Chapter 11 Current Liabilites and Payroll

Question 1

How are current liabilities of known amounts accounted for?

Answer 1

current liabilities are liabilities that must be paid with cash or with goods and services within one year or within the entity’s operation cycle if the cycle is longer than a year. Some examples of current liabilities are accounts payable, sales tax payable, unearned revenues, and short-term notes payable. Current liabilities also include any current portion of long-term notes payable.

Question 2

How do companies account for and record payroll?

Answer 2

Gross pay is the total amount of salary or wages earned by the employee. Net pay is the amount that each employee gets to keep (take-home pay). Payroll withholding deductions are the difference between gross pay and net pay. Income tax withholding: federal, state, local income tax. Optional withholding are charitable contributions, union dues, and so on. A payroll register can be used to help summarize the earnings, withholdings, and net pay for each employee. Businesses record a journal entry for payroll and payroll withholdings, and net pay for each employee. Employers mush pay at least three payroll taxes: FICA (OASDI, Medicare), state unemployment compensation tax (varies by state), and Federal unemployment compensation tax. Payroll taxes are recorded as a DR Payroll, CR Liabilities until they are paid. Internal control over payroll involves efficiency and safeguarding of payroll disbursements

Question 3

How are current liabilities that must be estimated accounted for?

Answer 3

bonuses are based on meeting a specific goal and are considered liabilities (employee bonus payable) until paid. Vacation, health, and pension benefits must be estimated and recorded as liabilities. Warranty expense (DR) and Warranty payable(CR) must be recorded in the same period that the company records the revenue related to the warranty. As warranties are honored, the estimated warranty payable account is reduced.

Question 4

How are contingent liabilities accounted for?

Answer 4

a contingent liability is potential liability that depends on some future event. Accounting for contingent liabilities is based on the following likelihoods: remote: do not disclose; reasonably possible: describe the situation in a note to the financial statements; Probable and the amount of loss cannot be estimated: describe the situation in a note to the financial statements; Probable and the amount of the loss can be estimated: record and expense and a liability based on estimated amounts

Question 5

How do we use the times-interest-earned ratio to evaluate business performance?

Answer 5

The times-interest-earned ratio is calculated as (net income + income tax expense + interest expense) / Interest expense. It measures the number of times earnings before interest and taxes (EBIT) can cover (pay) interest expense

Question 6

define contingent liability

Answer 6

a potential liability that depends on some future event

Question 7

define current liability

Answer 7

a liability that must be paid with cash or with goods and services within one year, or within the entity’s operating cycle if the cycle is longer than a year

Question 8

define current portion of notes payable

Answer 8

the amount of the principal that is payable within one year

Question 9

define FICA

Answer 9

Federal insurance contributions act, is the federal act that created the social security tax that provides retirement, disability, and medical benefits

Question 10

define Gross Pay

Answer 10

the total amount of salary, wages, commissions, or any other employee compensation before taxes and other deductions

Question 11

define income tax withholding

Answer 11

income tax deducted from an employee’s gross pay

Question 12

define liabilities

Answer 12

debts are owed to creditors

Question 13

define long-term liability

Answer 13

a liability that does not need to be paid within one year or within the entity’s operating cycle, whichever is longer

Question 14

define net pay

Answer 14

gross pay minus all deductions. The amount of compensation that the employee actually takes home

Question 15

define payroll register

Answer 15

a schedule that summarized the earnings, withholdings, and net pay for each employee

Question 16

define pension plan

Answer 16

a plan that provides benefits to retired employees

Question 17

define short-term note payable

Answer 17

a written promise made by the business to pay a debt, usually involving interest, within one year or less

Question 18

Define social security FICA tax

Answer 18

federal insurance contributions act tax, which is withheld from employees’ pay and matched by the employer

Question 19

Define times-interest-earned ratio

Answer 19

evaluates a business’s ability to pay interest expense. (Net income + Income tax expense + interest expense) / Interest expense

Question 20

define unemployment compensation tax

Answer 20

payroll tax paid by employers to the government, which uses the cash to pay unemployment benefits to people are out of work

Question 21

define warranty

Answer 21

an agreement that guarantees a company’s product against defects.