Chapter 10: Accounting for Liabilities Flashcards
Define liabilities
Obligations resulting from past transactions or events that require a company to pay money or provide goods or services in the future.
Define current liabilities
Liabilities that come due within the coming year or normal operating cycle
What two accounts are current liabilities?
Accounts payable and notes payable.
What is the difference between accounts payable and notes payable regarding credit periods?
Accounts payable: short-term creditors
Notes payable: Longer credit period, 30-60 days
What is the difference between accounts payable and notes payable regarding interest?
Accounts payable: Non-interest bearing
Notes payable: Interest bearing
Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.
How do you record the purchase of equipment?
Debit equipment 10,000
Credit notes payable 10,000
Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.
How do you calculate accrued interest expense for this example?
Equipment cost * interest * 2/12
10,000 * 0.6 * 2/12 = 100
(I have no idea where the 2/12 comes from)
Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.
How do you record the accrued interest expense (100)
Debit interest expense 100
Credit interest payable 100
Example of journaling interest payable: Pomona Corporation signed a 90-day note on November 1 for $10,000 with 6 percent annual interest in exchange for equipment.
How do you record the payment of notes and interest?
Debit interest expense 50
Debit interest payable 100
Debit Notes payable 10,000
Credit cash 10,150
Payroll expenses are a _____ cost for most firms
A. Major
B. Minor
A. Major
What 3 things are included in payroll expenses?
- Salaries and wages
- Withheld employee paychecks
- Payroll taxes/benefits
What four taxes can employers withhold from employee paychecks?
- Federal tax
- State tax
- Social Security tax
- Medicare tax
Other than taxes, what other payments can employers withhold from employee paychecks?
Health insurance, union dues, and retirement
Which payroll taxes are paid by the employer?
FICA, federal and state unemployment taxes
How do you calculate net pay?
Net pay = gross pay - amounts withheld
What 5 accounts are “amounts withheld”?
- Health insurance premiums
- FICA
- Federal income tax
- State income tax
- Union dues
Calculate net pay with the following information:
Federal income tax: 1,200
FICA: 459
Gross Pay: 6,000
Health insurance premiums: 320
State income tax: 405
Union dues: 100
Net pay = gross profit - amounts withheld
Net pay = gross profit - (health insurance premiums + FICA + Federal income tax +state income tax + union dues+
Net pay = 6,000 - (+2,484)
Net pay = 6,000 - 2,484
Net pay = 3,516
Define unearned revenue
Revenue that had not been earned
What type of account is unearned revenue?
Liability
Southwest Airlines sells a ticket on June 1 for travel on July 15 for $300.
How do you record the advance sale of the ticker?
Debit cash 300
Credit unearned revenue 300
Southwest Airlines sells a ticket on June 1 for travel on July 15 for $300.
How do you record ticked revenue earned?
Debit unearned revenue 300
Credit ticket revenue 300
Which of the following is NOT a current liability?
A. Account payable
B. Unearned revenue
C. Payroll taxes payable
D. Bonds payable
D. Bonds payable
Explanation: bonds payable is a non-current liability, not current liability, because it is payable after one accounting period. (longer credit period)
Define bond
A long-term debt instrument that promises to pay periodic interest in addition to the principal amount at maturity
What are the 5 types of bonds?
- Secured bonds
- Debenture bonds
- Serial bonds
- Convertible bonds
- Zero-coupon bonds
