ACC 210 Sawyer Test 3 CH 8

fringe benefits

-payments to employees other than wages or salary - often pay all or part of employees' insurance premiums and make contributions to retirement ans savings plans ex: free flights for airline employees(usually not recorded in the accounting records

loss

-reported in the income statement as either an operating or a nonoperating expense

accounts payable

-sometimes called "trade accounts payable" -amounts the company owes to suppliers that it has bought on credit ex: purchase inventory and promise to pay within 30 to 45 days with no formal agreement signed

payroll withholdings

1 federal and state income taxes 2 social security and medicare 3 health, dental, disability and life insurance premium 4 employee investments to retirement or savings plans

reporting a contingent liability

1 likelihood of payment 2 the ability to estimate the amount of payment

liabilities characteristics

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

deferred revenue

-liability account NOT a revenue account

Anastasia company recognizes payroll for the month of May. Gross employee income is $200,000; federal tax withheld are $40,000; state taxes withheld are $6,000; Social security and medicare taxes are $15,000. Employees contribute $10,000 to a 401(k) retirement plan. Anastasia will pay which net amount to its employees (ignore employer payroll taxes)?

$129,000 Calculation: (Employee Income 200,000 - federal taxes withheld 40,000 - state taxes withheld 6,000 - Social Security and Medicare taxes 15,000 - 401(k) employee contributions 10,000)

liquidity

-refers to having sufficient cash and other current assets to pay currently maturing debts three important measures -working capital -current ratio -acid-test ratio

FUTA

-Federal Unemployment Tax Act -requires a tax of 6.2% on the first $7000 earned by each employee

notes payable

-a liability that creates interest expense on the income statement

employers required to pay

-additional FICA tax matching employee -federal and state unemployment taxes -only employers pay FUDA and SUDA

company receives cash in advance

debit cash and credit deferred revenue

EX: on october 1, 2018, perry corp. signed a 12-month, 8% interest promissory note for $10,000. adjusting journal entries were made 12/31. journal entry for when the note matures oct 1, 2019:

debit to interest expense for $600 =$800 X 9/12

EX: company pays for items that were previously purchased on an account

journal entry: debit to accounts payable credit to cash

contingent gain

-an existing uncertain situation that might result in a gain -not recorded until the gain is certain -flipside is a contingent loss

contingent liability

-an existing uncertain situation that might result in a loss -only recorded if a loss is probable AND the amount is a reasonably estimable -reported in the balance sheet as either a current or a long-term liability depending on when management expects the probable loss to be paid -when no amount within the range appears more likely than others, we record the MINIMUM amount an disclose the range of potential loss -Probable-"likely" -Reasonably Possible(less than likely) -Remote-"unlikely to occur" ex: lawsuits, product warranties, environmental problems, and premium offers(ie future flier programs)

current portion of long-term debt

-debt that will be paid within the NEXT year

quick assets

-includes only cash, current investments, and accounts receivable

EX: ralph charges a fee of $2180 for services performed. fee includes 9% sales tax, ralph should credit sales tax payable for:

180 = 2180 - (2180/1.09)

Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2016 are as follows: 2016: $10,000 2017: $25,000 2018: $15,000 Assume that actual warranty costs during 2016 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2016 income statement?

40,000 =25,000+15,000 the warranty liability is reduced by the warranty costs paid during 2016

acid-test ratio

= (cash+ current investments + accounts receivable) / current liabilities -measures the availability of liquid current assets to pay current liabilities -aka "quick ratio"

working capital

= current assets - current liabilities -the difference between current assets and current liabilities -large positive working capital is an indicator of liquidity -not the best measure for comparison of companies

current ratio

=current assets /current liabilities -measures the availability of current assets to pay current liabilities -ratio of 1.0 or higher often reflects an acceptable level of liquidity -higher the ratio, the greater the company's liquidity

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required March 1, 2019 at the maturity date includes which of the following entries?

Debit note payable $100,000 Debit Interest Payable for $4,000 Debit Interest Expense for $2,000 Credit Cash for $106,000

contingencies

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

liability

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

wang corporation sells $200,000 goods on account to customers. wang estimates that warranties will be 2% of sales. at the end of the year, wang will require which of the following entries for warranties?

debit warranty expense $4,000; credit warranty liability $4,000

FICA taxes

-based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for SS and Medicare -requires employers to withhold 6.2% SS tax up to a maximum base plus a 1.45% medicare tax with no maximum -income less than 118,500 will have 7.65% withheld all year -income more than 118,500 will have 7.65% for the first 118,500 and then only 1.45% withheld on the remaining income during the rest of the year

payroll tax expense

-employer's portion of SS and Medicare taxes(matches employees) plus federal and state unemployment taxes

note receivable

-for the bank it is a note receivable instead of a note payable -is an asset that creates interest revenue

interest payable

-interest incurred but not paid debit interest expense credit interest payable

warranties

-most common example of contingent liabilities -companies record in the same accounting period it sells the product -represents an expense and a liability for the company

long-term obligations

-notes, mortgages, bonds -usually reclassified as current liabilities when they become payable within the upcoming year(or operating cycle)

long-term liabilities

-payable more than one year from now EX: note payable due in 3 years

sales tax payable

-sales tax collected from customers by the seller, representing current liabilities payable to the government -when the company collects sales taxes, it increases(debits) Cash and increases(credits) Sales Tax Payable sales tax = total cash paid -(total cash paid / 1 + sales tax rate)

interest

-stated in the terms of an annual percentage rate to be applied to the face value of the loan -typically annual = face value X annual interest rate X fraction of the year

operating cycle

-the time it takes to produce revenue

federal and state income taxes

-varies according to the amount the employee earns and the number of exemptions the employee claims

EX: When the note comes due on March 1, 2019, Southwest Airlines will pay the face value of the loan ($100,000) plus the entire $3,000 interest incurred ($100,000 × 6% × 6/12). The $3,000 represents six months of interest—the four months of interest ($2,000) in 2018 previously recorded as interest payable and two months of interest ($1,000) in 2019. Southwest records these transactions on March 1, 2019, as follows:

DEBIT notes payable(FV) 100,000 interest expense(=100k X 6% X 2/12) 1,000 interest payable (=100k X 6% X 4/12) 2,000 CREDIT cash 103,000

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. ex: 3 main: notes payable, accounts payable, and payroll liabilities. Also, deferred revenue, sales tax payable and the current portion of long-term debt

company earns revenue

debits deferred revenue and credits sales revenue

EX: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2018, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2019. On September 1, 2018, Southwest will receive $100,000 in cash and record the following:

sept 1, 2018 debit cash 100,000(+100,00 asset) credit notes payable 100,000 (-100,000 liabilities) dec 31, 2018 debit interest expense 2,000(=100k X 6% X 4/12) credit interest payable 2,000( record interest incurred, but not paid) How much interest cost does Southwest incur for the six-month period of the note from September 1, 2018, to March 1, 2019? 3000 = 100,000 X 6% X 6/12