Chapter 8: Current Liabilities

True or False? Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government.

True The amount withheld varies according to the amount the employee earns and the number of exemptions the employee claims.

When do you record contingent gains?

We do not record contingent gains until the gain is certain and no longer a contingency.

When do we record interest expense?

We record interest expense in the period in which we incur it, rather than in the period in which we pay it.

working capital

current assets- current liabilities

current ratio

current assets/current liabilities

Recording Notes Payable

debit cash at face value, credit notes payable at face value

Recording Interest Payable

debit interest expense, credit interest payable

Recording Repayment of Notes Payable

debit notes payable at face value, debit interest expense with current year fraction, debit interest payable and credit cash for total of debits

How do you record a companies warranty liability?

debit warranty expense (the number of sales x the percent of expected warranty costs) and credit warranty liability for the same amount debited

If the likelihood of payment is remote and reasonably estimable or not reasonably estimable...

disclosure is not required

If the likelihood of payment is probable and not reasonably estimable...

disclosure is required

If the likelihood of payment is reasonably possible and reasonably estimable or not reasonably estimable...

disclosure is required

quick assets

include only cash, current investments, and accounts receivable.

interest calculation on notes payable

interest = face value x annual interest rate x fraction of the year

long-term liabilities

liabilities which are payable more than one year from now

current liabilities

liabilities which are payable within one year

If the likelihood of payment is probable and reasonably estimable...

liability is recorded

operating cycle

the time it takes to produce revenue

How does a lender record the interest payments of a note?

they would record a debit to interest receivable for (face value x interest rate x fraction of the year) and a credit to interest revenue for the same amount

What are some of the most frequent reported current liabilities?

-notes payable -accounts payable -payroll liabilities -deferred revenue -sales tax payable - current portion of long-term debt

2 requirements for Warranties

1. The likelihood of payment is probable or likely to occur. 2. The amount of payment is reasonably estimable

A contingent liability is recorded only if:

1. The loss is probable and, 2. The amount is reasonably estimable

When does a company record warranty expense and what does this category fall into?

A company needs to record warranty expense in the same accounting period it sells you a product. The warranty represents an expense and a liability for the company. Warranties are almost always probably and estimable.

fringe benefits

Additional employee benefits paid for by the employer. Examples include, insurance premiums and contributions to retirement or savings plans

Contingent Gains

An existing uncertain situation that might result in a gain. Such as Polaroid suing Kodak for patent infringement. For polaroid that is a contingent gain and for Kodak that is a contingent loss.

Contingent Liabilities

An existing uncertain situation that might result in a loss depending on the outcome of a future event

Who pays FICA taxes?

Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. Also, The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security.

when are contingent gains recorded?

Contingent gains are not recorded until the gain is certain

Deferred revenue is what type of account?

It is a liability account not a revenue account

Notes payable

Note signed by a company promising to repay the amount borrowed plus interest

How does a lender record the issuance of a note?

They would record a debit to notes receivable and a credit to cash

liability

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

A line of credit

an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork.

accounts payable

are amounts the company owes to suppliers of merchandise or services that it has bought on credit

What does a company record at the end of the reporting period if the interest on a notes payable is not due till 2 months later? and what does it record (how does it adjust the books?) 2 months later when the interest is actually due?

end of the reporting period- the company records the current interest due debiting interest expense (using the current fraction of the year x the interest rate x the face value) and crediting INTEREST PAYABLE by the same amount 2 months later- the company will record a debit of notes payable (face value), a debit of interest expense (face value x interest rate x 2/12 (the two months of the current year)), a debit of interest payable for the same amount credited to interest payable at the end of the reporting period and a credit to cash for the total of the debits (face value + total interest due)

What categories do notes receivable and notes payable fall into and what do they create?

notes receivable is an asset and creates interest revenue notes payable is a liability and creates interest expense

Liquidity

refers to having sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts.

Current portion of long-term debt

the amount of debt that will be paid within the next year

What does a company record when they collect sales tax from customers?

the company records a increase in cash (debits) and an increase in sales tax payable (credits)

How does a company record a customers warranty claim?

the company would debit warranty liability ( decrease liability) by the amount the customer's warranty claim costs the company and credit cash (decrease asset) for the same amount

commercial paper

when a company borrows from another company rather than from a bank