ACCT Notes Chapter 8
Q: On October 1, a company signs a $10,000, 5%, 6-month note payable. How much interest would be recorded by December 31 of the same year? - $250 - $125 - $500 - $0
$125
Q: A home improvement store sells some merchandise to a customer. The price of the merchandise is $200 and the sales tax rate is 6.5%. How much would be recorded in the sales tax payable account? - $13.00 - $213.00 - $130.00 - None of the above.
$13.00
If Hawaiian Travel Agency paid $100,000 in salary expenses, $15,000 for fringe benefits, and $13,850 for employer payroll taxes, what is the total amount in expenses?
$28,850
When is a contingent liability recorded?
- only if a loss is probable and the amount is reasonably estimable
How would you record commercial paper and what is the interest rate?
- recording for commercial paper is exactly the same as the recording for notes payable - the interest rate on commercial paper is usually lower than on a bank loan
- cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities
Acid-test ratio (or quick ratio)
Besides the main current liabilities, what are other current liabilities?
Additional current liabilities companies might report include deferred revenues, sales tax payable, and the current portion of long-term debt
Ex: Assume a company with a current ratio of 1.25 (current assets of $5 million and current liabilities of $4 million) has a debt covenant with its bank that requires a minimum current ratio exceeding 1.25. How would the company fix this?
By delaying the receipt of $1 million in goods until early January, inventory and accounts payable would both be lower by $1 million than they would be without the delay. This, in turn, increases the current ratio to 1.33 (current assets of $4 million and current liabilities of $3 million), and the requirement of the debt covenant is met
What are the effects of various changes on the liquidity ratios?
Changes that increase the ratio Current ratio: increase in current assets; decrease in current liabilities Acid-Test Ratio: increase in quick assets; decrease in current liabilities Changes that Decrease the Ratio Current ratio: decrease in current assets; increase in current liabilities Acid-test ratio: decrease in quick assets; increase in current liabilities
- borrowing from another company rather than from a bank
Commercial paper
Q: The current ratio is: - Computed as the difference between current assets and current liabilities - Computed as current assets divided by current liabilities - A measure of profitability - All of the above
Computed as current assets divided by current liabilities
- uncertain situations that can result in a gain or a loss for a company
Contingencies
- an existing uncertain situation that might result in a gain
Contingent gain - companies usually do not record contingent gains until the gain is known with certainty
- an existing uncertain situation that might result in a loss
Contingent liability
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. On September 1, 2024, Southwest will receive $100,000 in cash and record the following:
Debit: Cash ($100,000) Credit: Notes Payable ($100,000)
Ex: Assume Apple Inc. sells an iTunes gift card to a customer for $100. Apple records the sale of the gift card as follows:
Debit: Cash ($100) Credit: Deferred Revenue ($100)
- employers incur expenses and liabilities from having employees
Payroll liabilities
What is the most common example of contingent liabilities?
Warranties
- the difference between current assets and current liabilities
Working capital
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. How much interest cost does Southwest incur for the six-month period of the note from September 1, 2024, to March 1, 2025?
$3,000 = $100,000 x 6% x 6/12
Q: During its first year of business, Oceanic, Inc. has sales of $300,000 and pays warranty claims of $10,400. Oceanic offers a one-year warranty and anticipates that warranty costs will total 5% of sales. What is the balance in Oceanic's Warranty Liability account at the end of the first year? - $15,000 - $4,600 - $25,400 - $20,800
$4,600 - Explanation: The estimated amount of total warranty expense is $300,000 × 5% = $15,000. Since payments of $10,400 were made during the year, the remaining warranty costs estimated to occur next year is: $15,000 - $10,400 = $4,600. The Warranty Liability account will have a balance of $4,600 at the end of the first year.
Ex: If you have $20 in your pocket and you know that you still owe $10 to your friend and $3 for parking, what is your working capital?
$7
Q: On July 1, Costa Rica Adventures issues a $120,000, eight-month, 6.75% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjusting entry on December 31?
- $4,050 $120,000 x 6.75% x 6/12 = $4,050
Ex: If you earn less than $142,800, how much FICA tax will be withheld from your check all year?
- 7.65%
What is the total FICA tax?
- 7.65% (6.2% + 1.45%) on income up to a base amount ($142,800 in 2021) and 1.45% on all income earned
What is the formula for the acid-test ratio?
- Cash + Current investments + Accounts receivable / Current liabilities
Do employers and employees pay the same amount of FICA tax?
