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Study Smarter.....Study The Answers!

Current Liabilities

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) On Your Test
3) Practice as You Learn 7) Quick Study Sheet
4) Easy Practice Test  

 

 

Key Things to Know

 Liability – probable future payment of assets (usually cash) or services which
                        1) occurs from a past transaction or event
                        2) is a present obligation
                        3) is a future payment
 
Current or short term – means it will be paid within one year of the balance sheet date
 
Common Current or Short Term Liabilities:
 
Accounts Payable:  amounts owed to suppliers for goods or services purchased
                                 on credit, normally 30 days, no interest charged
 
Sales Tax Payable:  a tax levied on retail sales.  The business must charge this
                                   and collect the money and then pay it to the state or city
                                    Each state/city sets its own %.  This is not a revenue or an
                                  expense to the business. They collect the cash and have an
                                  obligation to pass it on to the city/state.
 
                        Journal entry for sales tax collection and payable:
 
                                    Cash                                      $XXXX
                                                Sales revenue                      $XXXX
                                                Sales Tax Payable               $     XX
 
                                    Part of what is collected is revenue and part is owed to city/state.
           
 
Unearned Revenues:  occurs when the company collects money from a customer
                                      before providing the goods or services – they owe the customer
                                      the goods or services.  This is normally short term.
 
 
Short Term Notes Payable:   A written promise to pay an amount borrowed, with interest
                                                     Short term means the principle will be repaid in < 1 year
                                                    Notes payable typically have monthly periodic payments
 
Payroll Liabilities:     Amounts assessed to the business by the government and
                                  amounts taken out of the employee’s check that must be paid to
                                  the government for them:
 
                        Gross Pay – the total amount the employee earns (hrs worked x $ per hr)
                        Net Pay – the amount the employee receives after deductions are taken
 
            Payroll deductions – Withholdings
 
                        Employee FICA tax – (Social Security) – 6.2% up to a set amount
                        Medicare tax – 1.45% of total amount earned
                        Income tax – depends on how much is earned & the employee’s tax rate
                        Voluntary Deductions – Health insurance, union dues, pension savings…
                       
                        Journal entry for the employee’s paycheck:
 
                                    Salary Expense *
                                                FICA tax payable
                                                Medicare tax payable
                                                Federal income tax payable
                                                Medical insurance payable
                                                Union dues payable
                                                Pension payable
                                                Salaries payable **
                                                                       
                                    * Salary expense is what the employee earns – hrs x rate per hr
                                    ** Salaries payable is the check to the employee after deductions               
           
          Employer Payroll Taxes:
 
                        Employers must pay FICA/Social Security tax and Medicare tax for the
                          same amount the employee pays – 6.2% and 1.45%
 
                        Employers are required to pay unemployment taxes so that laid off
                       workers will be able to receive unemployment benefits.  This must
                       be paid to the state (SUTA) and to the federal government (FUTA).
 
                           State:  usually 1% to 5.4% of the first $7,000 earned, based on history
                           Federal:   usually .8% of first $7,000 earned, considering state was paid
 
                                    Journal entry for recording employer’s taxes to be paid
 
                                                Payroll tax expense **
                                                            FICA/SS tax payable
                                                            Medicare tax payable
                                                            SUTA payable
                                                            FUTA payable
 
                                            ** Payroll tax expense is the total of all the other payables that
                                              are calculated based on the given %  x   earnings
 
 
Warranty Liabilities:  the seller’s obligation to replace goods or provide service to
                                   defective products within a set period of time
 
                                    Sometimes extra is paid for the warranty and sometimes the
                                      warranty comes with the product.
 
                                    The matching principle requires the warranty expense to be
                                  recorded in the same period as the sale.  We do not know the
                                  exact amount that will occur in the future, so we must estimate.
 
                                                   Sales this period
                                                x % of warranty historically occurs
                                                = warranty expense for this period
 
                                    Record the warranty obligation for the calculated amount:
 
                                                Warranty Expense                           $XXXX
                                                            Warranty liability                              $XXXX
 
 
Contingent Liabilities:  An obligation that may occur, dependant on a future event to
                                     happen, in order for you to know how much will be paid to who.
 
                        Contingent liabilities may be short term or long term depending on when
                        the estimated amount is expected to be paid.
 
                        Examples:  Lawsuits, environmental cleanups, debt guarantees
 
                        First:  Classify the obligation based on how likely it is to occur:
                                   FASB did not give a definition of each category.
 
                                    1)         Probable
                                    2)         Reasonable Possible
                                    3)         Remote
 
                        Second:  Determine a high low range that may be paid for the obligation
                                      if possible.  Sometimes a reasonable estimate can not be made.
                                        
 
                        Third:  Based on the classification, report the following
 
                                    1) Probable – record an expense and a liability for the low end
                                                         of the estimated amount if you can estimate it
                                                        -  disclose the situation in the footnotes
 
                                                If you can not estimate it you do not record an expense
 
 
                                    2)  Reasonable Possible – disclose the situation in the footnotes
                                           stating the low and high estimate that might be paid
                                            or state that you can not reasonably estimate the loss
 
 
                                    3)  Remote – do nothing, don’t expense or disclose         

                                               


 

 

 

 
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