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Exam 9: Accounting for Current Liabilities and Payroll

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Question 51

Multiple Choice

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The following information is taken from the balance sheet of Menendez Company on January 1, Year 1: On January 2, Year 1, the company earned revenue on account of $8,000. How will this transaction affect the current ratio?

A) It will decrease the current ratio to 1:1.
B) It will increase the current ratio to 3:1.
C) It will increase the current ratio to 5:1.
D) It will have no effect on the current ratio.

E) B) and C)
F) All of the above

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Question 52

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The following information is taken from the balance sheet of Atlanta Company: What is Atlanta Company's current ratio?

A) 2.5 to 1
B) 1.6 to 1
C) 1.76 to 1
D) 0.66 to 1

E) A) and B)
F) None of the above

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Question 53

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How does the issuance of a note payable, accrual of interest, and repayment of the note's principal and interest each affect a company's statement of cash flows?

A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000. What is the company's current ratio?

When is warranty expense usually recognized?

Indicate whether each of the following statements is true or false. a)An eight-month, 6% note for $10,000 will require the issuer to pay $600 in interest.b)Interest expense is considered an operating expense on the income statement.c)Payment of interest is considered an operating activity on the statement of cash flows.d)Payment of interest on a one-year note due on March 1 will include a reduction in liabilities.e)The adjustment to recognize interest expense is an asset use transaction.

Extra Supplies had sales of $240,000 in Year 1. Extra warrants its products and estimates warranty expense to be 3% of sales. Which of the following shows how the year-end adjusting entry would affect the company's assets, liabilities, and stockholders' equity?

On a classified balance sheet, the financial statement user will be able to distinguish between:

Zinke Company borrowed $100,000 from Plains Bank on July 31, Year 1. The note carried a 6% interest rate with a one-year term to maturity. Required: 1)Show the effects of borrowing the money and then the adjustment required at the end of Year 1 on the accounting equation.2)What is the amount of interest expense for Year 1?3)How does this transaction affect the statement of cash flows for the Zinke Company for Year 1?

Houston Company borrowed $20,000 from Dallas Company on March 1, Year 1. Houston issued a note payable that had a one-year term and the annual interest rate is 8%. How will the necessary adjustment, dated December 31, Year 1, affect the Year 1 financial statements?

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements?

Riley Company borrowed $36,000 on April 1, Year 1 from Titan Bank. The note issued by Riley carried a one-year term and a 7% annual interest rate. Riley earned cash revenues of $1,700 during Year 1 and $1,400 during Year 2. Assume no other transactions. Based on this information alone, what amount of cash flow from operating activities would appear on the Year 2 statement of cash flows?

Which of the following would not likely appear in the current liabilities section of a classified balance sheet?

Indicate whether each of the following statements is true or false. a)The extension of a warranty on goods sold normally represents a legal obligation to the seller of the goods.b)Recognizing the warranty obligation increases the Warranties Payable account and decreases a revenue account.c)Recording the payment of cash to settle a warranty claim increases expenses (Warranties Expense)and decreases liabilities (Warranties Payable).d)Net income is not affected by the payment of cash to settle a warranty claim.e)Total assets are not affected by the adjustment to record the warranty obligation.

Employers must withhold unemployment taxes from employee salaries.

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA.You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAKelly Company sells goods to customers with a three-year warranty. On December 31, Year 1, Kelly made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year.

Craig Company issued a discount note for cash. How does this event affect Craig's financial statements?

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's burgers. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. What should Burger Barn do as a result of the information that is available?

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA.You do not need to enter amounts.Increase = I Decrease = D Not Affected = NACharles Company recognized payroll tax expense for the employer portion of FICA tax and federal and state unemployment taxes.

Ian Brown and Gayle Hubbard both perform work for Max Manufacturing. Ian Brown is an employee, and Gayle Hubbard is an independent contractor. How is this possible? How do these classifications affect payroll taxes?