Chapter 10

Question 1

Liabilities are created when a company

Answer 1

(1) Buys goods and services on credit,
(2) Obtains short-term loans to cover gaps in cash flows,
(3) Issues long-term debt to obtain money for expanding into new regions and markets.

Question 2

Short-term obligations that will be paid with current assets within the company’s current operating cycle or within one year of the balance sheet date, whichever is longer.

Answer 2

Current Liabilities

Question 3

Initial amount of the liability

Answer 3

Cash Equivalent

Question 4

Additional liability amounts

Answer 4

Increase Liability

Question 5

Payments Made

Answer 5

Decrease Liability

Question 6

Purchase of goods/services on credit

Answer 6

Accounts Payable

Question 7

An expense is incurred in one accounting period, the cash payment in a later period.

Answer 7

Accrued Liabilities

Question 8

Liability resulting when company collects and owes taxes relating to payroll.

Answer 8

Payroll Tax Payable

Question 9

Liability resulting when a company collects sales tax for the state.

Answer 9

Sales Tax Payable

Question 10

Occurs when one company borrows money from another.

Answer 10

Notes Payable

Question 11

The receipt of cash before goods or services are provided.

Answer 11

Unearned Revenue

Question 12

Accounts Payable is ________ when a company receives goods or services on credit, and it is _______ when the company pays on its account.

Answer 12

(1) increased (credited)

2) decreased (debited

Question 13

Liabilities that have been incurred but not yet paid

Answer 13

Accrued Liabilities

Question 14

Required by law or voluntarily requested by employees and create a current liability for the company.

Answer 14

Payroll Deductions

Question 15

Income tax, FICA tax, other deductions

Answer 15

Examples of Payroll Deductions

Question 16

Journal Entry with Payroll Deductions:

Answer 16

dr. Wages and Salaries Expense
cr. Withheld Income Taxes Payable
cr. FICA Payable
cr. United Way Payable
cr. Cash

Question 17

True or False: Not only does the employee have to pay taxes on the wages they earned, but so does the employer.

Answer 17

True

Question 18

Employers have other liabilities related to payroll:

(1) FICA Tax
(2) Federal Unemployment Tax
(3) State Unemployment Tax

Answer 18

Employer Payroll Taxes

Question 19

Journal Entry for Employer Payroll Taxes:

Answer 19

dr. Payroll Tax Expense
cr. FICA Tax Payable
cr. Federal Unemployment Tax Payable
cr. State Unemployment Tax Payable

Question 20

Calculated by subtracting tax allowed expense from revenues. This taxable income is then multiplied by a tax rate, which ranges for corporations from 15 to 35 percent.

Answer 20

Taxable Income (Accrued Income Taxes)

Question 21

Journal Entry for Income Tax:

Answer 21

dr. Income Tax Expense

cr. Income Tax Payable

Question 22

Payments collected from customers at time of sale create a liability that is due to the state government.

Answer 22

Sales Tax Payable

Question 23

Cash received in advance of providing services creates a liability of services due to the customer.

Answer 23

Unearned Revenue

Question 24

Recording Unearned Revenue Journal Entry:

Answer 24

dr. Cash

cr. Unearned Revenue

Question 25

Looks at the transaction from the viewpoint of the borrower.

Answer 25

Notes Payable

Question 26

Four Key Events that occur with any Note Payable:

Answer 26

(1) Establishing the note
(2) Accruing interest incurred but not paid
(3) Recording interest paid
(4) Recording principal paid

Question 27

When borrowing from a bank, the bank utilizes _______ interest concepts.

Answer 27

Compound

Question 28

A schedule of the periodic payments to be made over the life of the loan - monthly, quarterly or annually. Each scheduled payment consists partly of repayment of the principal and partly of interest on the loan balance. The interest portion of the payment is based on the loan balance at the beginning of the payment period.

Answer 28

Loan Amortization Table

Question 29

Potential liabilities that arise as a result of past transactions or events, but their ultimate resolution depends (is contingent) on a future event. Differ from other liabilities because their dependence on a future event introduces a great deal of uncertainty.

Answer 29

Contingent Liabilities

Question 30

Involve substantially larger sums of money, can be sold on an exchange, much longer periods of time and typically require annual or semi annual interest payments.

Answer 30

Bonds Payable

Question 31

Financial Instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.

Answer 31

Bonds

Question 32

Key Elements of a Bond

Answer 32

(1) Maturity date
(2) Face value
(3) Stated interest rate

Question 33

Involves present value computations and is the amount that investors are willing to pay on the issue date for the bonds.

Answer 33

Bond Pricing

Question 34

Journal Entry for Bonds Issued at Face Value:

Answer 34

dr. Cash

cr. Bonds Payable

Question 35

Borrowers must report in ________ the portion of long term debt that is due to be paid within one year.

Answer 35

Current Liabilities

Question 36

Two financial ratios are commonly used to make an assessment of the company’s ability to generate resources to pay future amounts owed:

Answer 36

(1) The debt-to-assets ratio

(2) The times interest earned ratio.

Question 37

Total Liabilities / Total Assets =

Answer 37

Debt to Assets Ratio

Question 38

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Answer 38

Times Interest Earned Ratio