Practice Midterm Quiz 13a

Question 1

47. Which ONE of the following is a danger of basing a manager’s bonus on reported net income?

a. Increases the accrual amount for postemployment benefits
b. Increases the incentive for managers to manipulate reported earnings
c. Increases the average level of severance benefits for both managers and employees
d. Increases information risk associated with actuarial estimates

Answer 1

47.

Solution = B

Question 2

48. Which ONE of the following is FALSE regarding defined benefit and defined contribution pension plans?

a. With a defined benefit plan, the pension benefits that will be paid are fixed.
b. With a defined benefit plan, the benefits that will be paid are uncertain.
c. With a defined contribution plan, the benefits that will be paid are uncertain.
d. With a defined contribution plan, the amount of money set aside to pay benefits is fixed.

Answer 2

48.
Solution = B

With a defined contribution plan, the amount of money set aside to pay benefits is fixed, and the benefits that will be paid are uncertain. The benefits depend on the earnings of the contributions, the age at retirement, and so forth. With a defined benefit plan, the pension benefits that will be paid are fixed, meaning retired workers will get a pension benefit that is based on factors such as the number of years worked and so forth.

Question 3

49. Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll.

Compute the TOTAL employee COMPENSATION EXPENSE for one week.

a. $400,000
b. $460,000
c. $369,400
d. $309,400
e. $430,600

Answer 3

49.
Solution = E

The total employee compensation expense for one week is $430,600, computed as follows:

GROSS PAY		$400,000
*Plus: Employer’s share of Social Security ($400,000  0.0620)		+24,800
*Plus: Employer’s share of Medicare ($400,000  0.0145)		+5,800
Total compensation expense		$430,600

*The Social Security and Medicare taxes are levied on both the employee and the employer.

Question 4

50. Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll.

How much CASH is paid to EMPLOYEES for one week?

a. $443,600
b. $363,600
c. $440,000
d. $360,000
e. $363,240
f. $329,400

Answer 4

50.
Solution = F

The total cash paid to employees for one week is $329,400, computed as follows:

GROSS PAY		$400,000
Less: Employee’s share of Social Security ($400,000  0.0620)		-24,800
Less: Employee’s share of Medicare ($400,000  0.0145)		-5,800
Less: Income tax withholding ($400,000 × 0.10)			-40,000
Total cash paid to employees		$329,400

Question 5

51. Gross payroll for the employees of Larrabee Company totals $400,000 per week. From this must be withheld Social Security taxes of 6.20% and Medicare taxes of 1.45%. In addition, federal and state income tax withholdings amount to 10% of gross payroll.

Which ONE of the following is in the SUMMARY JOURNAL ENTRY to record the payment of payroll for one week?

a. CREDIT to Social Security Payable for $49,600
b. CREDIT to Compensation Expense for $430,600
c. CREDIT to Medicare Payable for $5,800
d. DEBIT to Income Tax Withholding Payable for $40,000
e. DEBIT to Cash for $329,400

Answer 5

51.
Solution = A

See the solutions for Question 49 and Question 50 for detailed calculations for the numbers included in the journal entry.

	Compensation Expense	430,600
		Social Security Payable*		49,600
		Medicare Payable*		11,600
		Income Tax Withholding Payable		40,000
		Cash			329,400

Represents both the employee and the employer amounts that must be forwarded to the appropriate government unit.

Question 6

52. On January 1 of Year 1, Coley Company established a stock option plan for its senior employees. A total of 1,500,000 options were granted that permit employees to purchase 1,500,000 shares of stock at $50 per share. Each option had a fair value of $6 on the grant date. The market price for Coley stock on January 1 of Year 1 was $50. The employees are required to remain with Coley for three years (Years 1 through 3) to exercise these options. Coley’s net income for Year 1, before including any consideration of compensation expense, is $2,000,000.

Compute Coley Company’s NET INCOME for Year 1. Ignore income taxes.

a. Net loss of $7,000,000
b. Net loss of $3,000,000
c. Net loss of $5,000,000
d. Net loss of $1,000,000
e. Net income of $5,000,000
f. Net income of $11,000,000

Answer 6

52.
Solution = D

(1,500,000 options × $6) / 3 years = $3,000,000 compensation expense per year

Income before compensation expense	$2,000,000
Compensation expense	(3,000,000)
Net income	($1,000,000)

Question 7

53. Which ONE of the following is the BEST description of “internal controls”?

a. Policies and procedures implemented by a business that are designed to minimize fluctuations in the internal par value of capital stock.
b. Policies and procedures implemented by a business that are designed to prevent the purchase of property, plant, and equipment on credit.
c. Policies and procedures implemented by a business that are designed to reduce the number of adjusting entries made by a company each year.
d. Policies and procedures implemented by a business that are designed to safeguard assets and ensure accurate accounting records.

Answer 7

53.

Solution = D