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Table 9-1
Lexie Company has a monthly payroll with the following information:

A. The monthly gross salary for all its employees is $60,000. Lexie Company withholds 20% of the
employees' gross salary for federal taxes, 6% for state taxes, and 8% for Social Security (FICA) taxes.

B. Lexie Company also incurs other employee-related costs. Specifically, the company must (1) match
the Social Security taxes withheld from the employees, (2) contribute 4% of the employees' gross pay to
the employees' pension fund, and (3) pay 3% of the employees' gross pay for health insurance
premiums on behalf of the employees.

1) Referring to Table 9-1, what is the appropriate journal entry to be made by Lexie Company for part A of
their monthly payroll, which is associated with gross pay and withholdings?
A) Compensation Expense 60,000
Salaries and Wages Payable 60,000
B) Compensation Expense 60,000
Federal Income Tax Withholding Payable 12,000
State Income Tax Withholding Payable 3,600
Social Security Withholding Payable 4,800
Salaries and Wages Payable 39,600
C) Compensation Expense 60,000
Tax Expense 20,400
Federal Tax Withholding Payable 12,000
State and FICA Tax Withholding Payable 8,400
Salaries and Wages Payable 60,000
D) Compensation Expense 60,000
Federal Tax Expense 12,000

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 State Tax Expense 3,600
Social Security Tax Expense 4,800
Salaries and Wages Payable 80,400
E) Compensation Expense 80,400
Federal Tax Withholding Payable 12,000
State Tax Withholding Payable 3,600
Social Security Tax Withholding Payable 4,800
Salaries and Wages Payable 60,000

2) Referring to Table 9-1, what is the appropriate journal entry to be made by Lexie Company for part B of
their monthly payroll, which is associated with other employee-related costs?
A) Employee Benefit Expense 9,000
Employer Social Security Payable 4,800
Pension Liability Payable 2,400
Health Insurance Payable 1,800
B) Compensation Expense 9,000
Employer Social Security Payable 4,800
Pension Liability Payable 2,400
Health Insurance Payable 1,800
C) Prepaid Employee Benefits 9,000
Employer Social Security Payable 4,800
Pension Liability Payable 2,400
Health Insurance Payable 1,800
D) Unearned Employee Benefits 9,000
Employer Social Security Payable 4,800
Pension Liability Payable 2,400
Health Insurance Payable 1,800
E) Compensation Expense 9,000
Employer Social Security Payable 4,800
Pension Withholding Payable 2,400
Health Insurance Withholding Payable 1,800

3) Schwitzer Company estimated at January 1, 20X9, that its income before taxes for the year ended
December 31, 20X9, would be $7,500,000. Schwitzer Company's tax rate for the year is 45%. The company
made quarterly tax payments on April, June, September, and December 15. The actual income before taxes
for the year ended December 31, 20X9, for the Schwitzer Company was $7,700,000. What was the balance
in the income tax payable account at December 31, 20X9?
A) $0
B) $90,000
C) $110,000
D) $150,000
E) $200,000

4) Pink Flamingo, Inc., operates in a state where there is a 7% sales tax. If a customer pays cash for
merchandise with a sales price of $300, Pink Flamingo would record the transaction using which of the
following journal entries?

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A) Cash 300
Sales 300
B) Cash 300
Sales Tax Payable 21
Sales 279
C) Cash 300
Sales Tax Expense 21
Sales Tax Payable 21
Sales 300
D) Cash 321
Sales Tax Payable 21
Sales 300
E) Cash 321
Sales Tax Expense 21
Sales Tax Payable 21
Sales 321

5) James publishes the Marley Gazette. In June, he collected $60 in advance for 1-year subscriptions. He
delivered the first issue in July. Assume one issue is published per month. The journal entry to record the
delivery of the magazines in July would be
A) Cash 5.00
Subscription Revenue 5.00
B) Unearned Subscription Revenue 5.00
Subscription Revenue 5.00
C) Prepaid Subscriptions 5.00
Subscription Revenue 5.00
D) Prepaid Subscriptions 5.00
Cash 5.00
E) Cash 5.00
Prepaid Subscriptions 5.00

6) When the market interest rate is 13% and the coupon rate is 10%, a bond sells at
A) a discount.
B) a premium.
C) par.
D) liquidation value.
E) Cannot be determined without more information

7) Which of the following is false? The discount on bonds payable is

A) amortized over the life of the bond.
B) deducted from bonds payable.
C) a contra account.
D) a trading security account.

