Chapter 10 Flashcards
Liabilities are created when a company
(1) Buys goods and services on credit,
(2) Obtains short-term loans to cover gaps in cash flows,
(3) Issues long-term debt to obtain money for expanding into new regions and markets.
Short-term obligations that will be paid with current assets within the company’s current operating cycle or within one year of the balance sheet date, whichever is longer.
Current Liabilities
Initial amount of the liability
Cash Equivalent
Additional liability amounts
Increase Liability
Payments Made
Decrease Liability
Purchase of goods/services on credit
Accounts Payable
An expense is incurred in one accounting period, the cash payment in a later period.
Accrued Liabilities
Liability resulting when company collects and owes taxes relating to payroll.
Payroll Tax Payable
Liability resulting when a company collects sales tax for the state.
Sales Tax Payable
Occurs when one company borrows money from another.
Notes Payable
The receipt of cash before goods or services are provided.
Unearned Revenue
Accounts Payable is ________ when a company receives goods or services on credit, and it is _______ when the company pays on its account.
(1) increased (credited)
2) decreased (debited
Liabilities that have been incurred but not yet paid
Accrued Liabilities
Required by law or voluntarily requested by employees and create a current liability for the company.
Payroll Deductions
Income tax, FICA tax, other deductions
Examples of Payroll Deductions
Journal Entry with Payroll Deductions:
dr. Wages and Salaries Expense
cr. Withheld Income Taxes Payable
cr. FICA Payable
cr. United Way Payable
cr. Cash
True or False: Not only does the employee have to pay taxes on the wages they earned, but so does the employer.
True
Employers have other liabilities related to payroll:
(1) FICA Tax
(2) Federal Unemployment Tax
(3) State Unemployment Tax
Employer Payroll Taxes
Journal Entry for Employer Payroll Taxes:
dr. Payroll Tax Expense
cr. FICA Tax Payable
cr. Federal Unemployment Tax Payable
cr. State Unemployment Tax Payable
Calculated by subtracting tax allowed expense from revenues. This taxable income is then multiplied by a tax rate, which ranges for corporations from 15 to 35 percent.
Taxable Income (Accrued Income Taxes)
Journal Entry for Income Tax:
dr. Income Tax Expense
cr. Income Tax Payable
Payments collected from customers at time of sale create a liability that is due to the state government.
Sales Tax Payable
Cash received in advance of providing services creates a liability of services due to the customer.
Unearned Revenue
Recording Unearned Revenue Journal Entry:
dr. Cash
cr. Unearned Revenue
Looks at the transaction from the viewpoint of the borrower.
Notes Payable
Four Key Events that occur with any Note Payable:
(1) Establishing the note
(2) Accruing interest incurred but not paid
(3) Recording interest paid
(4) Recording principal paid
When borrowing from a bank, the bank utilizes _______ interest concepts.
Compound
A schedule of the periodic payments to be made over the life of the loan - monthly, quarterly or annually. Each scheduled payment consists partly of repayment of the principal and partly of interest on the loan balance. The interest portion of the payment is based on the loan balance at the beginning of the payment period.
Loan Amortization Table
Potential liabilities that arise as a result of past transactions or events, but their ultimate resolution depends (is contingent) on a future event. Differ from other liabilities because their dependence on a future event introduces a great deal of uncertainty.
Contingent Liabilities
Involve substantially larger sums of money, can be sold on an exchange, much longer periods of time and typically require annual or semi annual interest payments.
Bonds Payable
Financial Instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.
Bonds
Key Elements of a Bond
(1) Maturity date
(2) Face value
(3) Stated interest rate
Involves present value computations and is the amount that investors are willing to pay on the issue date for the bonds.
Bond Pricing
Journal Entry for Bonds Issued at Face Value:
dr. Cash
cr. Bonds Payable
Borrowers must report in ________ the portion of long term debt that is due to be paid within one year.
Current Liabilities
Two financial ratios are commonly used to make an assessment of the company’s ability to generate resources to pay future amounts owed:
(1) The debt-to-assets ratio
(2) The times interest earned ratio.
Total Liabilities / Total Assets =
Debt to Assets Ratio
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense
Times Interest Earned Ratio
