ACC 210 Chapter 8 (Exam 3)

payroll costs for employees

Federal and state income taxes Employee portion of Social Security and Medicare Employee contributions for health, dental, disability, and life insurance Employee Investments in retirement or savings plans

payroll costs for employers

Federal and state unemployment taxes Employer matching portion of Social Security and Medicare Employer contributions for health, dentail, disability, and life insurance Employer contributions to retirement or savings plan

By law, an employer is required to pay what as payroll taxes?

Federal unemployment tax Medicare contributions Social Security contributions

Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?

The current ratio will remain the same.

warranty

most common example of a contingent liability represents a liability because it meets criteria for recording a contingent liability (probable + reasonably estimable)

main current liabilities

notes payable, accounts payable, payroll liabilities also include deferred revenue, sales tax payable, current debt

FICA taxes paid by the employer are recorded as:

payroll tax expense

we usually do not record contingent gains until:

the gain is known with certainty

Payroll withholdings

the items subtracted from an employee's gross pay to arrive at take-home pay.

operating cycle

the length of time from spending cash to providing goods and services to a customer until collection of cash from that customer

gift card breakage

the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote

True or False: Different types of current assets are equally liquid.

False

True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.

False

liquidity

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts

What does a current ratio of 4.2 indicate?

It indicates that for every $1 of current liabilities, the company has $4.20 of current assets.

interest on notes is calculated as:

interest = face value x annual interest rate x fraction of the year

Notes payable is classified as a liability that has what effect?

Creates interest expense on the income statement

current liabilities

Debts that, in most cases, are due within one year. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.

WP Corp. borrows $100,000 on 9/1/2020 to be repaid (with interest) on 3/1/2021. The interest rate is 10%. WP's year-end is December 31. How much interest expense will WP recognize for this borrowing on its 2021 income statement?

$1,667 $100,000 x .10 x 2/12

acid-test ratio (quick ratio)

(cash + current investments + accounts receivable) / current liabilities measures availability of liquid current assets to pay current liabilities may provide better indication of liquidity than current ratio

characteristics of liabilities

1. probable future sacrifices of economic benefits 2. arising from present obligations to other entities 3. resulting from past transactions or events

options for a contingency:

1. report a liability 2. do not report a liability, but provide disclosure in a note to financial statements 3. do not report a liability and provide no disclosure option we choose depends on likelihood of payment and ability to estimate the amount of payment

fringe benefits

Additional employee benefits paid for by the employer

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

What are not required to be deducted from an employee's paycheck?

Charitable contributions State unemployment tax (SUTA) Federal unemployment tax (FUTA)

Jordan Corp. and Miller Corp. have current ratios of 1.75 and 1.3, respectively. All else being equal, which of the following statements is more likely to be true?

Jordan Corp. is more liquid than Miller Corp.

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

Common current liabilities include:

Sales tax payable Deferred revenues The current portion of long-term debt

An agreement between a borrower and a lender that requires certain minimum financial measures to be met in order to prevent the lender from recalling the debt is called:

a debt covenant

A contingent liability is recorded only if:

a loss is probable and the amount is reasonably estimable

liability

a present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past

unemployment taxes

a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

debt covenant

an agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt

contingent gain

an existing uncertain situation that might result in a gain

contingent liability

an existing uncertain situation that might result in a loss ex. lawsuits, product warranties, environmental problems, premium offers

line of credit

an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

commercial paper

borrowing from another company rather than from a bank

deferred revenue

cash received in advance from a customer for products or services to be provided in the future liability account

quick assets

cash, current investments, and accounts receivable

Payroll liabilities make up a significant portion of current liabilities for:

companies that are labor intensive

current ratio

current assets / current liabilities measures availability of current assets to pay current liabilities current ratio > 1 often reflects acceptable level of liquidity

sale journal entry

debit cash, credit sales revenue and sales tax payable

prepayment journal entry

debit deferred revenue, credit sales revenue

If the likelihood of payment is only reasonably possible rather than probable:

we record no entry but make full disclosure in a note to the financial statements

measures of liquidity

working capital, current ratio, acid-test ratio

notes payable

written promises to repay amounts borrowed plus interest

employer payroll journal entry

debit payroll tax expense, credit FICA tax payable, unemployment tax payable

employee salary journal entry

debit salaries expense, credit income tax payable, FICA tax payable, and salaries payable

Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a:

debit to loss credit to contingent liability

warranty journal entry

debit warranty expense credit estimated warranty liability

current portion of long-term debit

debt that will be paid within one year from the balance sheet date reported as current liability in the balance sheet

how is current ratio affected by: -The company declares and pays a cash dividend. -The company makes a cash purchase of inventory. -The company purchases supplies on account. -The company receives cash from the issuance of common stock. -The company receives cash in advance of it being earned. -The company receives cash from a customer on account.

decrease no effect decrease increase decrease no effect

working capital

difference between current assets and current liabilities large working capital is indicator of liquidity

If the likelihood of payment is remote:

disclosure usually is not required

Besides salaries or wages, additional employee benefits paid for by the employer are called:

fringe benefits

A Line of Credit:

represents a pre-existing agreement between a bank and a company to allow for speedy access to borrowed funds

sales tax payable

sales tax collected from customers by the seller, representing. current liabilities payable to the government

contingencies

uncertain situations that can result in a gain or a loss for a company