- Yes - employer's limits on FICA tax are the same as the employee's - Government actually collects 15.3% on each employee's salary
Ex: If you earn $192,800, how much FICA tax will be withheld from your check all year?
- You would have 7.65% withheld for FICA on the first $142,800 of your annual salary and then only 1.45% withheld on the remaining $50,000 earned during the rest of the year
What might provide a better indication of a company's liquidity than does the current ratio?
- acid-test ratio
What are examples of fringe benefits?
- employees' insurance premiums and make contributions to retirement or savings plans
Ex: You are hired at a $60,000 annual salary with salary payments of $5,000 per month. Before making any spending plans, though, you need to realize that your paycheck will be much less than $5,000 a month. Why is that?
- employer might withhold amounts for federal and state income taxes, social security and Medicare, health, dental, disability, and life insurance premiums, and employee investments to retirement - actual take-home pay may be $3,150
What are payroll costs for employees?
- federal and state income taxes - Employee portion of Social Security and Medicare (FICA taxes) - Employee contributions for health, dental, disability, and life insurance - Employee investments in retirement or savings plans
What are payroll costs for employers?
- federal and state unemployment taxes - employer matching portion of Social Security and Medicare - Employer contributions for health, dental, disability, and life insurance - employer contributions to retirement or savings plans
Most accounts are payable within one year and are classified as current liabilities. When are any accounts payable classified as long-term liabilities?
- if they are more than one year
What are examples of contingent liability?
- lawsuits, product warranties, environmental problems, and premium offers
What obligations do companies most frequently report as current liabilities?
- notes payable, accounts payable, payroll liabilities, deferred revenue, sales tax payable, salaries payable, etc.
A current ratio of 1.5 indicates...
- that for every $1 of current liabilities, the company has $1.50 of current assets
What does a current ratio greater than 1 indicate?
- there are more current assets than current liabilities - the higher the current ratio, the greater the company's liquidity
What are the three liquidity measures?
- working capital, the current ratio, and the acid-test ratio (all three measures are calculated using current assets and current liabilities)
- amounts the company owes to suppliers of merchandise or services that it has bought on credit
Accounts Payable
Ex: When you buy a new Dell laptop, it comes with a warranty covering the hardware from defect for either a 90-day, one-year, or two-year period depending on the product. The warranty for the computer represents a liability for Dell at the time of the sale because it meets the criteria for recording a contingent liability. What is that?
1. Probable = warranties almost always entail an eventual expenditure 2. Reasonably estimable = Even though Dell doesn't know precisely what the warranty costs will be next year, it can formulate a reasonable prediction from past experiences, industry statistics, and other current business conditions
Ex: Deloitte was the auditor for a client we'll call Jeeps, Inc. One of the major issues that appeared in Deloitte's audit of Jeeps, Inc., was outstanding litigation. Several lawsuits against the company allege that the jeep top (made of vinyl) did not hold in a major collision. The damages claimed were quite large, about $100 million. Question whether the insurance company could pay because the insurance carrier was undergoing financial difficulty. What, if anything, should the auditor require Jeeps, Inc., to report because of the litigation? There are three options to consider for Jeeps, Inc.
1. Report a liability in the balance sheet for the full $100 million (perhaps some lesser amount that is more likely to be owed) 2. Do not report a liability in the balance sheet, but provide full disclosure of the litigation in a note to the financial statements 3. Do not report a liability in the balance sheet and provide no disclosure in a note
Q: Computer Wholesalers restores and resells notebook computers. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 5% of sales. Sales for the month of December are $590,000. Actual warranty expenditures in January of the following year were $22,500. 1. Does this situation represent a contingent liability? 2. Record the necessary entries in the Journal Entry Worksheet below. 4. What is the balance in the Warranty Liability account after the entries in Parts 2 and 3?
1. Yes 2. Debit: Warranty Expense ($29,500) Credit: Warranty Liability ($29,500) Debit: Warranty Liability ($22,500) Credit: Cash ($22,500) 3. Warranty Liability ($7,000) - Yes, it's probable that costs for warranties will be incurred and based on previous experience the amount is reasonably estimable - Warranty Expense ($590,000 x 5%) = $29,500 - $29,500 - $22,500 = 7,000
Q: Top Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2024 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $2.5 million. The fiscal year ends on December 31. 1. Should this contingent liability be reported, disclosed in a note only, or neither 2. What loss, if any, should Top Sound report in its 2024 income statement? 3. What liability, if any, should Top Sound report in its 2024 balance sheet? 4. What entry, if any, should be recorded?
