EXAM 3 ACCT

has 100 or fewer stockholders, is treated as a partnership for income tax purposes but otherwise is accounted for as a "c" corporation

"S" corportation

amounts owed to supplies (also called vendors) for products or services purchased with credit

accounts payable

amounts due from customers for credit sales. they occur when a customer uses credit cards issued by third parties and when a company gives credit directly to customers.

accounts receivable

bonuses to remaining partners are

allocated based on their income and loss sharing agreement

___ ____ matches the estimated loss from uncollectibles against the sales they helped produce. at the end of each accounting period, bad debts expense is estimated and recorded in an adjusting entry

allowance method

how do partners divide income and loss

any agreed upon method of dividing income or loss is allowed. if there is no agreement, the net income or loss is divided equally

valuing accounts receviable accounts of customers who do not pay are uncollectible accounts, commonly called

bad debts

same as accounting for a proprietorship except for transactions directly affecting partners' equity. use separate capital and withdrawal accounts for each partner. allocates net income or loss to partners according to the partnership agreement

basic partnership accounting

employee bonuses must be estimated and recorded in year-end adjusting entries

bonus plans

US GAAP to IFRS global view on valuation of receivables

both require that receivables be reported net of estimated uncollectibles and both required that the expense be recorded that same period as the related revenue (allowance method)

a potential liability that depends on a future event arising from a past transaction

contingent liabilities

uncertainties (such as natural disasters) are not ___ ____ because they are future events not arising from past transactions

contingent liabilities

who is/isnt subject to income taxes and must estimate their income tax liability when preparing financial statements

corporations are sole proprietorships or partnerships are not

obligations due within one year or the companys operating cycle, whicheveer is longer. expected to be paid using current assets or by creating other current liabilities

current liabilities

portion that will be fulfilled in next year

current liabilities

Credit card sales (when cash is received immediately upon deposit of sales receipt) results in _____ to Cash for the amount of sale less the credit card company charge, ____ to Credit Card Expense for this fee and credit to Sales for full invoice amount.

debit debit

Credit card sales ((when cash receipt is received some time after deposit of sales receipt) results in ____ to Accounts Receivable for the amount to be collected, and a ____ to Credit Card expense for the amount of the fee and ____ to Sales for full invoice. Later, when payment is received, ____ Cash and _____ Accounts Receivable.

debit debit credit debit

to write off uncollectible and recognize loss what do you debit and credit

debit Bad Debt Expense credit Accounts Receivable

records the loss from an uncollectible account receivable when it is determined to be uncollectible

direct write-off method

companies can convert receviables to cash before they are due. reasons for this include the need for cash or a desire to no be involved in collection activities.

disposing of receivables

how to organize a partnership

each partners investment is recorded at an agreed upon value, normally the market value of the assets and liabilities at their date of contribution

what is determined from chart based on their gross pay, pay period, martial status and number of withholding allowances the employee claims

employee income tax payable

a cumulative record of an employees hours worked, gross pay, deductions, net pay, and certain personal information about the employee; contains the data the employer needs to prepare a Form W-2

employees earnings report

payroll taxes in addition to those required of employees. These taxes result in expenses (DR) and current liabilities (CR)

employer payroll taxes

other contingencies, such as _____, require disclosure in notes if potential liabilities are reasonably possible

environmental damagers, possible tax assessments, insurance losses, and government investigations

withdrawing partner may accept assets ___ to, __ ___, or ___ __his/her equity

equal to less than greater than

known obligations of uncertain amounts that can be reasonable estimated. recorded as expenses (DR) and payables (CR)

estimated liabilities

salaries to partners and interest on partners investments are not partnership ______; they are allocations of net income

expenses

withholding allowance certificate form. filed by employee with employer to identify personal exemptions claimed

form W-4

total compensation an employee earns. (includes wages, salaries, commissions, and bonuses). gross pay amount if recorded as salaries expense (DR)

gross pay

benefits beyond salaries and wages provided by business. appropriate proportion accrued at time of each payroll

health and pension benefits

what are examples of estimated liabilities

health and pension benefits, vacation benefits, bonus plans, warranty liabilities, and note

how is times interest earned ratio calculated

income before interest expense and income taxes divided by interest expense

for accounts receivable: Sales on credit— _______Accounts Receivable for the full amount of the sale and ______ Sales.