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E) payable at the maturity date of the bond.

8) Apple Markets just made the interest payment on its $4,000,000 of outstanding bonds. The bonds are
callable at 101 5/8 and the unamortized premium is currently $167,400. The entry to retire half of the
bonds would include a
A) debit to premium on bonds payable for $167,400.
B) credit to cash for $2,000,000.
C) credit to gain on early extinguishment of debt for $51,200.
D) debit to loss on early extinguishment of debt for $52,500.
E) debit to loss on early extinguishments of debt for $167,400.

9) The premium on bonds payable

A) serves to reduce interest expense on the income statement.
B) serves to increase interest expense on the income statement.
C) serves to increase the amount of cash paid to bondholders over the stated rate of interest.
D) serves to decrease the initial amount of cash paid by bondholders.
E) None of the above

10) Under the effective-interest method of amortizing bond discount, the cash payment on each interest
payment date is calculated by multiplying the
A) ending net liability times the effective interest rate for the appropriate time period.
B) ending net liability times the coupon interest rate for the appropriate time period.
C) face value of the bonds times the effective interest rate for the appropriate time period.
D) face value of the bonds times the coupon interest rate for the appropriate time period.
E) difference between the market value and the liquidation value by the market rate of interest.

11) On January 1, 20X9, Amanda Mackenzie purchased a $24,000 car, making a $4,000 down payment,
and borrowing the rest on a 4-year note at 8% interest. She agrees to make annual payments of $6,038.47,
starting January 1, 2X10. What is the journal entry that Amanda would make on January 1, 2X10, for the
first payment on the note?
A) Note Payable 6,038.47
Cash 6,038.47
B) Interest Payable 1,600.00
Note Payable 4,438.47
Cash 6,038.47
C) Interest Expense 483.08
Note Payable 5,555.39
Cash 6,038.47
D) Interest Expense 1,920.00
Note Payable 4,118.47
Cash 6,038.47
E) Interest Expense 5,555.39
Note Payable 438.08
Cash 6,038.47

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Table 9-4
Boiler Industries issued 3,000 debentures on January 1, 20X9. The debentures were 12-year, 7% debt,
which paid interest semi-annually, every June 30 and December 31. The face value of each debenture is
$1,000.

12) Referring to Table 9-4, if the market rate of interest is 7% on January 1, 20X9, what is the journal entry
to record the issuance of the bonds?
A) Cash 3,000,000
Bonds Payable 3,000,000
B) Bonds Payable 3,000,000
Cash 3,000,000
C) Bonds Receivable 3,000,000
Cash 3,000,000
D) Bonds Receivable 3,000,000
Bonds Payable 3,000,000
E) Cannot be determined from the information given

13) Referring to Table 9-4, if the market rate of interest is 7% on January 1, 20X9, what is the journal entry
to record the payment of interest on June 30, 20X9?
A) Bonds Payable 105,000
Cash 105,000
B) Interest Payable 105,000
Cash 105,000
C) Cash 210,000
Bonds Payable 210,000
D) Interest Expense 105,000
Cash 105,000
E) Interest Expense 210,000
Bonds Payable 210,000

14) A deferred income tax liability

A) arises because of differences between U.S. income tax rules and foreign income tax rules.
B) can arise because of "permanent" and "transitory" differences.
C) arise because managers wish to maximize taxable income and minimize income for financial reporting.
D) can arise when a firm uses special accelerated depreciation for tax purposes while using straight-line
depreciation for financial reporting.
E) occurs when the company has a NOL (net operating loss).

15) A contingent liability

A) is a potential liability that depends on a future event arising out of a past transaction.
B) can always be calculated with great precision (i.e., always has a definite amount).

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C) include liabilities for warranty repairs.
D) must be disclosed in the body of the financial statements, including the expected dollar amount.
E) is not of interest to readers of financial statements.