1. reported 2. $2,500,000 3. $2,500,000 4. Debit: Loss ($2,500,000) Credit: Contingent Liability ($2,500,000)
What is the criteria for reporting a contingent liability?
1. the likelihood of payment is - probable - likely to occur - reasonably possible - more than remote but less than probable - remote - the chance is slight 2. The amount of payment is - reasonably estimable - not reasonably estimable
Airport asked you to pay $16.50 for lunch and the sales tax rate was 10%. What is the sales tax?
16.50 - (16.50 / 1 + .10) = 1.50
Q: Aspen Ski Resorts has 100 employees, each working 40 hours per week and earning $12 an hour. Although the company does not pay any health or retirement benefits, one of the perks of working at Aspen is that employees are allowed free skiing on their days off. Federal income taxes are withheld at 15% and state income taxes at 5%. FICA taxes are 7.65% of the first $142,800 earned per employee and 1.45% thereafter. Unemployment taxes are 6.2% of the first $7,000 earned per employee. Compute the total payroll tax expense Aspen Ski Resorts will pay for the first week of January in addition to the total salary expense and employee withholdings calculated in Part 1.
= $6,648 FICA taxes ($48,000 x 0.0765) = $3,672 Unemployment taxes ($48,000 x 0.062) = 2,976
What is the formula for sales tax?
= total cash paid - (total cash paid / 1 + sales tax rate)
Q: On September 1, 2024, Bahamas Airlines borrows $40.9 million, of which $9.8 million is due next year. Show how Bahamas Airlines would report the $40.9 million debt on its December 31, 2024, balance sheet.
Current Liabilities: Current portion of long-term debt = $9,800,000 Long-term liabilities: Notes payable = 31,100,000 Total liabilities = $40,900,000
Q: Airline Accessories has the following current assets: cash, $111 million; receivables, $103 million; inventory, $191 million; and other current assets, $27 million. Airline Accessories has the following liabilities: accounts payable, $116 million; current portion of long-term debt, $44 million; and long-term debt, $32 million. Based on these amounts, calculate the current ratio and the acid-test ratio for Airline Accessories.
Current Ratio = 432/160 = 2.70 Acid-Test Ratio = (Quick assets) 214/ (Current liabilities) 160 = 1.34 Current assets = 111 + 103 + 191 + 27 = 432 Current liabilities = 116 + 44 = 160 Quick assets = 111 + 103 = 214
What is the formula for current ratio?
Current Ratio = Current Assets / Current Liabilities
- obligations that, in most cases, are due within one year from the balance sheet date. However, when a company has an operating cycle of longer than a year, these are defined by the length of the operating cycle, rather than by the length of one year
Current liabilities
- debt that will be paid within one year from the balance sheet date
Current portion of long-term debt
- current assets divided by current liabilities; measures the availability of current assets to pay current liabilities
Current ratio
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. When the note comes due on March 1, 2025, Southwest Airlines will pay the face value of the loan ($100,000) plus the entire $3,000 interest incurred ($100,000 x 6% x 6/12). The $3,000 represents six months of interest - the four months of interest ($2,000) in 2024 previously recorded as interest payable and two months of interest ($1,000) in 2025. How would Bank of America record this transaction on March 1?
Debit: Cash ($103,000) Credit: Notes Receivable ($100,000) + Interest Receivable ($2,000) + Interest Revenue (100,000 + 6% + 2/12) ($1,000)
Ex: Suppose you buy lunch in the airport for $15 plus 10% sales tax. The airport restaurant records the transaction this way:
Debit: Cash ($16.50) Credit: Sales Revenue ($15.00) + Sales Tax Payable (= $15 x 10%) ($1.50) - When a company collects $16.50 from the customer, it owes $1.50 of that to the government for sales taxes. Only $15.00 represents revenue the company has generated from sales to customers
Ex: Assume Apple Inc. sells an iTunes gift card to a customer for $100. The first transaction is a debit to cash and a credit to deferred revenue. When the customer purchases and downloads, say, $15 worth of music, Apple records the following:
Debit: Deferred Revenue ($15) Credit: Sales Revenue ($15)
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. However, if Southwest's reporting period ends on December 31, 2024, then the company should not wait until March 1, 2025, to record interest cost. Instead, the company reports the four months' interest incurred during 2024 in its 2024 financial statements. The remaining interest will be reported in its 2025 financial statements. The adjusting entry to record interest is:
Debit: Interest Expense ($100,000 x 6% x 4/12) ($2,000) Credit: Interest Payable ($2,000)
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. However, if Southwest's reporting period ends on December 31, 2024, then the company should not wait until March 1, 2025, to record interest cost. Instead, the company reports the four months' interest incurred during 2024 in its 2024 financial statements. The remaining interest will be reported in its 2025 financial statements. How would Bank of America record this interest cost on December 31, 2024?
