Accounting Chapter Eleven
What is a contingent liability? Provide some examples of contingencies.
A contingent liability is a potential, rather than an actual, liability because it depends on a future event. For a contingent liability to be paid, some event (the contingency) must happen in the future. Some examples of contingencies are lawsuits and co-signing a note for another entity.
Curtis, Inc. is facing a potential lawsuit. Curtis's lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?
Contingencies that are reasonably possible have more chance of occurring but are not likely. A reasonably possible contingency should be described in the notes to the financial statements.
What is a current liability? Provide some examples of current liabilities.
Current liabilities must be paid with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than a year. Examples of current liabilities include: Accounts Payable, Notes Payable due within one year, Salaries Payable, Interest Payable, and Unearned Revenue.
What payroll taxes is the employer responsible for paying?
Employer FICA tax (OASDI and Medicare) State unemployment compensation tax Federal unemployment compensation tax
List the required employee payroll withholding deductions.
Federal, State and Local Income Tax FICA-OASDI FICS-Medicare
What is the difference between gross pay and net pay?
Gross pay is the total amount of salary, wages, commissions, and bonuses earned by the employee during a pay period, before taxes or any other deductions. Gross pay is an expense to the employer. Net pay is the amount the employee gets to keep. Net pay equals gross pay minus all deductions paid by the employee such as income tax withheld
How is sales tax recorded? Is it considered an expense of a business? Why or why not?
Sales tax is recorded as a liability when it is charged to the customer; it is usually calculated as a percentage of the amount of the sale. It is not considered an expense to the business, but a current liability. Companies collect the sales tax and then forward it to the state at regular intervals.
When do businesses record warranty expense and why?
The matching principle requires businesses to record Warranty Expense in the same period that the company records the revenue related to that warranty. The expense, therefore, is incurred when the company makes a sale, not when the company pays the warranty claims.
What are the three main characteristics of liabilities?
The three main characteristics of liabilities are: • They occur because of a past transaction or event. • They create a present obligation for future payment of cash or services. • They are an unavoidable obligation.
