Chapter 9: Reporting & Analyzing Current Liabilities

Current liability

A liability due in 1 year

Long term liability

Liability due after 1 year

Known liability

Liabilities set by agreements, contracts, or laws and are measurable

Sales tax payable

Seller collects sales tax from customer and remits them to govt (liability because seller owes sales tax to govt

Debit cash; credit sales tax payable and sales revenue

Journal entry to record sales tax payable

Debit sales tax payable; credit cash

Journal entry for when seller remits sales tax to govt

Principal x Annual Interest Rate x Days/360

Interest Rate Formula

Interest expense

Interest is classified as an ______ ______ for the maker of the note

Adjusting entries

If the note spans multiple accounting periods, company must make _______ _______ on the last day of the accounting period to accrue interest expense

Current liabilities

Notes payable that mature within one year are classified as ________ ________ on the balance sheet

Gross Pay

Hours worked x rate/hour

Payroll Liabilities

_______ _________: Deducted from employee’s gross pay by the employer and remitted to proper third part

• FICA— Social Security Payable

• FICA— Medicare Payable

• Employee (Federal/State/Local) Income Tax Payable

• Voluntary Items (Union dues, retirement savings, medical insurance)

Current

For items withheld that are payroll liabilities, they are also classified as ______ liabilities

6.2% of first $176,100 wages

For payroll liabilities, how is FICA— Social Security determined?

1.45% of all wages/year

For payroll liabilities, how is FICA— Medicare determined?

Debit wage expense; credit FICA— SS payable, FICA— Medicare payable…

Journal entry to record wage expense

Debil payroll liabilities payable; credit cash

Journal entry for when the employer settles all of the payroll liabilities payable

Payroll tax expense

_______ __________ _________: Expenses that are not deducted from the employee’s gross pay that a company must pay

• FICA— Social Security Payable (Employer match)

• FICA— Medicare Payable (Employer Match)

• State Unemployment Tax

• Federal Unemployment Tax

5.4% of first $7000

For payroll tax expenses, how is state unemployment determined?

0.6% of first $7000

For payroll tax expenses, how is federal unemployment determined?

Debit payroll tax expense; credit FICA— SS payable, FICA— medicare payable, state unemployment tax payable, federal unemployment tax payable

Journal entry for payroll tax expenses

Estimated liabilities

Obligations of an uncertain amount that can be reasonably estimated

Warranties

Created when a seller of a product promises to compensate the buyer in the event of a product defect—> often takes the form of replacing the defective product

Period of the sale

U.S. GAAP requires the seller to recognize warranty expense and warranty liability in the ______ __ __ ______, even though the existence, the amount, the payee, and the date of future payments are uncertain

Debit warranty expense; credit estimated warranty liability

Journal entry for recording warranty expense

Debit estimated warranty liability; credit repair parts inventory

Journal entry to record warranty claim

Contingent liability

Potential obligation that depends on a future event arising from a past transaction or event

• Pending lawsuits, possible tax assessments

Record Liability

Contingent liability:

• Probable

• Estimable

Disclose in notes

Contingent liability:

• Probable

• Non-estimable

Disclose in notes

Contingent liability:

• Possible

No disclosure

Contingent liability:

• Remote