FinancialAccounting-OP_YioY6nY-161

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6. 12.2 A client pays cash in advance for a magazine subscription to Living Daily. Living Daily has yet to
provide the magazine to the client. What accounts would Living Daily use to recognize this advance payment?
A. unearned subscription revenue, cash
B. cash, subscription revenue
C. subscription revenue, unearned subscription revenue
D. unearned subscription revenue, subscription revenue, cash
7. 12.2 Lime Co. incurs a $4,000 note with equal principal installment payments due for the next eight
years. What is the amount of the current portion of the noncurrent note payable due in the second year?
A. $800
B. $1,000
C. $500
D. nothing, since this is a noncurrent note payable
8. 12.3 Which of the following best describes a contingent liability that is likely to occur but cannot be
reasonably estimated?
A. reasonably possible
B. probable and estimable
C. probable and inestimable
D. remote
9. 12.3 Blake Department Store sells television sets with one-year warranties that cover repair and
replacement of television parts. In the month of June, Blake sells forty television sets with a per unit cost of
$500. If Blake estimates warranty fulfillment at 10% of sales, what would be the warranty liability reported in
June?
A. $1,000
B. $2,000
C. $500
D. $20,000
10. 12.3 What accounts are used to record a contingent warranty liability that is probable and estimable but
has yet to be fulfilled?
A. warranty liability and cash
B. warranty expense and cash
C. warranty liability and warranty expense, cash
D. warranty expense and warranty liability
11. 12.3 Which of the following best describes a contingent liability that is unlikely to occur?
A. remote
B. probable and estimable
C. reasonably possible
D. probable and inestimable
12. 12.4 Which of the following accounts are used when a short-term note payable with 5% interest is
honored (paid)?
A. short-term notes payable, cash
B. short-term notes payable, cash, interest expense
C. interest expense, cash
D. short-term notes payable, interest expense, interest payable
Chapter 12 Current Liabilities 791
13. 12.4 Which of the following is not a characteristic of a short-term note payable?
A. Payment is due in less than a year.
B. It bears interest.
C. It can result from an accounts payable conversion.
D. It is reported on the balance sheet under noncurrent liabilities.
14. 12.4 Sunlight Growers borrows $250,000 from a bank at a 4% annual interest rate. The loan is due in
three months. At the end of the three months, the company pays the amount due in full. How much did the
company remit to the bank?
A. $250,000
B. $10,000
C. $252,500
D. $2,500
15. 12.4 Marathon Peanuts converts a $130,000 account payable into a short-term note payable, with an
annual interest rate of 6%, and payable in four months. How much interest will Marathon Peanuts owe at the
end of four months?
A. $2,600
B. $7,800
C. $137,800
D. $132,600
16. 12.5 An employee earns $8,000 in the first pay period. The FICA Social Security Tax rate is 6.2%, and the
FICA Medicare tax rate is 1.45%. What is the employee’s FICA taxes responsibility?
A. $535.50
B. $612
C. None, only the employer pays FICA taxes
D. $597.50
E. $550
17. 12.5 Which of the following is considered an employer payroll tax?
A. FICA Medicare
B. FUTA
C. SUTA
D. A and B only
E. B and C only
F. A, B, and C
18. 12.5 Employees at Rayon Enterprises earn one day a month of vacation compensation (twelve days total
each year). Vacation compensation is paid at an hourly rate of $45, based on an eight-hour work day. Rayon’s
first pay period is January. It is now April 30, how much vacation liability has accumulated if the company has
four employees and no vacation compensation has been paid?
A. $1,440
B. $4,320
C. $5,760
D. $7,200
792 Chapter 12 Current Liabilities
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
19. 12.5 An employee and employer cost-share health insurance. If the employee covers three-fourths of
the cost and the employer covers the rest, what would be the employee’s responsibility if the total premium
was $825?
A. $618.75
B. $206.25
C. $412.50
D. $275
Questions
1. 12.1 Why is Accounts Payable classified as a current liability?
2. 12.1 On which financial statement are current liabilities reported?
3. 12.1 What is the difference between a noncurrent liability and a current liability?
4. 12.1 How is the sales tax rate usually determined? Does the company get to keep the sales tax as earned
revenue?
5. 12.2 If Bergen Air Systems takes out a $100,000 loan, with eight equal principal payments due over the
next eight years, how much will be accounted for as a current portion of a noncurrent note payable each
year?
6. 12.2 What amount is payable to a state tax board if the original sales price is $3,000, and the tax rate is
3.5%?
7. 12.2 What specific accounts are recognized when a business purchases equipment on credit?
8. 12.3 What is a contingent liability?
9. 12.3 What are the two FASB required conditions for a contingent liability to be recognized?
10. 12.3 If a bankruptcy is deemed likely to occur and is reasonably estimated, what would be the
recognition and disclosure requirements for the company?
11. 12.3 Name the four contingent liability treatments.
12. 12.3 A company’s sales for January are $250,000. If the company projects warranty obligations to be 5%
of sales, what is the warranty liability amount for January?