increase-debit increase-credit

what are installment sales and receivables amounts

installment sales and receivables amounts owed by customers from credit sales where payment is required in periodic amounts over an extended time period

the charge for using money until the due date

interest

how to record interest in the two examples above

interest is recorded as incurred. this may be when paid with note or as end-of-period accrued interest adjustment. (DR interest expense and note payable, CR cash) if interest is being recorded as note is paid at maturity (DR interest expense and CR interest payable) if accrued interest is being recorded at end-of-period adjustment

set by agreements, contracts, or laws and are measurable.

known liabilities aka definitely determinable liabilities

probable future payments of assets or services that a company is presently obligated to make as a result of past transactions or events

liabilities

designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner. generally, all partners are personally liability for other partnersgip debts

limited liability partnership

obligations not expected to be paid within the longer of one year or operating cycle

long-term liabilities

portion that will be fulfilled after next year

long-term liability

___ ___ states that an amount can be ignored if its effect on the financial statements is unimportant to users decisions. this constraint permits use of direct write-off when bad debts expenses are very small in relation to other financial statement items such as sales and net income

materiality constraint

date the note must be repaid

maturity date

amount to be repaid is principal plus interest

maturity value

liabilities that extend over many periods. ex. unearned revenues and notes payable. classification is based upon period in which they will be satisfied

multi-period known liabilities

gross less all deductions, also called take-home pay. net pay is recorded as salaries payable (CR)

net pay

estimated liabilities can also be current or long-term and must be classified based upon when they will be satisfied

note

promissory note that is a written promise to pay a specified amount of money (principal) either on demand or on a definite future date. most notes are interest bearing.

notes receivable

an unincorporated association of two or more people to pursue a business for profit as co-owners

partnership form of organization

a separate payroll bank account used in a company with many employees

payroll bank account

generally accompanied with a detachable statement of earnings showing gross pay, deducations, and net pay

payroll check

amounts withheld from an employees gross pay, either involuntary or voluntary; also called withholdings. Each is recorded as a separate liability (CR)

payroll deducations

_____ (uses balance sheet relations to estimate) - desired credit balance in allowance for doubtful accounts is computed (% x Acc/Rec = Desired balance in allowance for doubtful accounts)

percent of accounts receivable method

______ (uses income statement relations to estimate)- bad debts expense is computed as a percentage of sales for the period (% x sales = Bad Debt Expense)

percent of sales method

1. company borrows money by pledging its receivables as security 2. borrower retains ownership of the receivables 3. if borrower defaults, the lender has right to be paid from receipts on accounts receivable when collected 4. the pledge should be disclosed in financial statement footnotes 5. the loan is recorded as a debit to Cash and a credit to Notes Payable.

pledging receivables

notes payable to the maker (person promising to pay) and notes receviable to the payee (person to be paid)

promissory notes

additional expense beyond Wages and Salaries Expense

recording employer payroll taxes DR Payroll Tax Expense for the Total and Credit the individual liability accounts for the individual taxes

amounts the retailer (seller) collects as sales taxes from customers when sales occur, and currently owes to the government until remitted

sales taxes payable

written promise to pay a specified amount on a definite future date within one year or the companys operating cycle, whichever is longer.

short-term notes payable

what are the factors to be considered when choosing a business

taxes, liability risk, tax and fiscal year-end, ownership structure, estate planning, business risks, and earnings and property distributions

the time from the notes date to its maturity date

the period of the note

why may partners agree to salary and interest allowances

to reward unequal contributions of services or capital

requires addressing three important questions that are sometime unceratin at the time liabilitiy is incurred: 1. whom to pay? (Ex: a note "payable to bearer") 2. when to pay? (Ex: unearned revenues-may not know when service will be provided to satisfy) 3. how much to pay? (Ex: accrued expense that needed to be estimated prior to receipt of bill)

uncertainties in liabilities

amounts received in advance from customers for future products or services

unearned revenues (also known as deferred revenues, collections in advance and prepayments)

