Chapter 8

When do we record an interest expense?

in the period in which we incur it, not pay

Issuing a note payable for cash results in a

increase in assets and an increase in liabilities

Notes Payable

written promises to repay amounts borrowed plus interest

SUTA

State Unemployment Tax Act

Contingencies

Uncertain situations that can result in a gain or a loss for a company.

the most common example of contingent liabilities

Warranties

Deferred Revenue; what account is it?

cash received in advance from a customer for products or services to be provided in the future; a liability (to do the work)

Deferred revenues and sales tax payable typically are reported as

current liabilities

t/f: quick assets do no include inventory and prepaid expenses

true

Taxes subtracted from employees' pay and remitted to the government on their behalf are called

withholding taxes

Liability

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

Unemployment taxes

a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

Working capital:

= Current assets − Current liabilities

FUTA

Federal Unemployment Tax Act

Withholding taxes for federal and state income tax are based upon which items?

-amounts earned by employees -numbers of exemptions claimed

Examples of fringe benefits

-contributions to retirement and other savings accounts -reduced or no-cost company-provided services -payment of insurance premiums on employees behalf

What are the payroll costs for employees (all)?

-federal and state income taxes -employee portion of SS and Medicare (FICA) -employer contributions for health, dental, etc. -employer investments in retirement or savings

what are the payroll costs for employers (all)?

-federal and state unemployment taxes -employer portion of SS and Medicare (FICA) employer contributions for health, dental, etc. -employee investments in retirement or savings

Common current liabilities include

-the current portion of long-term debt -deferred revenues -sales tax payable

What three characteristics do liabilities have?

1. probable future sacrifices of economic benefits 2. arising from present obligations to other entities 3. resulting from past transactions/events

Current ratio:

= Current assets / Current liabilities; measures the availability of current assets to pay current liabilities

Sales tax

= total cash paid- (total cash paid/ 1 + sales tax rate)

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?

Remote Probable Reasonably possible

What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.

Acid-test ratio will increase Current ratio will increase

fringe benefits

Additional employee benefits paid for by the employer

Debt covenant:

An agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt.

Contingent gain:

An existing uncertain situation that might result in a gain.

Contingent liability:

An existing uncertain situation that might result in a loss.

What payroll taxes are paid ONLY by the employer?

SUTA FUTA

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?

Debit: cash 100,000 Credit: Notes Payable 100,000

When the company collects the sales tax, what does it record?

Debits: Cash Credits: Sales Tax Payable

Which of the following may be classified as contingent liabilities?

Future litigation losses Frequent flier program awards Product warranties

Liquidity:

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

Quick assets:

Includes only cash, current investments, and accounts receivable.

What are the required payroll withholdings?

Medicare Taxes Social Security Federal Income Tax

Current liabilities

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

t/f: Social security and Medicare taxes are often referred to as FICA taxes and employers have the option to match and pay in the same amount their employees had withheld

false

t/f: a contingent gain is always recorded in the accounting system

false

t/f: a line of credit is an agreement between a company and a bank which permits the company to borrow in excess of a prearranged limit

false

t/f: all liabilities require the future sacrifice of cash

false

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

Acid-test ratio:

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

sales tax payable

Sales tax collected from customers by the seller, representing current liabilities payable to the government

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

The ability to estimate the amount of payment The likelihood of payment

What is an important criterion used to determine the reporting of a contingent liability?

The likelihood of future payment or loss

gift card breakage

The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote.me

Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?

The quick ratio will increase. Rationale: The quick ratio will decrease because cash is a quick asset, and cash decreases.

t/f: Assuming a company has an operating cycle of less than one year, a current liability is one which will become due within one year from the balance sheet date

True

t/f: commercial paper is a term often used to describe a promissory note between two companies

True

A contingent liability is recorded only if

a loss is probable and the amount is reasonably estimable.

t/f: The employer's portion of the FICA taxes plus the employer's costs for federal and state unemployment taxes (FUTA & SUTA) are called payroll tax expenses

true

t/f: when employers withhold taxes from employees' paychecks, the amounts withheld are credited to current liability accounts

true