13. 12.4 What is a key difference between a short-term note payable and a current portion of a noncurrent
note payable?
14. 12.4 What business circumstance could bring about a short-term note payable created from a
purchase?
15. 12.4 What business circumstance could produce a short-term notes payable created from a loan?
16. 12.4 Jain Enterprises honors a short-term note payable. Principal on the note is $425,000, with an annual
interest rate of 3.5%, due in 6 months. What journal entry is created when Jain honors the note?
17. 12.5 What are examples of involuntary deductions employers are required to collect for employee and
employer payroll liabilities?
Chapter 12 Current Liabilities 793
18. 12.5 What are the tax rates for FICA Social Security and FICA Medicare? What are the maximum taxable
earnings amounts for each of these taxes?
19. 12.5 What are FUTA and SUTA taxes? Is there any possible reduction in the FUTA tax rate? If so, what is
the reduction, and how is this determined?
20. 12.5 Use Figure 12.15 as a reference to answer the following questions.
A. If an employee makes $1,400 per month and files as single with no withholding allowances, what would
be his monthly income tax withholding?
B. What would it be if an employee makes $2,500 per month and files as single with two withholding
allowances?
Exercise Set A
EA1. 12.1 Campus Flights takes out a bank loan in the amount of $200,500 on March 1. The terms of the
loan include a repayment of principal in ten equal installments, paid annually from March 1. The annual
interest rate on the loan is 8%, recognized on December 31. (Round answers to the nearest whole dollar if
needed.)
A. Compute the interest recognized as of December 31 in year 1 rounded to the whole dollar.
B. Compute the principal due in year 1.
EA2. 12.1 Consider the following accounts and determine if the account is a current liability, a noncurrent
liability, or neither.
A. cash
B. federal income tax payable this year
C. long-term note payable
D. current portion of a long-term note payable
E. note payable due in four years
F. interest expense
G. state income tax
EA3. 12.1 Lamplight Plus sells lamps to consumers. The company contracts with a supplier who provides
them with lamp fixtures. There is an agreement that Lamplight Plus is not required to provide cash payment
immediately and instead will provide payment within thirty days of the invoice date.
Additional information:
• Lamplight purchases thirty light fixtures for $20 each on August 1, invoice date August 1, with no
discount terms
• Lamplight returnsten light fixtures (receiving a credit amount for the total purchase price per fixture of
$20 each) on August 3.
• Lamplight purchases an additional fifteen light fixtures for $15 each on August 19, invoice date August
19, with no discount terms.
• Lamplight pays $100 toward its account on August 22.
What amount does Lamplight Plus still owe to the supplier on August 30? What account is used to recognize
this outstanding amount?
794 Chapter 12 Current Liabilities
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
EA4. 12.2 Review the following transactions and prepare any necessary journal entries for Olinda Pet
Supplies.
A. On March 2, Olinda Pet Supplies receives advance cash payment from a customer for forty dog food
dishes (from their Dish inventory), costing $25 each. Olinda had yet to supply the dog food bowls as of
March 2.
B. On April 4, Olinda provides all of the dog food bowls to the customer.
EA5. 12.2 Review the following transactions and prepare any necessary journal entries for Tolbert
Enterprises.
A. On April 7, Tolbert Enterprises contracts with a supplier to purchase 300 water bottles for their
merchandise inventory, on credit, for $10 each. Credit terms are 2/10, n/60 from the invoice date of
April 7.
B. On April 15, Tolbert pays the amount due in cash to the supplier.
EA6. 12.2 Elegant Electronics sells a cellular phone on September 2 for $450. On September 6, Elegant sells
another cellular phone for $500. Sales tax is computed at 3.5% of the total sale. Prepare journal entries for
each sale, including sales tax, and the remittance of all sales tax to the tax board on October 23.
EA7. 12.2 Homeland Plus specializes in home goods and accessories. In order for the company to expand
its business, the company takes out a long-term loan in the amount of $650,000. Assume that any loans are
created on January 1. The terms of the loan include a periodic payment plan, where interest payments are
accumulated each year but are only computed against the outstanding principal balance during that current
period. The annual interest rate is 8.5%. Each year on December 31, the company pays down the principal
balance by $80,000. This payment is considered part of the outstanding principal balance when computing the
interest accumulation that also occurs on December 31 of that year.
A. Determine the outstanding principal balance on December 31 of the first year that is computed for
interest.
B. Compute the interest accrued on December 31 of the first year.
C. Make a journal entry to record interest accumulated during the first year, but not paid as of December
31 of that first year.
EA8. 12.2 Bhakti Games is a chain of board game stores. Record entries for the following transactions
related to Bhakti’s purchase of inventory.
A. On October 5, Bhakti purchases and receives inventory from XYZ Entertainment for $5,000 with credit
terms of 2/10 net 30.
B. On October 7, Bhakti returns $1,000 worth of the inventory purchased from XYZ.
C. Bhakti makes payment in full on its purchase from XYZ on October 14.
Chapter 12 Current Liabilities 795
	Chapter 12. Current Liabilities
	Questions
	Exercise Set A