Current Liabilities

Easy Test

Easy Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following is almost always a current liability?

a. employee withholdings
b. notes payable
c. pension obligations
d. all of the above

Check Your Answer
A.  Employee withholdings must be paid to the government at least quarterly.  This is less than one year and is current. Notes payable can be current or long term depending on the repayment date, and both are very common.  Pension obligations always consist of a long term portion because they are paid in the future after employees retire.
2. Which of the following statements is not true?

a. social security payments are shared by the employee and the employer
b. the pay period always ends on the day the company’s fiscal year ends
c. warranty expenses are recorded when the sale is made
d. a contingent liability is recorded when it is probable it will be paid

Check Your Answer
B.  The pay period typically ends on Friday, on the 1st and 15th of the month, or at the end of the month.   Pay periods are not based on the fiscal year.  Employees are paid more than once a year. All other statements are true.
3. Accrued expenses result when

a. an expense is paid before the service is provided
b. an expense is paid after the service is provided
c. the expense is paid during the period
d. a customer pays before being provided goods

Check Your Answer
B.  Accrued means incurred and not yet paid.   An expense that has been paid for can not be a liability because it is not owed.
4. The federal government requires

a. state unemployment taxes to be paid
b. the employee to pay social security to the company
c. the company to withhold social security from all wages earned
d. the company to withhold social security from all wages earned up to a limited amount

Check Your Answer
D.  There is a federal law that requires social security taxes to be withheld from an employee’s paycheck.  The employee must pay a given % of wages earned up to a stated limited amount. State unemployment taxes are paid directly to the state (a.)  Social security is paid to the federal government (b).
5. A contingent liability that is reasonably possible 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.  Reasonably possible contingencies are reported in the footnotes only.  An expense and a liability is reported/recorded only when the payment is probable.
6. Which of the following accounts are reported in the liability section of the balance sheet?

a. accounts receivable, unearned revenue, goodwill
b. accrued expenses, unearned revenue, notes payable
c. accrued expenses, common stock, prepaid expenses
d. accounts payable, unearned revenues, prepaid expenses

Check Your Answer
B. Accounts receivable, goodwill and prepaid expenses are assets. Common stock is owner’s equity.
7. Which of the following is never a current liability?

a. the part of long term debt that will be paid in one year or less
b. unearned revenues
c. pension liabilities
d. all of the above can be current liabilities

Check Your Answer
D.  The portion of the liability that will be paid within one year or less will be reported as a current liability.  It is common for these obligations to be part current and part long term.
8. When a warranty claim is made by a customer

a. the warranty expense is recorded
b. the warranty liability is increased
c. the warranty liability is decreased
d. warranty expense will always be higher than warranty liability

Check Your Answer
C.  The warranty claim is recorded as a decrease to the liability (debit).  The expense was recorded in the same period as the sale (prior period) for matching purposes.  The expense will never be higher than the liability because when the expense is recorded the liability account is increased also (d.)
9. “SUTA” and “FUTA” are

a. paid by the employee on a set % of wages earned
b. paid by the employer on a set % of wages earned, up to a limited amount
c. payments made for social security benefits
d. refunded to the employee after employment for 5 years

Check Your Answer
B.  SUTA and FUTA are state and federal unemployment taxes.  They are accessed based on a % of wages earned, up to a limited amount.  It is never refunded.
10. Voluntary payroll deductions are paid by

a. the company
b. the employee
c. the state the employee lives in
d. the federal government

Check Your Answer
B.  Voluntary payroll deductions are amounts the employee requests to be taken out of their paycheck and paid for them.  These are items like union dues, employee portion of health insurance, company day care charges, and retirement plan contributions paid by the employee.
11. The following is a list of accounts for the company:

Unearned Revenues                             $ 5,000
Notes Payable                                    $100,000
Bonds Payable                                  $500,000
Salaries Payable                                 $ 22,000
Accrued Expenses                               $ 11,000
Prepaid Expenses                                 $ 6,000
Income Tax Payable                           $ 31,000
Long Term Debt                               $200,000
Interest Payable                                  $ 19,000
Accounts Payable                               $ 43,000

Unearned revenues are related to goods that will be shipped next month. The note
payable and long-term debt is repaid in 5 equal payments, plus accrued interest on
January 1 of each year. The maturity date of the bonds is 10 years from now.

