Chapter 10; short-term liabilities exam 3

Current liabilities that must be estimated

bonus plans vacation, health, and pension benefits warranties companies must record estimated employee bonus payable, estimated employee benefits payable, and estimated warranty payable to meet the matching principle

Employers MUST pay certain payroll taxes

employer FICA tax state and federal unemployment compensation taxes the related expense account (payroll tax expense) is debited in the journal entry recording employer's payroll taxes while the credit is to the related payable. the employer also must record benefits paid such as health and life insurance

Bonds

financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now

Accrued liabilities

liabilities that have been incurred but not yet paid

Current liabilities

must be paid either with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than a year.

Amortization

paying off debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan

Contingent liabilities

potential liabilities that arise from past transactions or events, but their ultimate resolution depends on a future event

Payroll with holding deductions are liabilities when recording a period's payroll

required withholding for employee income tax required withholding for employee social security (FICA) tax optional withholding deductions the specific withholding accounts are credited when recording a period's payroll

Debt to equity ratio

total liabilities/ total assets

Interest

typically paid semiannually at the stated interest rate on the bond

Accounts payable (when to debit or credit)

when a company receives goods or services on credit (INCREASES, CREDITED) when a company pays on its account (DECREASES, DEBITED)

What are current liabilities?

accounts payable sales tax payable unearned revenues short-term notes payable current portion of long-term notes payable

Bonds

bonds are issued at face value, at a discount, or at a premium

Unearned revenue

cash received in advance of providing services creates a liability of services due to the customer credit unearned revenue when the event has not happened yet debit unearned revenue when the event has happened

Effective interest amortization

considered a conceptually superior method of accounting for bonds because it correctly calculates annual interest expense by multiplying the market interest rate times the carrying value of the bonds

CALLABLE BONDS; FOR BONDS ISSUED AT A DISCOUNT

debit bonds payable for the face value; credit the discount on bonds payable attributable to the portion called; credit cash; credit gain or loss on retirement of bonds payable to balance

CONVERTIBLE BONDS; FOR BONDS ISSUED AT A DISCOUNT

debit bonds payable for the face value; credit the discount on bonds payable; credit common stock for face value; credit paid-in capital in excess of par for any excess needed to balance.

FOR BONDS ISSUED AT FACE VALUE

debit cash and credit bonds payable

FOR BONDS ISSUED AT A PREMIUM

debit cash for the proceeds received; credit bonds payable for the face value; credit premium on bonds payable for the difference

FOR BONDS ISSUED AT A DISCOUNT

debit cash for the proceeds received; credit bonds payable for the face value; debit discount on bonds payable for the difference

Income taxes

debit income tax expense credit income tax payable

Bonds payable

discount on bonds payable; the discount is a contra account to bonds payable

Long-term liabilities

due beyond one year operating cycle

Gross pay and net (take-home) pay

gross pay is the debit to salaries and wages expense when recording the period's payroll net pay is the credit to salaries and wages payable in the entry

Notes payable

interest= principal x interest rate x time

Common long-term liabilities

long-term notes payable deferred income taxes bonds payable

Times interest earned ratio

net income + interest expense + income tax expense/ interest expense

Sales tax payable

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

Maturity date

the date of the borrower must pay back the face value amount to bondholders