Comprehensive Payroll, Bonds, and Long-Term Liabilities Review for Accounting Students

What is the focus of Chapters Nine and Ten?

Liabilities

What does Chapter Eleven focus on?

Stockholders' equity, specifically common stock.

Why is payroll considered complex?

It involves multiple types of payables and requires extra study time.

What does the phrase 'Employees are expensive' imply?

It refers to costs beyond just paying wages, including additional employer expenses.

What is included in employee compensation?

Salary or wages, which is only a fraction of the total expenses related to each employee.

Define an employee.

A person supervised and directed by an employer, performing specific tasks.

Define an independent contractor.

A self-managing worker who negotiates their own tasks and schedule.

What is a W-2 Form?

A tax form received by employees summarizing total wages and taxes withheld.

What is a 1099 Form?

A tax form received by independent contractors for earnings.

What does the W-4 Form inform employers about?

How much tax to withhold based on dependents and filing status.

What are FICA Taxes?

Taxes for Social Security and Medicare, with both employee and employer contributions.

What is the total combined FICA tax rate?

15% of gross pay (12% for Social Security, 3% for Medicare).

Who is responsible for unemployment taxes?

Only the employer, not withheld from employee checks.

What is the total unemployment tax rate?

6% on gross wages, capped at $7,000.

What are fringe benefits?

Additional employee expenses such as medical, dental, and paid time off.

What is the distinction between employee withholdings and employer expenses?

Employee withholdings are sold as payables, while employer expenses are often hidden but significant.

What is the purpose of practice problems in payroll?

To illustrate overtime calculations, federal withholding, and net pay computation.

What is a bond?

A certificate evidencing a bondholder's investment in a company.

What is a bond discount?

Occurs when the market interest rate is higher than the bond's stated rate.

What is a bond premium?

Occurs when the bond's stated interest rate is higher than the market rate.

How is a bond discount accounted for?

As a discount on bonds payable, reflecting the difference between face value and issuance price.

How is a bond premium accounted for?

As a premium on bonds payable, reflecting the difference when bonds are issued at a premium.

What happens to the face value of bonds payable?

It remains unchanged until maturity.

What is the significance of payroll in business?

It shapes the employer's financial landscape and impacts operational cash flow.

What should students focus on when studying payroll?

Understanding the intersection of costs with broader financial reporting and management practices.

What is the face value of bonds payable?

The face value remains unchanged until maturity.

How is carrying value of bonds calculated?

Carrying value = Face value ± Premium/Discount.

What happens to carrying value at maturity?

It aims to match the face value.

What is a premium bond?

A bond issued at a price above its face value.

How much cash did Pear Inc. receive from issuing $400,000 bonds at 103%?

$412,000.

What is a discount bond?

A bond issued at a price below its face value.

How much cash did Apple Inc. receive from issuing $200,000 bonds at 97.5%?

$195,000.

What is the annual amortization for a bond discount of $5,000 over 5 years?

$1,000 per period.

What happens to interest expense for bonds issued at a discount?

Interest expense increases as the bond discount is amortized.

What is the total effective interest expense for Mason Co. with a cash interest payment of $9,000 and amortization of $1,000?

$10,000.

How is the cash inflow recorded at bond issuance?

Cash is recorded, and discount is recorded as a contra liability.

What is the total expense each year for Diaz Company with stated interest of $12,600 and amortization of $720?

$13,320.

What is the effect of premium amortization on interest expense?

It reduces interest expense.

What is a line of credit?

Short-term borrowing with a maximum limit, similar to a credit card.

What is the interest expense formula for a line of credit?

Interest Expense = Outstanding Principal * (Annual Rate/12).

What is the principal repayment structure for bonds?

Principal is repaid in a lump sum at maturity.

What are installment loans?

Loans with fixed payments over time, such as car loans or mortgages.

What is the impact of long-term liabilities on financial statements?

Interest expense affects the income statement, while principal repayments affect the balance sheet.

What is the difference between short-term and long-term liabilities?

Short-term liabilities mature within 12 months; long-term liabilities mature beyond 12 months.

What is the significance of understanding long-term liabilities?

It is crucial for effective financial management.

What is the amortization table used for?

To calculate principal and interest payments over the life of a loan.

What is the cash received for Cherry Co. issuing $100,000 bonds at 102.5%?

$102,500.

What is the recorded discount for Grape Inc. issuing $120,000 bonds at 96%?

$4,800.

What is the stated interest for Diaz Company bonds of $180,000 at 7%?

$12,600.

What is the cash inflow for Mason Co. issuing a bond at 95%?

$95,000.

What does the contra liability account for bond discounts do?

Acts oppositely to typical liabilities, increasing by debits and decreasing by credits.

What is a liability?

Anything 'payable' is a liability.

What are examples of payables?

Notes payable, interest payable, sales tax payable, warranty payable.

What is the distinction between notes receivable and notes payable?

