Current Liabilities

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1. A current liability is any liability that

a. will be repaid to a bank or financing company
b. will be paid within one year or the operating cycle whichever is longer
c. will be paid to a government agency
d. is owed by the company and will be repaid with cash

Answer
B. For a liability to be reported as current, it must be management’s intent to repay the liability within or the operating cycle if it is longer than one year. The type of liability does not impact whether it is current or long-term.
2. Accounts payable represents amounts owed to

a. suppliers and those who provide services repeatedly
b. customers
c. only suppliers
d. the government for employee related items

Answer
A. Accounts payable is amounts owed to suppliers and other vendors for goods and services purchased repeatedly during the year. These accounts typically carry 30-day terms. (d) is normally called payroll tax payable, employee benefits payable, or accrued compensation.
3. Expenses related to paid future absences are recorded when

a. the employee works and earns the benefit
b. the benefit is taken
c. the payment for the benefit is not probable
d. the exact cost of the benefit is known

Answer
A. The cost of future paid absences (vacation and sick leave) is recorded during the period that the employee works and earns the benefit and not when the benefit is taken by the employee. The criteria that must be met before an expense is recorded are:

1. Obligation from services already performed by the employee
2. The benefit can be taken at a later time
3. Payment of the benefit is probable
4. The amount can be reasonably estimated

4. FASB defines a contingency that is reasonably possible as one that

a. has greater than 50% chance of occurring
b. has a stronger than probable chance of occurring
c. has a greater than 30% chance of occurring
d. FASB does not provide a definition of reasonably possible

Answer
D. FASB does not provide definitions for the terms probably, reasonably possible, or remote. The attorneys and management use judgment to determine which category the contingency falls in.
5. Unearned revenues occurs when

a. cash is collected from a supplier
b. cash is collected from a customer before the service is provided
c. cash is collected from a customer after service is provided
d. the company provided the goods and will not earn the revenue

Answer
B. Unearned revenue occurs when the customer pays prior to receiving the good or service. The company owes the customer until the goods/services are provided.
6. Short-term notes payable

a. is repaid within one year or less and does not incur interest
b. is an amount the company owes to investors
c. is repaid within one year or less and does incur interest
d. is always repaid at the end of the note

Answer
C. Short-term is another word for current, which indicates payment will be made in one year or less. Notes payable incur interest expense as time passes. It is typically owed to banks or financing companies and principal is repaid as payments are made.
7. Interest incurred and not yet paid on short-term notes payable is recorded with

a. a decrease to cash always
b. a decrease to interest expense when paid
c. an increase to interest payable
d. an increase to notes payable

Answer
C. Interest incurred is always recorded with interest expense (increase) and interest payable (liability) until paid. The expense is recorded when it is incurred, not paid. Notes payable represents principal only.
8. Payroll liabilities are

a. accessed by the government and withheld from employees checks
b. accessed by the government and paid by the company
c. only related to benefits provided to employees by the company
d. both a. & b.

Answer
D. Payroll liabilities include items owed by the company and items paid by the employee and withheld out of their paycheck that the company must pay to the government for them. 
9. Net pay refers to

a. the amount the company pays to the government for employees
b. the amount paid to the employee by the company
c. the amount left over after federal income taxes are withheld
d. total wages earned by the employee for the period

Answer
B. Net pay is the net amount of the check that is given to the employee. It is the amount of wages earned less all taxes paid by the employee and with holdings for other items paid by the employee. (d) is the wage expense recorded.
10. Gross pay refers to

a. the amount the company pays to the government for employees
b. the amount payable to the employee
c. the amount left over after federal income taxes are withheld
d. total wages earned by the employee for the period

Answer
D. Gross pay is the total amount earned by the employee before any taxes or with holdings. This is the amount used to compute other tax amounts.
11. Withholding deductions for employees generally consist of

a. federal income tax
b. social security tax
c. medicare tax
d. all of the above

Answer
D. All of the listed taxes are required to be withheld from the employee’s check. The employee pays other withholding deductions that are taken directly from their paycheck.
12. Payroll taxes accessed to the employer consist of

a. federal income tax
b. social security tax
c. medical health insurance premiums paid by the company
d. all of the above

Answer
B. Employers pay the same amount of social security taxes as the employee does. Company federal income tax is not a payroll tax (a). Medical health insurance premiums are not accessed by the government. 
13. The amount withheld for FICA is based on

a. a % of total earnings, up to a limited amount
b. a % of total net pay
c. a % of annual estimated earnings
d. none of the above

Answer
A. FICA is another word for social security taxes. It is accessed as a % of total wages earned, up to a limited amount. 
14. A warranty liability occurs when a company

a. accepts a return of goods from the customer
b. sells goods with a promise to replace or repaid if the customer is not satisfied
c. the customer collects on the warranty
d. all of the above

Answer
B. The warranty liability occurs when the item under warranty is sold. The expense is recorded in the same period as the sale. The amount is estimated based on past history because the company does not know the value of claims that will occur.
15. A contingency is

a. a liability the company knows for certain will have to be paid.
b. a liability the company may have to pay; however, the amount and date of payment is uncertain
c. only recorded if there is a reasonable possibility the amount will be paid
d. never recorded because the monies have not been paid

Answer
B. A contingency occurs when the company may have to pay an amount and they do not know exactly how much will be paid. Whether or not a contingency is recorded (expense and liability) is based on how probable it is that an estimated amount will be paid.
16. What types of companies borrow using commercial paper?

a. investment companies
b. small companies
c. very large companies
d. all privately owned companies

Answer
C. Only very large companies borrow from investors using commercial paper. Commercial paper is very short-term notes that the company normally repays by borrowing using commercial paper again. Only very large stable companies have the credit worthiness to borrow using commercial paper. Commercial paper typically carries a much lower interest rate than borrowings.
17. A line of credit is normally agreed to

a. at the time funds are needed
b. at the time of repayment
c. before the funds are needed
d. none of the above

Answer
C. A line of credit is an agreement between a company and the bank stating that the bank will make funds available as necessary up to a certain amount for a certain period of time for a fee. This eliminates the need to process time consuming loan documentation every time the company needs operating funds.
18. An obligation that is callable within one year and due in 5 years is reported as a

a. current asset
b. current liability
c. non current liability
d. as current or non current at the discretion of management

Answer
B. An obligation that is callable within one year may have to be repaid within one year and is reported as a current liability. Callable means that the lender can force payment at the option of the lender.
19. A short-term notes payable may be reported as non current if

a. the company intends to refinance long-term
b. the company can demonstrate the ability to refinance long-term
c. both a. and b.
d. none of the above

Answer
C. A note that is due within one year (short-term) may be reported as non current if the company intends to refinance long-term and can demonstrate the ability to refinance long-term. 
20. A contingency that is reasonably possible should be reported

a. in the footnotes
b. as an expense and a liability
c. both a. and b.
d. in a future period when the contingency is settled

Answer
A. A contingency that is reasonably possible is disclosed in the footnotes only. No expense or liability is recorded unless the payment is probable.