Chapter 12: Current Liabilities and Contingencies

what is the acid test ratio?

(cash + short term investments + AR)/ currrent liabilities

what is it called when a government claims privately owned property against the wishes of its owners?

expropriation

(T/F) Companies record or report in the notes to the financial statements general risk contingencies inherent in business operations

false

(T/F) anticipated losses should be recorded as a liability

false

(T/F) a retailer records both an expense and a liability for sales taxes

false; for sales taxes, retailers only record a liability because the expense falls on the customer

(T/F) Unremitted taxes should be recorded as an expense

false; should be recorded as a current liability to the employer until the amounts are remitted to the various organizations.

what are the 4 conditions that must be met in order for a compensated absences to be recorded as a liability?

1) The employer's obligation relating to employees' rights to receive compensation for future absences is attributable to employees' services already rendered. 2) The obligation relates to the rights that vest or accumulate. 3) Payment of the compensation is probable. 4) The amount can be reasonably estimated.

Companies should accrue an estimated loss from a loss contingency only if both of the following conditions are met:

1) it is probable that a liability has been incurred at the date of the financial statements. 2) The amount of the loss can be reasonably estimated.

what are examples of current liabilities?

1) payables such as accounts payable, wages payable, taxes payable, etc 2) collections received in advance for goods or services, such as unearned reent revenue or unearned subscriptions revenue 3) other liabilities whose liquidation will take place within the next operaitng cycle (portion of long term bonds paid in the current period or short-term obligations arising from purchase of equipment or other assets)

what are the 3 conditions for something to be considerd a liability?

1) probable future sacrifices of economic benefits (cash, goods, services) 2) arises from present obligation (it is unavoidable) 3) the present obligation arises from a past transaction or event (occurred in the past)

companies must consider what 3 factors in determining whether to record a liability with respect to litigation, claims, and assessments?

1) the time period in which the underlying cause of action occurred 2) the probability of an unfavorable outcome 3) the ability to make a reasonable estimate of the amoount of loss

how are sales taxes recorded?

Instead of separates the sales tax and the amount of the sale at the time of the sale, companies credit both amounts in total in the Sales Revenue account. Then, to reflect the correct amount of sales and the liability for sales taxes, the company would debit (reduce) the Sales Revenue Account for the amount of sales taxes due to the government and would credit (increase) the Sales Taxes Pauabble account for the same amount

How does a zero-interest bearing note still have an interest component?

Rather than explicitly stating an interest rate and charging interest each period, the interest amount is collected implicitly at the issuance date. The borrower receives the PV of the note but must pay back the face value of the note at maturity, so the difference is the interest amount.

what is the contra account to notes payable? how is this presented on the balance sheet?

discount on notes payable

what are vested rights? what is an example?

Vested rights exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Thus, vested rights are not contingent on an employee's future service. example: assume that you earn four days of vacation pay as of December 31, the end of your employer's fiscal year. Company policy is that you will be paid for this vacation time even if you terminate employment. In this situation, your four days of vacation pay are vested, and your employer must accrue the vested amount.

Warranties FACTS You purchase a car from Hamlin Auto for $30,000 on January 2, 2025. Hamlin estimates the assurance-type warranty costs on the car to be $700 (Hamlin will pay for repairs for the first 36,000 miles or 3 years, whichever comes first). You also purchase for $900 a service-type warranty for an additional 3 years or 36,000 miles. Hamlin incurs warranty costs related to the assurance-type warranty of $500 in 2025 and expects costs of $100 in 2026 and 2027. Hamlin records revenue on the service-type warranty on a straight-line basis. QUESTION What are the necessary entries for Hamlin in 2025 and 2028?