(state and federal) current tax rate multiplied by wages subject to tax

unemployment taxes

estimated and recorded by the employers during the weeks the employees are working and earning the vacation time. appropriate proportion accrued at time of each payroll

vacation benefits

what does the write off method violate, which is why it is not the method to use

violates the matching (expense recognition) principle since it frequently results in expense being charged in a period after that of a credit sale

charitable contributions, health insurance premium, and union dues result in various payables. (note: all the payroll components, gross pay, each deduction and net pay, are recorded in one journal entry)

voluntary deductions

reported to comply with the full disclosure and matching principles. seller reports the expected warranty expense (DR) and liability (CR) in the period when revenue from the sales of the product is reported. when warranty liabilities are settled the liability is removed and the asset used (Ex: Parts Inventory) is reduced

warranty liabilities

a number that is used to reduce the amount of federal income tax withheld from an employees pay, and which corresponds to the personal exemptions the employee is allowed to subtract from annual earnings in calculating taxable income

withholding allowane

what are the examples of known liabilities in the current classification

1. accounts payable 2. sales taxes payable 3. unearned revenues

what are two common examples of how a short term notes payable can arise from transactions

1. creditor requires the substitution of an interest bearing note for an overdue account payable that does not bear interest (DR accounts payable, CR notes payable) 2. notes given to borrow money from bank Ex. Face value equals amount borrowed (principal) and at maturity a larger amount is repaid. The difference between amount borrowed and repaid is the interest. The note is recorded at and reported at face value. (DR cash, CR notes payable)

two qualifications of installment sales and receivables amounts

1. customer is usually charged interest 2. should be classified as current assets even if credit period exceeds year if the company regularly offers customers such terms

what are the two methods used to account for uncollectible accounts

1. direct write off method 2. allowance method matches

what happens with a death of a partner

1. dissolves a partnership 2. deceased partners estate is entitled to receive is or her equity. contract usually calls for closing of the books and determining current value of assets and liabilities to update equity 3. settlement of the deceased partners equity can involve selling the equity to remaining partners or to an outsider, or it can involve withdrawing assets

what are the 3 characteristics of liabilities

1. due to pas transaction or event 2. present obligation 3. future payment of assets or services

what are advantages of credit card sales (visa, mastercard, american express)

1. eliminates the companys need to evaluate each custoemrs credit standing 2. avoids sellers risk 3. seller receives cash sooner than when they grant credit directly 4. more credit options potentially increase sales

for payroll reports, which ones are employers required to prepare and submit

1. employers quarterly federal tax returns (IRS Form 941) 2. Annual Federal Unemployment Tax return (IRS Form 940) 3. Wage and Tax Statement (Form W-2)

US GAAP to IFRS global view on decision analysis-Accounts Receivable turnover

1. measures both the quality (likeliness of collecting) and liquidity (speed of collection) of accounts receivable 2. indicates how often, on average, receivables are received and collected during the period 3. calculated by dividing net sales by average accounts receivable

what can allocating gains or. losses on liquidation result in

1. no capital deficiencies - all partners have a zero or credit balance in their capital accounts the totals or which are equivalent to final distribution of cash 2. capital deficiencies- when at least one partner has a debit balance in his/her capital account a. partners w a capital deficiency must, if possible, cover the deficit by paying cash into the partnership. when a partner is cannot pay the deficiency, the remaining partners wth credit balances absorb the unpaid deficit according to their income-and-loss ratio. inability to cover deficiency does not relieve partner of liability

what are the four basic steps in liquidation of a partnership

1. noncash assets are sold for cash and a gain or loss on liquidation is recorded 2. gain or loss on liquidation is allocated to partners using their income-and-loss ratio 3. pay or settle liabilities 4. distribute any remaining cash to partners according to their capital account balances

what are the two methods to estimate bad debts expense

1. percent of sales method 2. percent of accounts receivable method

what are two examples of (resonably) possible contingent liabilities and describe them

