Chapter 13: Current Liabilities and Contingencies

Dr. Accounts Payable 10000, Cr. Cash 9800, Cr. Purchase Discounts 200

(Take Discount) Paid a bill of 10000 early with terms of 2/10 net 30. (Gross Method)

cash dividend payable

A __ __ __ is an amount owed by a corporation to its stockholders as a result of board of directors' authorization.

contingency

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

warranty

A ___(product guarantee) is a promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product.

intend to refinance, demonstrate an ability

A company is required to exclude a short-term obligation from current liabilities if both of the following conditions are met: 1. It must ___ ___ ___ the obligation on a long-term basis. 2. It must ___ ___ ___ to consummate the refinancing.

obligation, unavoidable, occurred

A liability has three essential characteristics: 1.) It is a present __ that entails settlement by probable future transfer or use of cash, goods, or services. 2.) It is an __ obligation. 3.) The transaction or other event creating the obligation has already __.

charged

A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. Interest is still ___, however.

Cash + Short-term investments + net receivables/Current liabilities

Acid-test ratio =

$1,500, 20

All employers who meet the following criteria are subject to the Federal Unemployment Tax Act (FUTA): (1) those who paid wages of ___ or more during any calendar quarter in the year or preceding year, or (2) those who employed at least one individual on at least one day in each of weeks during the current or preceding calendar year.

litigation, warranty, premiums, environmental

As a result, accruals and disclosures of contingencies vary considerably in practice. Some of the more common loss contingencies are: 1. ___, claims, and assessments. 2. Guarantee and ___ costs. 3. ___ and coupons. 4. ___ liabilities.

Dr. Unearned Sales Revenue 100000, Cr. Sales Revenue 100000 (To record football ticket revenue)

As each game is completed, Allstate University makes the following entry.

Dr. Cash 100000, Cr. Notes Payable 100000 (To record issuance of 6%, 4-month note to Castle National Bank)

Assume that Castle National Bank agrees to lend $100,000 on March 1, 2014, to Landscape Co. if Landscape signs a $100,000, 6 percent, four-month note. Landscape records the cash received on March 1 as follows.

Dr. Notes Payable 100000, Dr. Interest Payable 2000, Cr. Cash 102000 (To record payment of Castle National Bank interest-bearing note and accrued interest at maturity)

At maturity (July 1), Landscape must pay the face value of the note ($100,000) plus $2,000 interest ($100,000 x 6% x 4/12). Landscape records payment of the note and accrued interest as follows.

operating expense, liability

Because both the federal and the state unemployment taxes accrue on earned compensation, companies should record the amount of accrued but unpaid employer contributions as an ___ ___ and as a current ___ when preparing financial statements at year-end.

Payroll, compensated, bonuses

Companies also report as a current liability amounts owed to employees for salaries or wages at the end of an accounting period. In addition, they often also report as current liabilities the following items related to employee compensation. 1. ___ ___ 2.___ ___ 3. ___.

time period, probability, reasonable estimate

Companies must consider the following factors, among others, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments. 1. The ___ ___ in which the underlying cause of action occurred. 2. The ___ of an unfavorable outcome. 3. The ability to make a ___ ___ of the amount of loss.

already rendered, vest, probable, estimated

Companies should accrue a liability for the cost of compensation for future absences if all of the following conditions exist. [6] (a) The employer's obligation relating to employees' rights to receive compensation for future absences is attributable to employees' services __ ___. (b) The obligation relates to the rights that __or accumulate. (c) Payment of the compensation is ___. (d) The amount can be reasonably ___.

probable, reasonably estimated

Companies should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met. 1. Information available prior to the issuance of the financial statements indicates that it is ___ that a liability has been incurred at the date of the financial statements. 2. The amount of the loss can be ___ ___.

compensated absences

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Retired, refinanced, converted

Companies, like PepsiCo, exclude long-term debts maturing currently as current liabilities if they are to be: 1. ___ by assets accumulated for this purpose that properly have not been shown as current assets, 2. ___, or retired from the proceeds of a new debt issue, or 3. ___ into capital stock.

Contingent

Contingent liabilities depend on the occurrence of one or more future events to confirm either the amount payable, the payee, the date payable, or its existence.

returnable

Current liabilities may include ___ cash deposits received from customers and employees.