Debit: Interest Receivable ($2,000) Credit: Interest Revenue ($100,000 x 6% x 4/12) ($2,000)
Deloitte was the auditor for a client we'll call Jeeps, Inc. One of the major issues that appeared in Deloitte's audit of Jeeps, Inc., was outstanding litigation. Several lawsuits against the company allege that the jeep top (made of vinyl) did not hold in a major collision. The damages claimed were quite large, about $100 million. Question whether the insurance company could pay because the insurance carrier was undergoing financial difficulty. Ex: In the case of Jeeps, Inc., above, if the auditor believes it is probable that Jeeps, Inc., will lose the $100 million lawsuit at some point in the future, Jeeps, Inc., would report a contingent liability for $100 million at the end of the year. How would that look?
Debit: Loss ($100) Credit: Contingent Liability ($100)
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. When the note comes due on March 1, 2025, Southwest Airlines will pay the face value of the loan ($100,000) plus the entire $3,000 interest incurred ($100,000 x 6% x 6/12). The $3,000 represents six months of interest - the four months of interest ($2,000) in 2024 previously recorded as interest payable and two months of interest ($1,000) in 2025. The following transaction is recorded as following....
Debit: Notes Payable ($100,000) + Interest Payable (from 2024) ($2,000) + Interest Expense ($100,000 x 6% x 2/12) ($1,000) Credit: Cash ($103,000)
Ex: Suppose a company has a long-term note payable of $1,000,000. At the balance sheet date (December 31, 2024), the company determined that $200,000 of the note is due within the next 12 months (2025), while the remaining $800,000 is due in later periods (2026 and beyond). The company needs to reclassify $200,000 of the long-term note to current notes payable. How would it do that?
Debit: Notes Payable (long-term) ($200,000) Credit: Notes Payable (current) ($200,000) - The entry has no effect on total liabilities. Instead of reporting long-term notes payable of $1,000,000, the company will now report long-term notes payable of $800,000 and current notes payable of $200,000.
Ex: Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2014, signing a 6%, six-month note for the amount borrowed plus accrued interest due six months later on March 1, 2025. How would Bank of America record this note on September 1, 2024? (No interest yet)
Debit: Notes Receivable ($100,000) Credit: Cash ($100,000)
Ex: to understand how employee and employer payroll costs are recorded, assume that Hawaiian Travel Agency has a total payroll for the month of January of $100,000 for its 20 employees. Federal and state income tax withheld: $24,000 FICA tax rate (Social Security and Medicare): 7.65% Health insurance premiums (Blue Cross) paid by employer: $5,000 Contribution to retirement plan (Fidelity) paid by employer: $10,000 Federal and state unemployment tax rate: 6.2% Hawaiian Travel Agency pays employer's FICA taxes at the same rate that the employees pay (7.65%) and also pays unemployment taxes at the rate of 6.2%. The agency records its employer's payroll taxes as follows: (employers, not employees like before)
Debit: Payroll Tax Expense (total) ($13,850) Credit: FICA Tax Payable (0.0765 x $100,000) ($7,650) + Unemployment Tax Payable (0.062 x $100,000) ($6,200)
Ex: to understand how employee and employer payroll costs are recorded, assume that Hawaiian Travel Agency has a total payroll for the month of January of $100,000 for its 20 employees. Federal and state income tax withheld: $24,000 FICA tax rate (Social Security and Medicare): 7.65% Health insurance premiums (Blue Cross) paid by employer: $5,000 Contribution to retirement plan (Fidelity) paid by employer: $10,000 Federal and state unemployment tax rate: 6.2% Hawaiian Travel Agency records the employee salary expense, withholdings, and salaries payable on January 31 as follows:
Debit: Salaries Expense ($100,000) Credit: Employee Income Tax Payable ($24,000) + FICA Tax Payable (= 0.0765 x $100,000) ($7,650) Salaries Payable ($68,350) - salaries payable = 100,000 - 24,000 - 7,650 = 68,350
Ex: to understand how employee and employer payroll costs are recorded, assume that Hawaiian Travel Agency has a total payroll for the month of January of $100,000 for its 20 employees. Federal and state income tax withheld: $24,000 FICA tax rate (Social Security and Medicare): 7.65% Health insurance premiums (Blue Cross) paid by employer: $5,000 Contribution to retirement plan (Fidelity) paid by employer: $10,000 Federal and state unemployment tax rate: 6.2% Hawaiian Travel Agency also records its employer-provided fringe benefits as Salaries Expense and records the related credit balances to Fringe Benefits Payable:
Debit: Salaries Expense (fringe benefits) ($15,000) Credit: Fringe Benefits Payable (to Blue Cross) ($5,000) + Fringe Benefits Payable (to Fidelity) ($10,000)
Q: Sunny introduces a new compact music player that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 2% of sales. By the end of the first year of selling the product, total sales are $30.9 million, and actual warranty expenditures are $290,000. Record the adjusting entry for the remaining expected future warranty costs as of December 31, the end of the reporting period.