Prepare the liability section of the company’s classified balance sheet.

Check Your Answer
Accounts Payable                                  43,000
Unearned Revenues                                5,000
Salaries Payable                                     22,000
Interest Payable                                     19,000
Accrued Expenses                                  11,000
Income Tax Payable                              31,000
Current maturities of LTD                  40,000
Current maturities of N/P                   20,000
       Total Current Liabilities              191,000

Notes Payable                                        80,000
Long Term Debt                                  160,000
Bonds Payable                                     500,000

       Total Liabilities                             931,000

12.  A company had cash sales for this period of $250,000.  The city sales tax rate is 6.15%. Record the sales and the related sales tax liability.
Check Your Answer
Total sales                  250,000
x tax rate                          .0615
Sales Tax Payable          15,375

Cash                             265,375
       Sales Revenue                   250,000
       Sales Tax Payable                 15,375

Revenue is reported on the income statement
Sales tax payable is a liability reported on the balance sheet

13.  A company’s employees earned $189,500.  No employee earned over $50,000. Federal income tax withholdings totaled $31,200.  Health insurance premiums withheld and paid by employees totaled $5,985. Employee withholding for the company pension plan totaled $4,200.  The government tax rates are as follows: FICA SS 6.2% of the first $90,000 per employee, FICA Medicare 1.45%, FUTA 0.9% of total base wages of $41,250 and SUTA 4.8% total base wages of $41,250.

A.  Record the journal entry to record salary expense

B.  Record the journal entry to record the payroll tax expense

Check Your Answer
Salaries and wage expense 189,500        
       Federal income tax withholding payable 31,200
     Social security tax withholding payable 11,749**
     Medicare tax withholding payable 2,748**
     Health insurance premium payable 5,985
     Pension plan withholding payable 4,200
     Salaries payable 133,618

**  computed as salaries and wages expense x given %

***  salaries and wages expense less all withholdings, amount that balances the journal entry

Payroll Tax Expense 16,848           
       Social security tax withholding payable 11,749**
       Medicare tax withholding payable 2,748**
       FUTA payable 371**
       SUTA payable 1,980**

The payroll tax expense is the total of all payables in this entry

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.

14.  A camera manufacturer offers a free 1 year warranty on all cameras sold.  The company had sales of $500,000 last year and $800,000 this year. Claims on the warranty have historically occurred at a rate of 2% of sales.  $8,000 in warranty claims occurred last year and $11,000 occurred this year. A cash refund was given for claims. Last year was the first year a warranty was provided.

A.  Record the warranty liability for last year and this year.

B.  Record the claims against the warranty for last year and this year.

C.  Determine the balance in the liability account at the end of this year.

Check Your Answer

Warranty Expense        10,000
       Warranty Liability               10,000          

Warranty Expense        16,000
       Warranty Liability               16,000

The amount recorded is sales for the year x .02


Warranty Liability               8,000
       Cash                                           8,000

Warranty Liability               11,000
       Cash                                           11,000


Beginning warranty liability 0
+ Increase to liability when expense is estimated – PY 10,000
+ Increase to liability when expense is estimated – CY 16,000
– reduce the liability when claims are paid – PY (8,000)
– reduce the liability when claims are paid – CY (11,000)
Ending balance of the liability 7,000
15.  A company is involved in a product liability lawsuit.  The plaintiff is asking for $2,000,000 in damages. The company’s legal counsel believes the company is not in the wrong and the lawsuit will be dropped.   Similar lawsuits have been settled for $100,000. The suit is not expected to go to court for 5 more years. 

What should be reported in the company’s current year financial statements?

Check Your Answer
The company’s legal counsel’s opinion is what determines what must be recorded. In this case, they believe nothing will be paid, which puts this in the remote category. When a contingency is remote nothing is recorded or disclosed.

When a contingency is reasonably possible the situation and estimated amounts are disclosed in the footnotes.

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.