Chapter 13: Current Liabilities

Employee pays:

Income tax withholding FICA taxes - employee share Union dues

Social Security Taxes

OASDI aka FICA (Fed Insurance Contribution Act) 1965 Congress passed Medicare Hospital Insurance tax, paid by employee & employer 6.2% based on gross pay up to $127,200

Current Liabilities

Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilites

NEXUS

Occurs when a business has some kind of connection to a state. most of the time, states consider a substantial "physical presence" creates nexus. Does NOT include delivery relationship

Compensated Absences

Paid absences for vacation, illness and holidays

operating cycle

Period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

Guarantee and Warranty Costs

Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product.

(Trade) Accounts payable

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

Gain Contingencies

claims or rights to receive assets whose existence is uncertain but which may become valid eventually DO NOT RECORD - disclose in notes only when high probability exists

Returnable Cash Deposits

current liability that results from customers making deposits to guarantee performance of a contract or service, or as a guarantee to cover payment of expected future obligations

Interest bearing note

does not explicitly state an interest rate on face of the note. INTEREST still charged. - borrower receives in cash the PV of note

Unearned Revenues

Cash received before a company completes the revenue recognition process by providing goods or performing services.

Companies consider following factors in determining whether to record liability with respect to pending or threatened litigations and actual or possible claims and assessments

- Time period in which the action occurred. - Probability of an unfavorable outcome. - Ability to make a reasonable estimate of the loss.

Discount on Notes Payable

- contra account to N/P, subtracted from N/P on balance sheet - represents interest expense chargeable to future period

Consideration Payable (Premiums/Coupons)

-Companies should charge the costs of premiums and coupons to expense in the period of the sale that benefits from the plan. -Companies offer premiums, coupon offers, and rebates to stimulate sales.

Notes Payable

-Written promises to pay a certain sum of money of specified future date -classified as short-term or long-term -interest bearing or zero interest

Accrue estimated loss from loss contingency if both conditions met:

1. Information available prior indicates PROBABLE that a liability has been incurred 2. amount of loss can be REASONABLY ESTIMATED

Liability has 3 essential characteristics

1. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. 2. It is an unavoidable obligation. 3. The transaction or other event creating the obligation has already occurred.

EXCLUDE short-term obligations expected to be refinanced if both of following are met:

1. Must intend to refinance the obligation on long-term basis 2. Must demonstrate an ability to refinance: - Actual Refinancing - Enter into financing agreement

Examples of Gain Contingencies:

1. Possible receipts of monies from gifts, donations, asset sales, and so on. 2. Possible refunds from the government in tax disputes. 3. Pending court cases with a probable favorable outcome. 4. Tax loss carryforwards

Common loss contingencies are:

1.Litigation, claims, and assessments. 2.Guarantee and warranty costs. 3.Consideration payable (e.g., premiums and coupons).

Cash Dividend Payable

Amount owed by a corporation to its stockholders as a result of its board of directors' authorization

Employer pays:

FICA taxes - employer share Federal unemployment State unemployment

Unemployment taxes

FUTA (Fed Unemployment Tax Act) Federal Rate is 0.6% on first $7,000

When is Sales Tax due?

For the period in which the sale takes place, and the customer takes POSSESSION or TITLE of an item. (regardless of when actual payment is received)

Loss Contingencies

Involves possible losses - dependent on future occurrence (contingent liability) FASB uses 3 areas of probability - Probable = Accrue/Footnote - Reasonably possible = Footnote - Remote = Ignore

Assurance-type warranty

a quality guarantee that the good or service is free from defects at the point of sale - Charge warranty costs to operating expense in the year of sale, or service provided. - Should record a warranty liability

Companies should accrue a liability for the cost of compensation for future absences if all of the following conditions exist:

a) The employer's obligation is attributable to employees' services already rendered. b) The obligation relates to rights that vest or accumulate. c) Payment of the compensation is probable. d) The amount can be reasonably estimated. Recognize in year earned