Exam 4: Ch. 8 (Current Liabilities) Flashcards
(29 cards)
What do companies most frequently report as current liabilities?
The main 3 are Notes Payable, Accounts Payable, and Payroll Liabilities
Also - Deferred Revenue, Sales Tax Payable, and Current Portion of Long-Term Debt
How does a company record a Notes Payable?
Debit Cash and Credit Notes Payable
How does a company record interest INCURRED (but not paid yet) on a Notes Payable (for a portion of a year)?
Debit Interest Expense and Credit Interest Payable
How does a company record payment of Notes Payable plus interest?
Debit:
- Notes Payable for face value of loan
- Interest Payable (from previous year)
- Interest Expense (for portion of current year)
Credit Cash for entire amount
How does a bank record the acceptance (lending) of a Notes Receivable?
Debit Notes Receivable and Credit Cash
How does a bank record interest earned (but not yet received) from a Note Receivable?
Debit Interest Receivable and Credit Interest Revenue
How does a bank record collection of a Note Receivable and interest?
Debit Cash
Credit:
- Notes Receivable for face value
- Interest Receivable (from previous year)
- Interest Revenue (for portion of current year)
What are the 4 employee payroll costs and 4 employer payroll costs?
Employee:
- Federal and state income taxes
- FICA taxes (Employee portion of SS and Medicare)
- Employee insurance contributions
- Employee retirement investments
Employer:
- Federal and state unemployment taxes
- Employer matching FICA taxes
- Employer insurance contributions
- Employee retirement contributions
What are the %s for FICA taxes?
Employers withhold (so employees contribute) 6.2% SS tax up to a max base amt. plus 1.45% Medicare tax with no max amt. —– So total FICA taxes equal 7.65% on income up to a base amt. and 1.45% on additional income earned beyond base amt.
Employees match the same amt. so gvt. collects 15.3% on each employee’s salary
Why is Deferred Revenue a liability account?
Having already collected the cash, the company now has an obligation to provide a good or service.
How does a company record Deferred Revenue (ex: receive cash for gift card, airline ticket, etc.) before the service is performed/good is provided AND after the service is performed/good is provided?
Before service is performed/good is provided:
Debit Cash and Credit Deferred Revenue
After service is performed/good is provided:
Debit Deferred Revenue and Credit Sales Revenue
How does a company record the sale of an item with sales tax?
Debit Cash for entire cost to customer
Credit:
Sales Revenue AND
Sales Tax Payable
How does a company reclassify a portion of a long-term Notes Payable as a current liability (when part of it is due within the next year)?
Debit Notes Payable (long-term) and Credit Notes Payable (current)
Given a choice, would most companies prefer to report an obligation as a current or long-term liability?
Most would choose long-term because many banks, shareholders, etc. consider current debt to be riskier than long-term debt. Riskier debt means higher interest rates for borrowing. Current debt also provides information about a company’s bankruptcy risk.
A contingent liability is only recorded IF ____ and ______.
A contingent liability is only recorded IF a loss is probable AND the amount is reasonably estimable.
How does a company record a contingent liability?
Where are these reported on the balance sheet and income statement?
What amount is recorded when there is a range?
Debit Loss and Credit Contingent Liability
Income statement: Loss is reported as an operating or nonoperating expense
Balance sheet: Contingent liability is reported as a current or long-term liability
When no amount within a range appears more likely than others, record the minimum amount and disclose the range of potential loss.
What does a company do if the contingent liability is only reasonably possible (rather than probable)?
What about when a contingent liability is remote?
If likelihood of payment is only reasonably possible, do not record an entry but make full disclosure in financial statement notes.
If likelihood of payment is remote, disclosure is usually not required.
What is the most common example of contingent liabilities?
Warranties
How does a company record warranties? (as a contingent liability/adjusting entry)
Debit Warranty Expense and Credit Warranty Liability
How does a company record actual warranty expenditures?
Debit Warranty Liability and Credit Cash (or Salaries Payable, Inventory, Supplies, etc. if the company uses something other than cash to satisfy warranty claims)
When is a contingent gain recorded?
Companies usually do not record contingent gains until the gain is known with certainty.
What are the 3 liquidity measures?
Working capital, current ratio, and acid-test ratio/quick ratio
What is the formula for working capital?
Why isn’t it the best measure of liquidity when comparing different companies?
Working capital = Current assets - Current liabilities
It does not control for the relative size of each company. Current ratio and acid-test ratio/quick ratio are better measures of a company’s ability to pay its obligations on time.
What is the formula for current ratio?
What does the current ratio actually mean?
What does a ratio of 1.5 (for example) mean?
Current ratio = Current assets / current liabilities
A current ratio greater than 1 means there are more current assets than current liabilities.
The higher the current ratio, the greater the company’s liquidity.
A current ratio of 1.5 (for example) means that for every $1 of current liabilities, the company has $1.50 of current assets.
