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ACCT ch8 practice test - ACCT ch8 practice test The primary...

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ACCT ch8 practice test The primary reason for incurring liabilities is: to meet needs for cash during the operating cycle. The primary reason for incurring liabilities is to meet needs for cash during the operating cycle. Continued failure to pay current liabilities can lead to bankruptcy. Use this information to answer the following question___________ Jackson and Smith Company, December 31, 2009: Cash: $22,860 Accounts Receivable: $21,400 Merchandise Inventory: $41,000 Land: $145,000 Buildings: $90,000 Accounts Payable: $35,000 Wages Payable: $20,100 Mortgage Payable: $229,000 ______________________________ Jackson and Smith Company, December 31, 2010: Cash: $27,900 Accounts Receivable: $23,000 Merchandise Inventory: $36,000 Land: $145,000 Buildings: $80,000 Accounts Payable: $48,000 Wages Payable: $23,700 Mortgage Payable: $208,000 ______________________________ Compute Jackson and Smith Company's working capital for 2009. $30,160 Working capital for 2009 is equal to current assets of $85,260 ($22,860 + $21,400 + $41,000) minus current liabilities of $55,100 ($35,000 + $20,100), or $30,160 . Land and Buildings are noncurrent assets and Mortgage Payable is a long-term liability. These items should not be included when calculating working capital. Because accounting measures should be verifiable, liabilities should not be estimated. False In cases when the amount of the liability is not definitely known, the amount must be estimated. A warranty is an example of an obligation that definitely exists, but the amount of the obligation must be estimated. The amount is usually based on past experience and anticipated changes in the business environment. A company receives $220 for merchandise, of which $15 is for sales tax and $5 is for excise tax. The entry to record the sale would include a: credit to Sales Tax Payable for $15. The cash received was $220 . The entry to record this sale would include a credit to Sales Tax Payable for $15. The complete journal entry to record the sale would be debit Cash, $220 ; credit Sales, $200; credit Sales Tax Payable, $15; and credit Excise Tax Payable, $5. Warranties fall under the category of definitely determinable liabilities. False A warranty is an estimated liability. The amount to be paid in the future for warranty claims is unknown, so an estimate must be recorded which is usually based on past experience. Definitely determinable liabilities are set by contract or by statute and can be measured exactly.
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