Notes receivable is the perspective of the lender (loan money), while notes payable is from the borrower's perspective (borrow money).

How are notes payable recorded in accounting?

Notes payable are recorded as a liability at face value.

What is the treatment of interest expense for notes payable?

Interest expense is recognized as incurred and if unpaid, it is carried as interest payable.

What are current liabilities?

Obligations due within one year or during the operating cycle, whichever is longer.

What does 'going concern' indicate?

A company's ability to pay obligations in full as they come due, signifying financial stability.

What is the journal entry for recording cash received from a note payable?

Debit Cash and Credit Notes Payable.

How is interest expense calculated?

Interest Expense = Principal × Interest Rate × (Months Outstanding / 12).

What is the total cash outflow at maturity for a note payable?

Total Cash Outflow = Principal + Interest.

What is sales tax payable?

Sales tax collected from customers that retailers remit to authorities, not considered revenue/expense.

What are contingent liabilities?

Future obligations arising from past events that may require future payment based on a future event occurrence.

How are contingent liabilities classified under GAAP?

Probable and estimable: recognized as a liability; reasonably possible but not estimable: disclosed in notes; remote: not recognized or disclosed.

What is the accounting treatment for warranty obligations?

Debit Warranty Expense and Credit Warranty Payable based on estimated warranty costs.

What is the cash payment at maturity for a six-month note payable?

Total Cash Outflow = Principal + Interest calculated for the term.

What is the relationship between notes receivable and notes payable?

Notes receivable is from the lender's perspective, while notes payable is from the borrower's perspective.

What is the journal entry for recognizing interest expense at year-end?

Debit Interest Expense and Credit Interest Payable.

What is the total interest paid at maturity for a one-year note payable?

Total interest paid is the sum of interest accrued during the term.

What does 'net realizable value' mean in terms of notes receivable?

The amount expected to be collected from the notes receivable after deducting any allowances.

What is the significance of the cash movement in notes payable?

Cash movement occurs only at issuance and maturity.

What is the accounting treatment for payroll-related payables?

Employee withholdings are not expenses; employer payroll-related taxes are considered expenses.

What is the journal entry for recording sales tax collected?

Debit Cash and Credit Sales Revenue and Sales Tax Payable.

What is the total cash paid to the bank on maturity for principal and interest?

Total cash paid includes both the principal and the total interest accrued.

What is the role of interest payable in financial statements?

It represents the interest expense that has been incurred but not yet paid.

What is the impact of warranty expenses on cash flows?

Actual repair costs recognized when incurred affect operating cash flows.

What does the term 'liquidity' refer to in financial analysis?

The ability of a company to meet its short-term obligations.

What does 'solvency' refer to in financial analysis?

The ability of a company to meet its long-term obligations.

What is the total cash paid to the bank on March 31, Year 2 for principal and interest?

$10,800

How is interest accrued in Year 1 calculated?

Interest = $1,800 ($9,000 × 0.08 × 3/12)

What is the definition of a contingent liability?

A potential obligation depending on a future event.

What are the three classifications of contingent liabilities?

Probable and estimable (recognized), reasonably possible (disclosed), remote (no entries required).

What is the formula for calculating the current ratio?

Current Ratio = Current Assets / Current Liabilities

What does liquidity refer to in accounting?

The ability to meet short-term obligations.

What is the definition of warranty obligations?

A warranty obligates the seller to repair or replace defective products within a specified warranty period.

How is warranty expense recognized in accounting?

Recognized upon sale creation, e.g., estimated warranty expense of $100 on $4,000 worth of merchandise.

What is the FICA tax rate for employees?

7.5% for Social Security and Medicare, matched by the employer.

What is the total cash collected when merchandise is sold for $2,000 with a 6% sales tax?

$2,120

What are the journal entries for recording sales tax on a $2,000 sale?

Debit: Cash $2,120; Credit: Sales Revenue $2,000; Credit: Sales Tax Payable $120.

What is the formula for calculating total interest recognized?

Total Interest = Principal × Interest Rate × Total Time

What is the definition of current liabilities?

Obligations due within one year or within the operating cycle, whichever is longer.

What is the debt-to-assets ratio formula?

Debt-to-Assets Ratio = Total Liabilities / Total Assets

What does solvency refer to in accounting?

The ability to meet long-term obligations.

How is cash activity classified when issuing notes payable?

Financing activity.

What is the accounting treatment for warranty claims?

Paying for warranty claims does not affect the income statement as the expense is previously recognized.

What is the impact of sales tax on revenue or expenses?

Sales tax does not affect revenue or expense; it is collected on top of the set price.

What is the purpose of Form W-2?

Reports employee earnings and withholdings.

What is the purpose of Form W-4?

Reports employee withholding allowances.

How is net wages calculated?

Net Wages = Gross Wages - Payroll Taxes

What is the employer's payroll tax expense based on $6,000 gross earnings?

Includes deductions for Social Security and Medicare.