Sunday, March 23, 2008

Matters Concerning Current Liabilities

 1. What is a current liability? A current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer.

 2. MaryMarc Company obtains $40,000 in cash by signing a 9%, 6-month, $40,000 note payable to Citrusgroup Bank on July 1. If the company’s fiscal year ends on September 30, what should the company report for notes payable in its balance sheet?

In the balance sheet, Notes Payable of $40,000 and Interest Payable of $900 ($40,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $900 should be reported under other expenses and losses.

 3. (a) Are sales taxes reported as an expense in the income statement?

The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government.

(b) MaryMarc collected $7,400 in sales, which includes $400 in sales tax. Journalize.
The entry to record the proceeds is:
Cash 7,400
Sales 7,000
Sales Taxes Payable 400   

 4. UCLA sold 10,000 season football tickets at $80 each for 5 games in the fall. Journalize.
(a) The entry when the tickets are sold is:
Cash 800,000
Unearned Football Ticket Revenue 800,000

(b) The entry after each game is:
Unearned Football Ticket Revenue 160,000
Football Ticket Revenue 160,000

 5. What is Liquidity? Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected needs for cash. Two measures of liquidity are working capital (current assets – current liabilities) and the current ratio (current assets ÷ current liabilities).

 6. What is a Contingent Liability? A contingent liability is an existing situation involving uncertainty as to a possible obligation which will be resolved when one or more future events occur or fail to occur. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. Warranty costs are a contingent liability usually recorded in the accounts since they are both probable in incurrence and subject to estimation.

 7. How is a Contingent Liability recorded when no amount is available? If an event is only reasonably possible, then only note disclosure is required. If the possibility of a contingent liability occurring is only remote, then neither recording in the accounts nor note disclosure is required.

 8. What is the difference between gross pay and net pay? Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense.

 9. Why is FICA a matching tax? Because both employees and employers are required to pay FICA taxes.

10. Are federal and state income taxes withheld expenses? No. When an employer withholds federal or state income taxes from employee paychecks, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees’ funds, these withholdings are a liability for the employer until they are remitted to the government.

11. FICA stands for Federal Insurance Contribution Act; FUTA stands for Federal Unemployment Tax Act; and SUTA stands for State Unemployment Tax Act.

12. What does a W-2 show? A W-2 statement contains the employee’s name, address, social security number, wages, tips, other compensation, social security taxes withheld, wages subject to social security taxes, and federal, state and local income taxes withheld.

13. Payroll deductions can be classified as either mandatory (required by the government) or voluntary (not required by the government). Mandatory deductions include FICA taxes and income taxes. Examples of voluntary deductions are health and life insurance premiums, pension contributions, union dues, and charitable contributions.

14. The employee earnings record is used in: (1) determining when an employee has earned the maximum earnings subject to FICA taxes, (2) filing state and federal tax returns, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year.

15. (a) The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment.
(b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement.

16. The main internal control objectives associated with payrolls are: (1) to safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls.

17. The four functions associated with payroll are: (1) hiring employees, (2) timekeeping, (3) preparing the payroll, and (4) paying the payroll.

*18. Two additional types of fringe benefits are:
(1) Paid absences—vacation pay, sick pay, and paid holidays.
(2) Post-retirement benefits—pensions and health care and life insurance.

*19. Paid absences refer to compensation paid by employers to employees for vacations, sickness, and holidays. When the payment of such compensation is probable and the amount can be reasonably estimated, a liability should be accrued for paid future absences which employees have earned. When this amount cannot be reasonably estimated, the potential liability should be disclosed.

*20. Post-retirement benefits consist of payments by employers to retired employees for: (1) pensions and (2) health care and life insurance.

*21. A 401(K) works as follows: an employee can contribute up to a certain percentage of pay into
a 401(K) plan and employers will match a percentage of the employee’s contribution.

*22. A defined contribution plan defines the contribution that an employer can make but not the benefit that the employee will receive. In a defined benefit plan, the employer agrees to pay a defined amount to retirees based on employees meeting certain eligibility standards.