Debit: Warranty Expense ($328,000) Credit: Warranty Liability ($328,000) - $328,000 = ($30,900,000 x 2%) - $290,000
Ex: Suppose Dell introduces a new laptop computer in December 2024 that carries a one-year warranty against manufacturer's defects. Suppose new laptop sales for the entire month of December are $1.5 million. How much does Dell "owe" these customers? Even though no laptops are currently needing warranty work, Dell expects future warranty costs to be 3% of sales. This means the probable warranty cost in the next year is estimated to be $45,000 (= $1.5 million x 3%). This contingent liability is recorded in an adjusting entry at the end of 2024, the year of the sales as:
Debit: Warranty Expense ($45,000) Credit: Warranty Liability ($45,000)
Ex: Suppose Dell introduces a new laptop computer in December 2024 that carries a one-year warranty against manufacturer's defects. Suppose new laptop sales for the entire month of December are $1.5 million. How much does Dell "owe" these customers? Even though no laptops are currently needing warranty work, Dell expects future warranty costs to be 3% of sales. This means the probable warranty cost in the next year is estimated to be $45,000 (= $1.5 million x 3%). When customers make warranty claims and Dell incurs costs to satisfy those claims, the liability is reduced. Let's say that customers make warranty claims costing Dell $12,000 in January of 2025 (the following year). We record the payment for warranty work...
Debit: Warranty Liability ($12,000) Credit: Cash ($12,000) - balance in the Warranty Liability account at the end of January is $33,000
- an agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt
Debt covenant
- cash received in advance from a customer for products or services to be provided in the future
Deferred Revenue
- based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare
FICA taxes
What does the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) require for an employer's tax?
FUTA = requires a tax 6.0% on the first $7,000 earned by each employee SUTA = the unemployment tax rate and wage base vary by state
Q: February 1, Arrange a three-month bank loan of $4.0 million with First Bank under the line of credit agreement. Interest at the prime rate of 7% is payable at maturity. May 1: Pay the 7% note at maturity.
February 1 Debit: Cash ($4,000,000) Credit: Notes Payable ($4,000,000) May 1 Debit: Notes Payable ($4,000,000) + Interest Expense ($70,000) Credit: Cash ($4,070,000)
Q: Which of the following items is typically paid by the employer only? - Federal and state income taxes on employees' wages - Social Security taxes - Federal and state unemployment taxes - Medicare taxes
Federal and state unemployment taxes
- additional employee benefits paid for by the employer
Fringe benefits
- the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote
Gift card breakage - companies reduce deferred revenue and recognize sales revenue
- a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees
Unemployment taxes
When a company borrows money, it pays the lender interest in return for using the lender's money during the term of the loan. We calculate interest on notes as .....