Warranties FACTS You purchase a car from Hamlin Auto for $30,000 on January 2, 2025. Hamlin estimates the assurance-type warranty costs on the car to be $700 (Hamlin will pay for repairs for the first 36,000 miles or 3 years, whichever comes first). You also purchase for $900 a service-type warranty for an additional 3 years or 36,000 miles. Hamlin incurs warranty costs related to the assurance-type warranty of $500 in 2025 and expects costs of $100 in 2026 and 2027. Hamlin records revenue on the service-type warranty on a straight-line basis. QUESTION What are the necessary entries for Hamlin in 2025 and 2028?

what are balances owed to others for goods, supplies, or services purchased on open account?

accounts payable

what is a contingency?

an existing condition, situation, or set of circumstances involving uncertainty as to possible loss (loss contingency) or gain (gain contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur

To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or (before/after) the date of the financial statements.

before

Which of the following are taxable? (select all that apply) a) proprietorships b) partnerships c) corporations

c) corporations

Which of the following must be known to record a liability? a) the exact payee b) the exact date payable c) whether it is probable that a liability has incurred d) all of the above

c) whether it is probable that a liability has incurred; a company does not need to knoow the exact payee nor the exact date payable

what are refundable deposits? how would a refundable security deposit of $800 be recorded?

cash collected from a customer that a company expects to return after a specified period or when certain conditions are satisfied (ex: security deposits)

what is are the following an example of? Apple may be a defendant in a lawsuit, and any payment is contingent upon the outcome of a settlement or an administrative or court proceeding. Ford Motor Company provides a warranty for a car it sells, and any payments are contingent on the number of cars that qualify for benefits under the warranty. PepsiCo, Inc. acts as a guarantor on supply contracts for their independent bottlers, any payment is contingent on nonpayment by the independent bottler.

contingencies

Record Payables FACTS Presented below are selected transactions of Bonazza Corporation for the current month ending December 31. On December 1, borrowed $90,000 by signing a $90,000, 8%, 6-month note. Bonazza uses the perpetual inventory system and the gross method of accounting for purchase discounts. On December 2, Bonazza purchased $40,000 of inventory items, term 2/10, net 30 FOB shipping point. On December 10, Bonazza paid for the goods and related freight costs of $1,200. During December, cash sales total $800,000. A 5% sales tax on these sales, collected in addition to the $800,000, must be remitted to the state by the fifteenth day of the following month. For December, gross salary and wages totaled $100,000. All earnings are subject to 7.65% FICA taxes, 4% state unemployment tax and 0.6% federal unemployment taxes, income tax withholding is $18,000. In addition, it is determined that it owes employees $6,000 in accrued vacation wages. INSTRUCTIONS Prepare entries for these transactions, including any end of month adjusting entries that may be required.

cr. FICA Taxes payabble (100,000 x 0.0765) 7,650 cr. FUTA Taxes payabble (100,000 x 0.006) 600 cr. SUTA Taxes payabble (100,000 x 0.04) 4,000

liabilities are separated into which 2 categories based on when they are payable?

current liabilities and long-term debt

what is also called the working capital ratio sometimes?

current ratio

what are customer advances?

deposits paid by customers prior to providing a service or goods

what are written promises to pay a certain sum of money on a specified future date and arise from purchases, financing, or other transactions?

notes payable

what are current liabilities?

obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities

when does a company disclose gain contingencies in the notes?

only when a high probability exists for realizing them

what are compensated absences? what are the 2 most common fringe benefits related to compensated absences?

paid absences from employment for such items as vacations, illness, holidays, and jury duties 2 most common: vacation pay and sick pay

What is breakage? how should it be recorded?

revenue gained by retailers through unredeemed, expired, or lost gift cards

what are accumulated rights?

rights (such as vacation days, sick pay, etc) that are not used and are carried into later periods

what is the FICA tax?

the Federal Insurance Contribution Act; a tax collected primarily to fund Social Security and Medicare; is collected both from employers and employees; is currently 6.2%

(T/F) Companies should report the amount of unremitted employee and employer Social Security tax on gross wages paid as a current liability.

true

(T/F) current maturities of long-term debt should be disclosed in the notes of financial statments

true

(T/F) payroll deductions, compensated absences, and bonuses are recorded as current liabilites at the end of an accounting period

true

(T/F) secured liabilities should be disclosed in the notes of financial statments

true

(T/F) the unemployment tax is an expense for the employer and is debited to Payroll Tax Expense

true

rules regarding sick pay slightly differ from other fringe benfits. How do they differ?

typically, both veseted and accumulated rights are accrued as a liability. with sick pay, vested benefits are accrued as liabilities while accumulated benefits can be accrued or not.

what is a promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product

warranty