Chapter 8: Current Liabilities
True or False? Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government.
True The amount withheld varies according to the amount the employee earns and the number of exemptions the employee claims.
When do you record contingent gains?
We do not record contingent gains until the gain is certain and 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.
working capital
current assets- current liabilities
current ratio
current assets/current liabilities
Recording Notes Payable
debit cash at face value, credit notes payable at face value
Recording Interest Payable
debit interest expense, credit interest payable
Recording Repayment of Notes Payable
debit notes payable at face value, debit interest expense with current year fraction, debit interest payable and credit cash for total of debits
How do you record a companies warranty liability?
debit warranty expense (the number of sales x the percent of expected warranty costs) and credit warranty liability for the same amount debited
If the likelihood of payment is remote and reasonably estimable or not reasonably estimable...
disclosure is not required
If the likelihood of payment is probable and not reasonably estimable...
disclosure is required
If the likelihood of payment is reasonably possible and reasonably estimable or not reasonably estimable...
disclosure is required
quick assets
include only cash, current investments, and accounts receivable.
interest calculation on notes payable
interest = face value x annual interest rate x fraction of the year
long-term liabilities
liabilities which are payable more than one year from now
current liabilities
liabilities which are payable within one year
If the likelihood of payment is probable and reasonably estimable...
liability is recorded
operating cycle
the time it takes to produce revenue
How does a lender record the interest payments of a note?
they would record a debit to interest receivable for (face value x interest rate x fraction of the year) and a credit to interest revenue for the same amount
What are some of the most frequent reported current liabilities?
-notes payable -accounts payable -payroll liabilities -deferred revenue -sales tax payable - current portion of long-term debt
2 requirements for Warranties
1. The likelihood of payment is probable or likely to occur. 2. The amount of payment is reasonably estimable
A contingent liability is recorded only if:
1. The loss is probable and, 2. The amount is reasonably estimable
When does a company record warranty expense and what does this category fall into?
A company needs to record warranty expense in the same accounting period it sells you a product. The warranty represents an expense and a liability for the company. Warranties are almost always probably and estimable.
fringe benefits
Additional employee benefits paid for by the employer. Examples include, insurance premiums and contributions to retirement or savings plans
Contingent Gains
An existing uncertain situation that might result in a gain. Such as Polaroid suing Kodak for patent infringement. For polaroid that is a contingent gain and for Kodak that is a contingent loss.
Contingent Liabilities
An existing uncertain situation that might result in a loss depending on the outcome of a future event
Who pays FICA taxes?
Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. Also, The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security.
when are contingent gains recorded?
Contingent gains are not recorded until the gain is certain
Deferred revenue is what type of account?
It is a liability account not a revenue account
Notes payable
Note signed by a company promising to repay the amount borrowed plus interest
How does a lender record the issuance of a note?
They would record a debit to notes receivable and a credit to cash
liability
a present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.
A line of credit
an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork.
accounts payable
are amounts the company owes to suppliers of merchandise or services that it has bought on credit
What does a company record at the end of the reporting period if the interest on a notes payable is not due till 2 months later? and what does it record (how does it adjust the books?) 2 months later when the interest is actually due?
end of the reporting period- the company records the current interest due debiting interest expense (using the current fraction of the year x the interest rate x the face value) and crediting INTEREST PAYABLE by the same amount 2 months later- the company will record a debit of notes payable (face value), a debit of interest expense (face value x interest rate x 2/12 (the two months of the current year)), a debit of interest payable for the same amount credited to interest payable at the end of the reporting period and a credit to cash for the total of the debits (face value + total interest due)
What categories do notes receivable and notes payable fall into and what do they create?
notes receivable is an asset and creates interest revenue notes payable is a liability and creates interest expense
Liquidity
refers to having sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts.
Current portion of long-term debt
the amount of debt that will be paid within the next year
What does a company record when they collect sales tax from customers?
the company records a increase in cash (debits) and an increase in sales tax payable (credits)
How does a company record a customers warranty claim?
the company would debit warranty liability ( decrease liability) by the amount the customer's warranty claim costs the company and credit cash (decrease asset) for the same amount
commercial paper
when a company borrows from another company rather than from a bank