Ch. 11: Current Liabilities And Payroll Accounting - PART 2
What is the typical estimated rate for warranty expenses
4%
Why are these uncertainties not considered contingencies?
Because while they are future events, they DID NOT happen from Past transactions or events. They are NOT disclosed
For employees who are retired or will retire WITHIN THE YEAR, a portion of pension liabilities are ___________ (current/long term)
Current liabilities
Vacation Benefits payable are known as what kind of liabilities?
Current liabilities
What is the journal entry to record EXPECTED bonus costs?
Dr. Employee Bonus expense Cr. Bonus Payable
What is the journal entry for recording costs of employee benefits?
Dr. Employee benefits expense Cr. Employee medical insurance payable --> bc this increased since employer has to pay employees the benefits still Cr. Employee retirement program payable --> bc this increased since employer has to pay employees the benefits still
What is the journal entry for recording the COSTS of warranty repairs?
Dr. Estimated Warranty Liability --> bc buyer came in for repair or replacement the warranty is used and decreases liability of the seller Cr. Parts Inventory --> decreases bc inventory is an ASSET so crediting decreases it. Since they took parts from the inventory for the repair/replacement it decreases the inventory
What is the journal entry for recording vacation benefits accrued?
Dr. Vacation Benefits Expense Cr. Vacation Benefits Payable --> bc this is yet to be paid and is increased until the employee earns them which means they take paid time off
What is the journal entry for record vacation benefits TAKEN?
Dr. Vacation benefits payable --> bc it is taken by employee so it is now paid by employer reducing the liability Cr. Cash --> bc paid in cash by employer to employee
What is the journal entry to record estimated warranty expense?
Dr. Warranty Expense Cr. Estimated Warranty Liability --> bc the seller has a liability until the warranty is used
Vacation benefits are estimated and expensed in the period when employees ________ them
Earn
What are some other examples of contingencies?
Environmental damages, possible tax assessments, insurance losses, and government investigations
T OR F: Estimated liabilities CANNOT be both current and long term
FALSE: Estimated liabilities can be both current and long term
T OR F: If it is probable (likely) that the debtor ( person who owes money) will default, the guarantor does not need to report the guarantee as a liability
FALSE: if it is probable that the debtor will default, the guarantor reports the guarantee (promise) as a liability ** basically means, if the debtor , the person who owes the money doesn't pay, then the guarantor agrees to pay on behalf of the borrower
T OR F: An employer often pays none of the medical, dental,life, and disability insurance
FALSE: the employer often pays ALL or PART of the medical, dental, life, and disability insurance
T OR F: The seller reports the expected warranty expense in a period after the revenue from the sale of product/service was recorded
FALSE: the expected warranty expense in a period is reported WHEN THE REVENUE OF THE SALE OF THE GOOD IS REPORTED **Warranty is given when the sale of the good happens**
T OR F: Many companies offer bonuses to employees and many of the bonuses depend on gross income
FALSE: while many companies do offer bonuses to employees, the bonuses depend on NET INCOME
What are some other examples of multi-period estimated liabilities?
Health benefits and warranties
Accounting for contingent liabilities depends on the __________ (likelihood/unlikelihood) that a future event will occur and the ability to estimate the future amount owed if this event occurs
Likelihood
Pension liabilities to employees are _____________ (current/long term) to workers who WON'T retire within the next year
Long term **they are not retiring within the next year making this more than an accounting period, therefore making it a long term liability
What are Uncertainties that are NOT contingencies?
Natural disasters and new technologies
When the future event is _______________ and the amount owed can be ___________________ _________________ then do we: a. record the liability b. disclose in notes c. no disclosure
Probable; Reasonably Estimated a. record liability
When the future event is ______________ ____________ then we: a. record liability b. disclose in notes c. no disclosure
Reasonably possible (could occur) b. disclose in notes
T OR F: A potential claim is only recorded as liability if they payment for damages is probable (likely) and amount owed can be reasonably estimated
TRUE
T OR F: If potential claim cannot be reasonably estimated but it is reasonably possible it is disclosed in notes
TRUE
T OR F: Many companies also provide medical care and insurance benefits to their retired employees
TRUE
T OR F: The amounts for debt/liabilities are classified as either current or long term when the balance sheet is prepared
TRUE
T OR F: The guarantor usually discloses the guarantee in its financial statement notes as a contingent liability
TRUE
T OR F: The seller reports warranty liability, even though the existence, amount, payee, and date of future payments are uncertain
TRUE
T OR F: Warranty costs are probably (likely) and can be estimated using past experience
TRUE
T OR F: When total warranty expenses are more or less than the estimated 4% the management should monitor actual warranty expenses to see if 4% rate is accurate and if not, it is changed for future period
TRUE
T OR F: the accounting issue is whether the defendant records a liability or discloses a contingent liability in its notes while a lawsuit is still outstanding or not yet settled
TRUE
T or F: An accrued expense is an UNPAID EXPENSE and is also called accrued liability
TRUE
How many different possibilities are there for contingent liabilities?
There are 3 different possibilities
Under which category in the balance sheet is current portion of long term liability recorded in?
Under Current Liabilities
What accounts multi-known liabilities often include?
Unearned Revenue and notes payable ** Unearned revenue that is fulfilled within one year is a current liability, and the remaining portion will be fulfilled later which makes it a long term liability** **SAME WITH NOTES PAYABLE**
What are employee benefits?
are additional compensations paid to or on behalf of the employees such as premiums for medical, dental, life, and disability insurance and contributions to pension plans
What are pension plans?
are agreements to employers to provide payments to employees AFTER RETIREMENT
What are multi known period liabilities?
are many known liabilities which extend over multiple periods
What are vacation benefits?
are paid expenses that many employers offer
What are some common examples of estimated liabilities?
employee benefits such as pensions, health care, vacation pay, and warranties offered by the seller
What is an estimated liability?
is a known liability obligation of an uncertain amount that can be REASONABLY ESTIMATED **amount is uncertain bc it depends on the benefits received by the employee**
What is a contingent liability?
is a potential obligation that depends on a FUTURE event arising from a PAST transaction or event **LIKE A CAUSE AND EFFECT** the cause of this past event or transaction took effect like this in the future
What is a warranty?
it is a sellers obligation to replace or fix a product/service that fails to perform as expected within a specific period
Vacation benefits expense is what type of expense?
operating expense --> bc these are expenses related to sales
What are some examples of contingent liabilities?
pending lawsuit: a past transaction leads to a lawsuit whose financial outcome depends on the result of the lawsuit
What is current portion of long term debt?
portion of long term debt due WITHIN one year or the operating cycle, whichever is longer **KEY WORD: CURRENT**
When future event is ____________ and the amount owed is not ______________ then we: a. record liability b. disclose in notes c. no disclosure
probable (likely) ; Non estimable b. Disclose in Notes
When the future event is ____________ then we: a. record liability b. disclose in notes c. no disclosure
remote (unlikely) c. no disclosure
What is debt guarantee?
when a company guarantees the payment of debt owed by a supplier, customer, or another company
