Chapter 12

Question 1

Current liabilities -casual

Answer 1

due to be satisfied in the near term

ex: accounts payable, salaries, utilities, taxes, short-term loans

Question 2

Current liabilities

Answer 2

debts that are due to be paid within one year or the operating cycle, whichever is longer

involve:
- use of current assets
- creation of another current liability
- providing of some service

less obvious:

• customer prepayments
• amounts collected for a payable to 3rd parties
• portion of long term debt due within year

DOES NOT INLCUDE:
-amount not yet incurred - ex: next year’s salary

Question 3

Operating Cycle

Answer 3

length of time it takes to turn cash back into cash

less than one year for most businesses

Question 4

Accounts Payable

Answer 4

current liability

amounts due to suppliers relating to the purchase of goods and services

typically informal working relationship where credit received with expectation of payment

usually not in writing

Question 5

Notes Payable

Answer 5

formal short-term borrowings usually evidenced by specific written promises to pay

bank borrowing
equipment purchase
some credit purchase from suppliers

person who pays-maker

can be transferred to someone else

typically involve interest

when due in less than one year: current liability

Question 6

The Current Portion of Long-term

Answer 6

the amount of principal which is to be paid within one year or the operating cycle, whichever is longer, should be separated and classified as a current liability

the rest of the debt: long term liability

Question 7

Accrued Liabilities or accrued expenses

Answer 7

relate to expenses that accumulate with the passage of time but will be paid in one lump-sum amount

salaries
wages
taxes
interest

The amount that employees have earned but not been paid is termed accrued salaries and should be reported as a current liability

The reported accrued liabilities only relate to amounts already accumulated and not to amounts that will arise later.

Question 8

Prepayments by Customers

Answer 8

customer deposits money in advance of service

gift card
magazine subscription
tickets

represent an obligation on the part of the seller to either return the money or deliver a service in the future

prepayment is reported as “unearned revenue” within the current liability section of the balance sheet. Recall, from earlier chapters, that the unearned revenue is removed and revenue is recognized as the goods and services are provided.

Question 9

Collections for Third Parties

Answer 9

recipient of some payment is not the beneficiary of the payment

recipient has an obligation to turn the money over to another entity

ex: sales tax

amounts are appropriately reflected as a current liability until the funds are remitted to the rightful owner.

Question 10

Obligations to be Refinanced

Answer 10

A currently maturing long-term obligation is to be shown as a current liability unless

• the company intends to renew the debt on a long-term basis
• company has the ability to do so (ordinarily evidenced by a firm agreement with a competent lender).

Question 11

Notes Payable

Answer 11

When Issued:
D: cash
C: Note payable

When repaid:
D: Interest expense, note payable
C: cash

If the end of the year come before note it due:
D: interest expense
C: interest payable

Question 12

Current Liability on balance sheet

Answer 12

interest payable
and
note payable

Question 13

how are liabilities listed on balance sheet

Answer 13

due dates
from the earliest to the latest
from the largest to the smallest

Question 14

“rule of 78s

Answer 14

A year has 12 months, and 12 + 11 + 10 + 9 + . . . + 1 = 78; somehow giving rise to the “rule of 78s.”

Question 15

contingent liabilities

Answer 15

uncertain or potential obligations

legal disputes
environmental contamination
product warranties

Question 16

General business risks

Answer 16

do not confuse with contingent liabilities

include the risk of war, storms, and the like that are presumed to be an unfortunate part of life for which no specific accounting can be made in advance.

Question 17

Contingent liability rules

Answer 17

should be recorded in the accounts when
it is probable that the future event will occur and the amount of the liability can be reasonably estimated.

This means that a loss would be recorded (debit) and a liability established (credit) in advance of the settlement.

record estimates in low end for US standards

Question 18

reasonably possible contingent liability

Answer 18

note to the financial statements is required. Likewise, a note is required when it is probable a loss has occurred but the amount simply cannot be estimated.

Question 19

Acquired contingencies

Answer 19

recorded based on an estimate of actual value.

Question 20

remote risks

Answer 20

need not be disclosed;

frivolous lawsuit

Question 21

Time frame to record events

Answer 21

in year it happened

Question 22

Product liabilities

Answer 22

presumed to give rise to a probable liability that can be estimated

Question 23

Sell goods with Warranty

Answer 23

an estimate of the amount of warranty costs to be incurred on the goods should be recorded as expense

offsetting credit to a Warranty Liability account

Question 24

Warranty work preformed

Answer 24

Warranty Liability is reduced

cash/other resource credited

Question 25

estimated liability not a warranty

Answer 25

coupons, prizes, rebates, air-miles, free hotel stays, free rentals, and similar items associated with sales activity

Question 26

gross pay

Answer 26

total earnings

Question 27

net pay

Answer 27

gross pay - applicable deductions

Question 28

Withheld tax amounts that have yet to be remitted to the government

Answer 28

current liability

Question 29

FICA

Answer 29

FICA stands for Federal Insurance Contributions Act

Social Security/Medicare Taxes

employer must match both
cap on SS tax

Question 30

Suta and Futa

Answer 30

state and federal unemployment tax

capped at a certain rate

Question 31

workers compensation insurance

Answer 31

varies by state
provides for payments to workers who sustain on-the-job injuries and shields the employer from additional claims. But, for companies that do not carry such insurance, the employer may have an unlimited exposure to claims related to work place injuries. The cost of this insurance can be very high for risky work, like construction.

Question 32

compensated absences

Answer 32

expense (debit) and provide a liability (credit) for such accumulated costs when specified conditions are present.
Those conditions are that the accumulated benefit (1) relates to services already rendered, (2) is a right that vests or accumulates, (3) is probable to be paid to the employee, and (4) can be reasonably estimated. Vacation pay typically meets these conditions for accrual, while other costs depend upon the individual company’s policies and history.