Current assets/current liabilities

Current ratio =

contra, subtracted

Discount on Notes Payable is a __ account to Notes Payable, and therefore is __ from Notes Payable on the balance sheet.

Income Tax withholding, FICA taxes-employee share, union dues

Employee Payroll Liabilities

FICA taxes-employer share, Federal unemployment, State unemploymnet

Employer Payroll Liabilities

Federal Insurance Contribution Act

FICA

receive assets

Gain contingencies are claims or rights to ___ ___ (or have a liability reduced) whose existence is uncertain but which may become valid eventually

Cash, current liability, unearned revenue, revenue

How do these companies account for unearned revenues that they receive before delivering goods or rendering services? 1. When a company receives an advance payment, it debits ___, and credits a ___ ___ account identifying the source of the unearned revenue. 2. When a company recognizes revenue, it debits the ___ ___ account, and credits a ___ account.

Dr. Interest Expense 2000, Cr. Interest Payable 2000 (To accrue interest for 4 months on Castle National Bank note)

If Landscape prepares financial statements semiannually, it makes the adjusting entry (shown at the top of page 704) to recognize interest expense and interest payable of $2,000 ($100,000 x 6% x 4/12) at June 30.

full

In practice, current liabilities are usually recorded and reported in financial statements at their ___ maturity value.

Dr. Cash 500, Cr. Due to Customer 500

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 1. On December 5, the store received $500 from the Jackson Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15.

Dr. Cash 798000, Cr. Sales Revenue 760000, Cr. Sales Tax Payable 38000

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 2. During December, cash sales totaled $798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month.

Dr. Trucks 126000, Cr. Cash 126000

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 3. On December 10, the store purchased for cash three delivery trucks for $120,000. The trucks were purchased in a state that applies a 5% sales tax.

Dr. Land Improvements 84000, Cr. Asset Retirement Obligation 84000

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 4. The store determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Baileys' estimates the fair value of the obligation at December 31 is $84,000.

Dr. Lawsuit Loss 250000, Cr. Lawsuit Liability 250000

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 5. As a result of uninsured accidents during the year, personal injury suits for $350,000 and $60,000 have been filed against the company. It is the judgment of Baileys' legal counsel that an unfavorable outcome is unlikely in the $60,000 case but that an unfavorable verdict approximating $250,000 (reliably estimated) will probably result in the $350,000 case.

No entry required

Listed below are selected transactions of Baileys' Department Store for the current year ending December 31. 6. Baileys' Midwest store division consisting of 12 stores in "Tornado Alley" is uninsurable because of the special risk of injury to customers, employees, and losses due to severe weather and subpar construction standards in older malls. The year 2014 is considered one of the safest (luckiest) in the division's history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from $60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.

Dr. Cash 75000, Dr. Discount on Notes Payable 6000, Cr. Notes Payable 81000 Dr. Interest Expense 1500, Cr. Discount on Notes Payable 1500

Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note. Also include JE for Dec. 31.

Dr. Accounts Payable 50000, Cr. Notes Payable 50000 Dr. Interest Expense 1000, Dr. Interest Payable 1000

Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account. Also show JE for Dec. 31.

employers

Only ___ pay the unemployment tax.

6.2, 7000, .08

Only employers pay the unemployment tax. The rate of this tax is ___ percent on the first $___ of compensation paid to each employee during the calendar year. The employer receives a tax credit not to exceed 5.4 percent for contributions paid to a state plan for unemployment compensation. Thus, if an employer is subject to a state unemployment tax of 5.4 percent or more, it pays only __ percent tax to the federal government.

Dr. Accounts Payable 10000, Cr. Cash 10000

Paid a bill of 10000 and forego the discount (Gross Method)

Dr. Accounts Payable 9800, Dr. Purchase Discount Lost 200, Cr. Cash 10000

Paid a bill of 10000 and forego the discount (Net Method)

Dr. Accounts Payable 9800, Cr. Cash 9800

Paid a bill of 10000 early with terms of 2/10 net 30. (Net Method)

Dr. Salaries and Wages Expense 10000, Dr. Withholding Taxes Payable 1320, FICA Taxes Payable 765, Union Dues Payable 88, Cash 7827

Payroll Deductions Example. Assume a weekly payroll of $10,000 entirely subject to FICA and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with income tax withholding of $1,320 and union dues of $88 deducted. The company records the salaries and wages paid and the employee payroll deductions as follows.