1. potential legal claims- recorded in the accounts only if payment for damages is probably and the amount can be reasonably. if cant be reasonably estimated or less than probably but reasonably possible, disclose in footnotes 2. debt guarantees (of a debt owed by another company) - requires disclosure in financial statement notes if potential liabilities are reasonably possible

what are the three categories appropriate for accounting for contingent liabilities

1. probable (likely) - record if amount can be reasonably estimated; if cannot be estimated, disclose in footnotes to financial statements 2. possible (could occur) - disclose in financial statement notes 3. remote (unlikely) - omit (do not record or footnote)

what are the advantages to the allowance method

1. satisfies the matching principle because expense is charged in the period of the corresponding sale 2. reports accounts receivable on balance sheet at the estimated amount of cash to be collected

what two taxes can FICA (federal insurance contributions act) be separated into

1. social security 2. medicare taxes

what are the common methods of dividing partnership earnings

1. stated ratio 2. allocation on capital balances 3. allocation on service, capital, and stated ration-salary and interest allowances, and a fixed ratio are specified-when income exceed allowances, the remainder is allocated to individual partners using a fixed ratio and added to their individual planned allowance. but when allowances exceed the income, the negative amount or shortage is allocated using the ratio and applied against each partners total allowance

what are the steps of purchasing of partnership interest

1. the purchase is a personal transaction between one or more current partners and the new partner 2. purchaser does not become a partner until accepted by the current partners 3. involves a reallocation of current partners capital to reflect the transaction

what are the differences between partnership financial statements and a proprietorship

1. the statement of partners equity usually shows changes for each partners capital account, including the allocation of income 2. the balance sheet generally lists a separate capital account for each partner

what are the steps in investing assets in a partnership

1. the transaction is between the new partner and the partnership. invested assets become partnership property 2. new partners equity recorded for assets invested may be equal to, less than, or grater than investment 3. when the recorded new partners equity differs from investment, there is a bonus to new or old partners equity 4. bonuses to old partners are allocated based on their income and loss sharing agreement

what are the characteristics of partnerships

1. voluntary association 2. partnership contract (called articles of co-partnership) should be in writing but may be expressed orally 3. limited life- death, bankruptcy, or expiration of the contract period automatically ends a partnership 4. taxation-not subject to tax on income--partners report their share of income on personal income tax return 5. mutual agency- each partner is an agent of the partnership and can enter into and bind it to any contract within the normal scope of its business 6. unlimited liability- each general partner is responsible for payment of all the debts of the partnership if the other partners are unable to pay a share 7. general partnership- all partners have mutual agency and unlimited liability 8. co-ownership of property- assets are owned but jointly by all partners but claims on partnership assets are based on their capital account and the partnership contract

what does withdrawal of a partner mean

1. withdrawing partner sells his or her interest to another person who pays cash or other assets to the withdrawing partner 2. cash or other assets of the partnership can be distributed to the withdrawing partner in settlement of his or her interest

a record for a pay period that shows the pay period dates and the hours worked, gross pay, deductions, and net pay of each employee; contains all the data needed to record payroll (for each pay period) in the General Journal

Payroll register

when the withdrawing partners equity differs from assets withdrawn, there is

a bonus to remaining or withdrawing partners equity

shows that the sum of the individual accounts in the subsidiary ledger equals the balance of the Accounts Receivable account in the general ledger

a schedule of accounts receivable

employers must pay and amount equal to employee contribution. the taxes are credited to the same FICA taxes payable account used to record the amounts withheld from the employees

FICA taxes

owners are called members, are protected with the limited liability feature of corporations and can assume an active management role. the ___ has a limited life and is typically classified as a partnership for tax purposes

Limited Liability Company (LLC or LC) LLC

has two classes of partners, general (at least one) and limited. the general partners assume unlimited liability for the debts of the partnership. the limited partners assume no personal liability beyond their invested amounts and cannot take active role in managing the company

Limited Partnership (LP or Ltd.)