Accounting Chapter 10

Current Liability

Due withing one year or operating cycle (whichever is longer)

Long term liability

due after one year

Current portion of long-term debt

The principal due within the next year that is reported as a current liability, even if the rest of the debt remains long term

Gross Pay

Total compensation earned and recorded as salaries and wages expense

Net pay

Actual cash paid to employees after withholdings, not an expense account for employers

Employee payroll withholdings

Amounts withheld from employee gross pay (income taxes, fica) create current liabilities for the employer

Journal entry: employee payroll recording

Debit salaries and wages expense
Credit fica tax payable, income tax payable, cash

Journal entry: employer payroll taxes recording

Debit payroll tax expense, Credit fica tax payable & unemployment tax payable

Sales revenue when cash collected included sales tax (formula)

Total cash collected / (sales tax rate + 1)

Journal Entry: sales tax collected

Debit cash, Credit sales revenue & sales tax payable

Journal entry: sales tax remitted

Debit sales tax payable, Credit cash

Journal Entry: deferred revenue setup

Debit cash, credit deferred revenue

Journal entry: deferred revenue recognition

Debit deferred revenue, credit service revenue

Interest (formula)

principal x interest rate x time

Notes Payable - 4 events

establish note, accrue interest, pay interest, pay principal

Journal entry: establish note

debit cash, credit notes payable

Journal entry: accrue interest on n/p

Debit interest expense, credit interest payable

Journal entry: pay interest

Debit interest payable & expense, credit cash

Journal entry: pay principal

Debit notes payable, credit cash

Bond issued at face value

stated = market

Issued at premium

stated > market

Issued at discount

Stated < market

Cash interest formula

face value x stated rate x time

Interest Expense (formula)

carrying value x market rate x time

Bond carrying value & amortization direction

Premium carrying value moves down toward to face value over time
Discount carrying value moves up toward face value over time

Journal Entry: bond at face value

debit cash, credit bonds payable

Journal entry: bond at premium

Debit cash, credit bonds payable & premium on bonds payable

Journal entry: bond at discount

Debit cash & discount on bonds payable, credit bonds payable

Contingent Liabilities questions to ask

How likely? Can we estimate?

Probable & Estimable

record liability & loss

Probable & not estimable

disclose in notes to financial statements

Reasonably Possible

disclose in notes to financial statements

Remote probability

Ignore

Debt to assets ratio

total liabilities / total assets

Debt to asset ratio interpretation

ratio of _% means creditors financed about _% of the company’s assets

Times interest earned formula

(net income + interest expense + income tax expense) / interest expense

Times interest earned interpretation

ratio of _ means the company generated _ of income before interest and taxes for each $1 of interest expense