
Check Your Answer
A. A liability that can not be estimated can not be recorded and reported in the financial statements (b. & c.) because there is no amount. Because it is probable, it is reported in the footnotes and the company states that no estimate can be made.
5. Which of the following statements is true?
a. Warranty expense is an estimate that is recorded when the customer makes the claim.
b. Warranty expense is not an estimate because it is recorded when the customer makes a claim
c. Current liabilities is decreased when a customer makes a claim.
d. Net income is decreased when a customer makes a claim.
Check Your Answer
C. Warranty expense and warranty liability is recorded when the sale occurs based on a historical estimate. It is always an estimate because it has not yet occurred when it is recorded. When the claim is made, the liability is reduced. No expense is recorded because it was already expensed when the sale occurred (and that would be double expense).
6. Which of the following is most likely the highest tax paid by the company?
a. FUTA
b. SUTA
c. FICA
d. Medicare
Check Your Answer
C. FICA is levied at the highest % of earned wages and salaries up to the highest limit. Unemployment tax is typically only levied on wages less than $10,000. Medicare is 1.45% of total wages and FICA is 6.25% of wages up to about $130,000 which is all wages for most workers.
7. When making the entry to record the employee’s paycheck
a. salary expense is equal to the net pay for the week
b. salaries payable is equal to the amount of withholdings
c. withholdings paid by the employee are recorded as liabilities
d. withholdings of employees are recorded as a decrease to cash
Check Your Answer
C. Recording the employees paycheck requires an expense be increased for total wages/salaries earned, liabilities be recorded for all withholdings, and the liability salaries payable is recorded for the difference in the expense and withholdings. No entry is made to cash until the liabilities are paid.
8. Payroll taxes are
a. paid by the company and paid by the employee
b. paid by the company only
c. paid by the employee only
d. paid to the government every two weeks if employees are paid every two weeks
Check Your Answer
A. Payroll taxes are levied on the employer and the employee. Social security and medicare are considered payroll taxes and are paid by both. Unemployment taxes are paid only by the company. These taxes are typically remitted monthly or quarterly, depending on the size of the company.
9. The rate that is charged for sales tax
a. depends on the price of goods sold
b. is set by the individual retail store owner
c. is set by the individual city or state
d. varies with inflation and deflation
Check Your Answer
C. The sales tax rate for each city or state is set by that entity. The rate is consistent regardless of the price of goods sold. It normally only changes with a vote by the citizens.
10. The amount of a contingent liability recorded as an increase is
a. the amount that is remotely possible it will be paid
b. the amount that is actually paid
c. the lowest amount that is probable
d. the highest amount that is probable
Check Your Answer
C. FASB allows for the lowest estimate to be recorded as an expense and liability due to the uncertainty associated with a contingency. Only contingencies that are probable are recorded as an expense and a liability.
11. The company’s accountant printed a report from the payroll system which gave the following information:
| Total wages earned | 561,987 |
| Total salaries earned | 856,452 |
| Total federal income tax withholdings | 182,854 |
| Total social security tax withholdings | 81,852 |
| Medical insurance withholdings | 52,096 |
| Employee health club fees withheld | 3,950 |
| Employee parking fees withheld | 2,510 |
Federal unemployment tax was equal to 1.6% of total wages and salaries
State unemployment tax was equal to 0.4% of total wages and salaries
Medicare is taxed at 1.65% of total employee earnings
Record the transactions related to payroll for the company.
Check Your Answer
| Salaries expense | 856,452 |
| Wages expense | 561,987 |
| Federal income tax withholding payable | 182,854 |
| Social security tax withholding payable | 81,852 |
| Medicare tax withholding payable | 23,404** |
| Medical insurance withholding payable | 52,096 |
| Health club fees withholding payable | 3,950 |
| Parking fees withholding | 2,510 |
| Salaries payable | 1,071,773*** |
** computed as salaries plus wages expense x given %
*** salaries and wages expense less all withholdings (amount that balances the journal entry)
| Payroll Tax Expense | 133,625 |
| Social security tax withholding payable | 81,852 |
| Medicare tax withholding payable | 23,404 |
| FUTA Payable | 22,695** |
| SUTA Payable | 5,674** |
The payroll tax expense is the total of all payables in this entry
Employers must pay the same amount as employees for social security and medicare.
Do not do both entries together in the same entry. There are two plugs which will not work if it is done as one entry.
12. The Disney Co. is being sued for an infringement of a trademark illegibly owned by another company. Disney’s attorney believes that an amount in the range of $1,000,000 to $2,000,000 could be paid; however, they are not certain any amount will actually be paid.
Determine what the company must record and report to shareholders.
Check Your Answer
The company’s legal counsel’s opinion is what determines what must be recorded. In this case, they believe it is reasonably possible that an amount will be paid. When a contingency is reasonably possible, the situation is disclosed in the footnotes. No expense or liability is recorded. The company must disclose the range of what may be paid, $1,000,000 to $2,000,000.
When a contingency is remote, the situation and estimated amounts is not mentioned in the footnotes or the financial statements.
When a contingency is probable, the lowest estimated amount is recorded as an expense and a liability in the financial statements and the situation is disclosed.
13. The company reported the following related to a 2 year warranty given with products sold:
| Sales | Warranty Expense | Claims | |
| Year 1 | 100,000 | 6,000 | 3,900 |
| Year 2 | 220,000 | 13,200 | 8,580 |
The company had $280,000 sales and $11,000 in claims during year 3.
A. Make the entries to record the sales, estimated warranty expense, and claims for year 3 only.
B. Determine the amount of warranty liability that will be reported on the balance sheet at the end of year 3.
Check Your Answer
First, you must determine what past history has been used to determine the estimated warranty liability. Warranty expense divided by sales = the % of sales used to estimate warranty expense
| Warranty Expense | Sales | Estimate used | |
| Year 1 | 6,000 | 100,000 | 6% of sales |
| Year 2 | 13,200 | 220,000 | 6% of sales |
The company will use a consistent estimated for year 3:
Year 3 sales 280,000
x % sales x .06
Estimated warranty expense 16,800
A. Record the sales, estimated warranty expense, and claims for year 3 only.
Warranty expense 16,800
Warranty liability 16,800
Cash 280,000
Sales 280,000
Warranty Liability 11,000
Cash or Inventory 11,000
B. The balance in the warranty liability account is equal to:
| Total warranty expense recorded in all 3 years | 36,000 |
| – Total claims paid in all 3 years | (23,480) |
| = Warranty liability at the end of the 3rd year | 12,520 |