Chapter 8 Review Questions- Trone PDF

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Accounting 101, Professor Trone...

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Chapter 8 Review Questions • A liability is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events. • Liabilities are classified as current and long term • Obtaining a note payable for cash results in an increase in assets and an increase in liabilities o The issuance of a note payable is recorded with a debit to Cash and a credit to Notes Payable, a liability. • An account payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. • Payroll withholdings o are amounts subtracted from employees' gross earnings to determine their net pay o decrease the amount of cash an employee receives • Medicare and Social Security are payroll taxes that are paid by both the employer and the employee • Notes payable is classified as a liability that creates interest expense on the income statement • Your employer is required to send payroll deductions to the appropriate government agency or company. • By law the employer is required to pay the following payroll taxes o Federal unemployment tax o Social Security contributions o Medicare contributions • Which of the following are not required to be deducted from an employee's paycheck? o State unemployment tax (SUTA) o Federal unemployment tax (FUTA) o Charitable contributions • Common current liabilities include: o Sales tax payable o Deferred revenues o The current portion of long-term debt • Deferred revenue is classified as a liability • Which of these payroll taxes are paid only by the employer? o FUTA o SUTA  The employer matches the amount that the employee has paid through withholding. • A transaction or event in which the outcome is uncertain is referred to as a contingency • Taxes subtracted from employees' pay and remitted to the government on their behalf are called withholding taxes.

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A contingent liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event. Which of the following payroll-related taxes must the employer pay by law? o Unemployment taxes o Federal Insurance Contributions Act amounts Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to contingent liabilities. Deferred revenues and sales tax payable typically are reported as current liabilities. Which of the following is an important criterion used to determine the reporting of a contingent liability? o The likelihood of future payment or loss The feature that distinguishes loss contingencies from other liabilities is the uncertain outcome. A loss that is judged to be probable and for which the amount is reasonably estimable should be recorded Which of the following is a guarantee that protects a customer from product defects for a specified period of time? o Warranty Which of the following may be classified as contingent liabilities? o Frequent flyer program awards o Product warranties o Future litigation losses For a manufacturer, the most commonly reported contingent liabilities relate to product warranties What are the two criteria used to determine whether a contingent liability is reported in the financial statements? o The likelihood of payment o The ability to estimate the amount of payment Identify a primary reason why financial statement users assess a company's liquidity. Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful. A contingent liability is recorded if which conditions are met? o The amount of the loss can be reasonably estimated. o It is probable that a future loss will occur. A contingency gain is an existing uncertainty that might result in a gain The term referring to a company having a sufficient amount of cash to pay its current debts is liquidity...