Dr. Payroll Tax Expense 1245, Cr. FICA Taxes Payable 765, FUTA Taxes Payable 80, Cr. SUTA Taxes Payable 400

Payroll Deductions Example. Assume a weekly payroll of $10,000 entirely subject to FICA and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with income tax withholding of $1,320 and union dues of $88 deducted. The company records the salaries and wages paid and the employer payroll deductions as follows.

current maturities

PepsiCo reports as part of its current liabilities the portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next fiscal year. It categorizes this amount as ___ ___ of long-term debt.

present obligations, result of past transactions or event

Probable Future Sacrifices of Economic Benefits arising from ___ ___ of a particular entity to transfer assets or provide services to other entities in the future as a __ __ __ __ __ __

Dr. Purchases 10000, Cr. Accounts Payable 10000

Record a 10000 bill (2/10, net/30) (Gross Method)

Dr. Purchases 9800, Cr. Accounts Payable 9800

Record a 10000 bill (2/10, net/30) (Net Method)

Dr. Purchases 50000, Cr. Accounts Payable 50000

Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross and uses a periodic inventory system.

Accounts, notes, current maturities, refinanced, dividends, advances, deposits, unearned, sales tax, income, employee

Some typical current liabilities: 1.) __ payable 2.) __ payable 3.) __ __ of long-term debt 4.)Short-term obligations expected to be ___ 5.)__ payable 6.) Customer __ and __. 7.)__ revenues 8.)__ __ payable 9.)__ taxes payable 10.)__-related liabilities

operating cycle

The __ __is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. Industries that manufacture products requiring an aging process, and certain capital-intensive industries, have an operating cycle of considerably more than one year.

Social Security Tax

The combination of the OASDI tax (FICA) and the federal Hospital Insurance Tax is commonly referred to as the ___ ___ ___

7.65, 1.45

The combined rate for these taxes, ____ percent on an employee's wages to $113,700 and ____ percent in excess of $113,700, changes intermittently by acts of Congress.

actually refinancing, financing agreement

The company demonstrates the ability to consummate the refinancing by: (a) ___ ___ the short-term obligation by issuing a long-term obligation or equity securities after the date of the balance sheet but before it is issued; or (b) Entering into a ___ ___ that clearly permits the company to refinance the debt on a long-term basis on terms that are readily determinable.

Dr. Cash 3120, Cr. Sales Revenue 3000, Cr. Sales Taxes Payable 120

The entry below illustrates use of the Sales Taxes Payable account on a sale of $3,000 when a 4 percent sales tax is in effect.

taxes, premiums, savings, dues

The most common types of payroll deductions are __, insurance ___, employee ___, and union ___.

monies, refunds, pending, tax loss

The typical gain contingencies are: 1. Possible receipts of ___ from gifts, donations, asset sales, and so on. 2. Possible ___ from the government in tax disputes. 3. ___ court cases with a probable favorable outcome. 4. ___ ___ carryforwards (discussed in Chapter 19).

Dr. Salaries and Wages Expense 10700, Cr. Salaries and Wages Payable 10700, Dr. Salaries and Wages Payable 10700, Cr. Cash 10700

To illustrate the entries for an employee bonus, assume that Palmer Inc. shows income for the year 2014 of $100,000. It will pay out bonuses of $10,700 in January 2015. Palmer makes an adjusting entry dated December 31, 2014, to record the bonuses as follows. In January 2015, when Palmer pays the bonus, it makes this journal entry:

Cash or Accounts Receivable 500,000 Sales Revenue 500,000 (To record sales revenue) Warranty Expense 4,000 Cash, Inventory, Accrued Payroll 4,000 (Warranty costs incurred) Warranty Expense 16,000 Warranty Liability 16,000 (To accrue estimated warranty costs) Warranty Liability 16,000 Cash, Inventory, Accrued Payroll 16,000 (Warranty costs incurred)

To illustrate the expense warranty method, assume that Denson Machinery Company begins production on a new machine in July 2014, and sells 100 units at $5,000 each by its year-end, December 31, 2014. Each machine is under warranty for one year. Denson estimates, based on past experience with a similar machine, that the warranty cost will average $200 per unit. Further, as a result of parts replacements and services rendered in compliance with machinery warranties, it incurs $4,000 in warranty costs in 2014 and $16,000 in 2015. 1. Sale of 100 machines at $5,000 each, July through December 2014: 2. Recognition of warranty expense, July through December 2014: The December 31, 2014, balance sheet reports "Warranty liability" as a current liability of $16,000, and the income statement for 2014 reports "Warranty expense" of $20,000. 3. Recognition of warranty costs incurred in 2015 (on 2014 machinery sales):

