Current Liabilities
Self Test
Introduction to Accounting
Current Liabilities
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
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 less
c. will be paid to a government agency
d. is owed by the company and will be repaid with cash
Check Your Answer
B. For a liability to be reported as current, it must be management’s intent to repay the liability within one year or less. Any type of liability will be current if it is paid in one year or less.
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
Check Your 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. Sales tax payable is levied on
a. food
b. medical costs
c. retail sales
d. construction costs
Check Your Answer
C. Sales taxes are levied on retail sales when the sale is made. Other items listed are not charged sales tax.
4. Sales tax is
a. collected from the customer and then paid to the government
b. collected from the customer after paying to the government
c. paid annually to the government entity
d. charged on all items paid for by anyone
Check Your Answer
A. Sales tax is a levy from the local or state government. The customer pays the tax when paying for the goods and the company selling the goods remits the tax to the government. Sales tax is typically remitted to the government quarterly.
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
Check Your 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 owed to investors
c. is repaid within one year or less and does incur interest
d. is always repaid at the end of the note
Check Your 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 principle 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
Check Your 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 principle 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.
Check Your 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
Check Your 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 withholdings 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
Check Your Answer
D. Gross pay is the total amount earned by the employee before any taxes or withholdings. 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
Check Your Answer
D. All of the listed taxes are required to be withheld from the employee’s check. Other withholding deductions are items the employee pays for that is 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
Check Your 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
Check Your 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 if not satisfied
c. the customer collects on the warranty
d. all of the above
Check Your 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 amount 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 expects to have to pay; however, the amount 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
Check Your Answer
B. A contingency occurs when the company may have to pay an amount and they are not exactly how much will be paid. Whether or not a contingency is recorded in the accounts is based on how probable it is that an amount will be paid.