Interest = Face value x Annual interest rate x Fraction of the year
Q: GH Environmental provides cost-effective solutions for managing regulatory requirements and environmental needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $5.8 million. Interest is payable at maturity. Determine the amount of interest expense that should be reported in the year-end income statement under each of the following independent assumptions: 1. Interest Rate = 10%, Fiscal Year-End = December 31 2. Interest Rate = 11%, Fiscal Year-End = September 30 3. Interest Rate = 12%, Fiscal Year-End = October 31 4. Interest Rate = 6%, Fiscal Year-End = January 31
Interest Expense 1. $290,000 ($5,800,000 x 0.10 x 6/12) 2. $159,500 ($5,800,000 x 0.11 x 3/12) 3. $232,000 ($5,800,000 x 0.12 x 4/12) 4. $203,000 ($5,800,000 x 0.06 x 7/12)
- an obligation of a company to transfer some economic benefit in the future
Liability
- an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork
Line of credit - notes payable is recorded each time the company borrows money under the line of credit
- having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts
Liquidity
- managers can influence the ratios that measure liquidity to some extent (Ex: A company can influence the timing of inventory and accounts payable recognition by asking suppliers to change their delivery schedules. Delay the shipment and billing of certain inventory parts to receive them in early January rather than late December, reducing inventory and accounts payable at year-end)
Liquidity Management
What is reclassification for long-term obligations?
Long-term obligations (notes, mortgages, leases, bonds) are reclassified and reported as current liabilities when they become payable within the upcoming year (or operating cycle, if longer than a year). The reclassification is a simple entry made at the balance sheet date.
Q: January 13, Negotiate a revolving credit agreement with First Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $10 million at the bank's prime rate. Record the appropriate entries, if any, on January 13.
No journal entry required
- written promises to repay amounts borrowed plus interest
Notes payable
On November 1, 2024, Backpacking Training Corporation borrows $44,000 cash from Community Savings and Loan. Backpacking Training signs a three-month, 6% note payable. Interest is payable at maturity. Backpacking's year-end is December 31. Record the entries on November 1, 2024, December 31, 2024, and January 31, 2025.
November 1 Debit: Cash ($44,000) Credit: Notes Payable ($44,000) December 31 Debit: Interest Expense ($440) Credit: Interest Payable ($440) January 31 Debit: Notes Payable ($44,000) + Interest Payable ($440) + Interest Expense ($220) Credit: Cash ($44,660)
- the length of time from spending cash to provide goods and services to a customer until collection of cash from that customer
Operating cycle
What is the accounting treatment of contingent liabilities?
Payment is probable and reasonably estimable = liability recorded Payment is probable but not reasonably estimable, payment is reasonably possible and reasonably estimable, and payment is reasonably possible and not reasonably estimable = disclosure required Payment is remote and reasonably estimable or not reasonably estimable = disclosure not required
- includes only cash, current investments, and accounts receivable (exclude other current assets, such as inventory and prepaid rent)
Quick assets
Q: Which of the following is typically considered a current liability? - Salaries payable - Prepaid insurance - Mortgage payable due in 30 years - Accounts receivable
Salaries Payable
- sales tax collected from customers by the seller, representing current liabilities payable to the government
Sales Tax Payable - when the company collects the sales taxes, it increases (debits) cash and increases (credits) sales tax payable
Q: Which of the following statements is true with respect to warranty liabilities? - Warranty expense needs to be recorded in the period the warranty repair is made - The warranty expense account balance will always equal the warranty liability account balance - The warranty liability account is debited as actual repairs are made - All of the above are true
The warranty liability is debited as actual repairs are made
Q: Aspen Ski Resorts has 100 employees, each working 40 hours per week and earning $12 an hour. Although the company does not pay any health or retirement benefits, one of the perks of working at Aspen is that employees are allowed free skiing on their days off. Federal income taxes are withheld at 15% and state income taxes at 5%. FICA taxes are 7.65% of the first $142,800 earned per employee and 1.45% thereafter. Unemployment taxes are 6.2% of the first $7,000 earned per employee. Compute the total salary expense, the total withholdings from employee salaries, and the actual direct deposit of payroll for the first week of January.
Total salary expense: $48,000 Total withholdings: 13,272 Actual direct deposit: 34,728 $48,000 = (100 x 40 hours x $12) Federal income taxes ($48,000 x 0.15) = 7,200 + State income taxes ($48,000 x 0.05) = 2,400 + FICA taxes ($48,000 x 0.0765) = 3,672 = 13,272
What is the formula for working capital?
current assets - current liabilities
Large positive working capital is an indicator of liquidity - whether a company will be able to pay its current obligations on time. However, working capital is not the best measure of liquidity when comparing one company with another, because it does not control for the relative size of each company. In comparing companies, what are better measures of a company's ability to pay its obligations on time?
the current ratio and the acid-test ratio
