ACC 203 Chapter 8
Compare the differences between notes receivable and notes payable.
Notes receivable is an asset that creates interest revenue. Notes payable is a liability that creates interest expense.
Withholding taxes for federal and state income tax are based on what?
Number of exemptions claimed. Amounts earned by employees.
A contingent event that may give rise to a future loss is said to be what?
Probable.
What is classified as contingent liabilities?
Product warranties. Frequent flyer program awards. Future litigation losses.
What will increase a company's working capital?
Receipt of cash on a long-term notes payable.
What are payroll taxes paid ONLY by the employer?
SUTA FUTA
How is sales tax payable calculated?
Sales Tax Payable = Total cash paid - Total cash paid / 1 + Sales tax rate
What are long-term liabilities?
They are payable more than one year from now.
What happens when a company receives cash in advance?
When a company receives cash in advance, it debits Cash and credits Unearned Revenue, a current liability account. When it earns the revenue, the company debits Unearned Revenue and credits Sales Revenue.
What is Notes Payable?
When the borrower reports its liability.
What is sales tax payable?
When the selling company records sales revenue in one account and sales tax payable in another. When the company
What are contingencies?
They are uncertain situations - and how we should report them.
What are payroll withholdings?
1) Amounts subtracted from employees' gross earnings to determine their net pay. 2) Decrease the amount of cash an employee receives.
What are the rules of a contingent liability under GAAP?
1) Be in the notes to the financial statement if the loss may POSSIBLY occur and can be reasonably estimated. 2) Be reported on the balance sheet if the loss will PROBABLY occur and can be reasonably estimated. 3) Not be reported if the loss is remote and unable to be estimated.
A contingency liability is accured if which conditions are met?
1) It is probably that a future loss will occur. 2) The amount of the loss can be reasonably estimated.
What are the three essential characteristics of liabilities?
1) Probable future sacrifices of economic benefits. 2) Arising from present obligations to other entities 3) Resulting from past transactions or events.
What voluntary contributions are made by employees may employers deduct from their employee's pay?
Contributions towards retirement funds. Union dues.
Assets represent probable future economic _______, whereas liabilities represent probable future economic ______.
Benefits; sacrifices.
What is the acid-test ratio? How is it calculated?
It is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. Acid Test Ratio = Cash + Current Investments + Accounts Receivable / Current Liabilities
What do the ratios and formulas represent?
They each measure a company's liquidity, and its ability to pay currently maturing debts.
What represents the current accounting treatment for loss contingencies that do not meet the criteria for accrual but are at least reasonably possible?
A disclosure must describe the contingency. An estimate of the potential loss should be made (if possible) and disclosed.
What are fringe benefits?
Additional employee benefits paid for by the employer, such as health insurance, retirement benefits, or life insurance.
What are trade accounts payable?
Amounts the company owes to suppliers of merchandise or services that it has bought on credit.
What is a debt covenent?
An agreement between a borrower and lender that requires certain minimum financial measures be met or the lender can recall the debt.
What is a contingent gain?
An existing uncertain situation that might result in a gain, which often is the flip side of contingent liabilities.
Is a higher or lower current ratio better?
As a general rule, a higher current ratio is better. However, a high current ratio is not always a positive signal. Companies having difficulty collecting receivables or holding excessive inventory will also have a higher current ratio. Managers must balance the incentive for strong liquidity (yielding a high current ratio) with the need to minimize levels of receivables and inventory (yielding a lower current ratio).
What are quick assets?
They include only cash, current investments, and accounts receivable.
How do we record contingent gains?
We do not record contingent gains until the gain is certain and is 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.
Jenco Company's pay for employees at the end of the day period is $100,000. Jenco withholds the following account. Federal withholding tax - $20000 FICA withholding - employee portion $5000 Health Insurance premiums $2000. Record.
Credit Wages Payable - $73000 Credit FICA Payable - $5000 Debit Payroll Expense - $100000
Do you debit or credit when there are contributions or increases to FICA and FUTA?
Credit.
What is current ratio?
Current Ratio = Current Assets / Current Liabilities
What does the other half of the balance sheet show?
Current, long-term liabilities, stockholders' equity.
If a liability is classified as current, rather than noncurrent, what would happen to the company's working capital?
Decrease.
What is the journal entry to record the performance of warranty work?
Debit to warranty liability.
What are payroll withholdings subtracted from gross pay to arrive at net pay?
Employee contributions to retirement plans. Federal income taxes. Health insurance paid by the employee.
Explain the relationship between employee salaries, FICA taxes, and employers.
Employee salaries are reduced by withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. The employer, too, incurs additional payroll expenses for unemployment taxes, the employer portion of FICA taxes, and employer insurance and retirement contributions.
What are employer payroll costs?
Employer portion of medicare tax. Federal and state unemployment taxes.
What must employees withhold from their employees pay?
Federal Taxes. FICA Contributions.
By law, an employer is required to pay what as payroll taxes?
Federal unemployment tax. Social security contributions. Medicare contributions.
What is commercial paper?
If a company borrows from another company rather than from a back, the note is referred to as commercial paper.
What is interest? How do you calculate it?
Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. Interest = Face Value X Annual Interest Rate X Fraction of the Year
Define a liability.
It is a present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.
What is a line of credit?
It is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork.
What is a contingent liability?
It is dependent on whether an uncertain event that might result in a loss occurs or not. It may not be a liability at all.
When is a contingent liability recorded?
It is recorded only if a loss is probably and the amount can be reasonably estimated.
What is working capital? How is it calculated?
It is simply the difference between current assets and current liabilities. Working Capital = Current assets - current liabilities
What is liquidity?
It refers to having sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts.
What is a company's operating cycle?
It refers to the time required for the company to produce revenue.
When are gain contingencies accrued?
NEVER
What are sales taxes represented as?
Sales tax collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government.
What are FICA taxes?
Social Security and Medicare taxes. They require employers to withhold a 6.2% Social Security tax up to a maximum base amount plus a 1.45% Medicare tax with no maximum.
What is not required payroll witholdings?
State unemployment tax (SUTA). Charitable contributions. Federal unemployment tax (FUTA).
What are withholding taxes?
Taxes subtracted from employees' pay and remitted to the government on their behalf.
What are unemployment taxes? What is The Federal Unemployment Tax Act (FUTA)?
The FUTA requires a tax of 6.2% on the first $7000 earned by each employee. The employer also must pay federal and state unemployment taxes.
What is the current portion of long-term debt? What do we record it as?
The amount that will be paid within the next year. We report the currently maturing portion of a long-term debt as a current liability on the balance sheet.
What are some common characteristics of commercial papers
The loan period is between 30 and 270 days. The loan is between two companies.
What are current liabilities?
They are payable within one year in most cases.