Dr. Cash 500000, Cr. Unearned Revenue 500000 (To record sale of 10000 season tickets)

To illustrate, assume that Allstate University sells 10,000 season football tickets at $50 each for its five-game home schedule. Allstate University records the sales of season tickets as follows.

Dr. Salaries and Wages Expense 9600 Cr. Salaries and Wages Payable 9600 ($480 x 20) Dr. Salaries and Wages Payable 9600 Dr. Salaries and Wages Expense 1200 Cr. Cash 10800 ($540 x 20)

To illustrate, assume that Amutron Inc. began operations on January 1, 2014. The company employs 10 individuals and pays each $480 per week. Employees earned 20 unused vacation weeks in 2014. In 2015, the employees used the vacation weeks, but now they each earn $540 per week. Amutron accrues the accumulated vacation pay on December 31, 2014, as follows. At December 31, 2014, the company reports on its balance sheet a liability of $9,600. In 2015, it records the payment of vacation pay as follows.

Dr. Cash 100000, Dr. Discount on Notes Payable 2000, Cr. Notes Payable 102000 (To record issuance of 4-month, zero-interest-bearing note to Castle National Bank)

To illustrate, assume that Landscape issues a $102,000, four-month, zero-interestbearing note to Castle National Bank. The present value of the note is $100,000. Landscape records this transaction as follows.

Dr. Sales Revenue 5,769.23, Cr. Sales Taxes Payable 5,769.23

To illustrate, assume that the Sales Revenue account balance of $150,000 includes sales taxes of 4 percent. Thus, the amount recorded in the Sales Revenue account is comprised of the sales amount plus sales tax of 4 percent of the sales amount. Sales therefore are $144,230.77 ($150,000 4 1.04) and the sales tax liability is $5,769.23 ($144,230.77 3 0.04; or $150,000 2 $144,230.77). The following entry would record the amount due the taxing unit.

on or before

To report a loss and a liability in the financial statements, the cause for litigation must have occurred ___ ___ ___ the date of the financial statements.

current liabilities

To the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period, it should recognize them as ___ ___.

cash

Under the ___-basis method, companies expense warranty costs as incurred.

12, maturing

When only a part of a long-term debt is to be paid within the next __ months, as in the case of serial bonds that it retires through a series of annual installments, the company reports the __ portion of long-term debt as a current liability, and the remaining portion as a long-term debt.

Discount on Notes Payable

__ __ __ __ is a contra account to Notes Payable, and therefore is subtracted from Notes Payable on the balance sheet.

Current Liabilities

__ __ are "obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities."

Notes Payable

__ __ are written promises to pay a certain sum of money on a specified future date.

Accounts payable

__ __, or trade accounts payable, are balances owed to others for goods, supplies, or services purchased on open account.

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."

Preferred dividends in arrears

___ ___ ___ ___ are not an obligation until the board of directors authorizes the payment

Compensated absences

___ ___ are paid absences from employment—such as vacation, illness, and holidays.

Accumulated Rgihts

___ ___ are those that employees can carry forward to future periods if not used in the period in which earned. For 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.

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.

Short-term, refinanced

___ ___ obligations are debts scheduled to mature within one year after the date of a company's balance sheet or within its operating cycle, whichever is longer. Some short-term obligations are expected to be __ on a long-term basis.

Loss

___ contingencies involve possible losses. A liability incurred as a result of a loss contingency is by definition a contingent liability.

Intention

___ to refinance on a long-term basis means that the company intends to refinance the short-term obligation so that it will not require the use of working capital during the ensuing fiscal year (or operating cycle, if longer).

Probable, Reasonably possible, Remote

___-The future event or events are likely to occur. ___ ___ -. The chance of the future event or events occurring is more than remote but less than likely. ___-The chance of the future event or events occurring is slight.

due on demand

a company should classify as current any liability that is ___ __ ___ callable by the creditor) or will be due on demand within a year (or operating cycle, if longer)