Module 2 Flashcards
Bargain Surplus made cash sales during the month of October of $375,000. The sales are subject to a 6% sales tax that was also collected.
What would be included in the summary journal entry to reflect the sale transactions?
Credit Sales Taxes Payable for $22,500
The sales were cash sales, not on account. Therefore, no entry to accounts receivable is necessary. The original entry for the sales revenue is: Debit Cash $375,000, Credit Sales Revenue $375,000. The sales tax liability of 6% of total sales revenue, or $22,500, is recorded as a separate entry. The correct journal entry to record the sales tax liability is: Debit Sales Revenue $22,500, Credit Sales Tax Payable $22,500.
Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten’s lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000.
As a result of the above facts, what is the correct treatment of Wooten’s contingent obligation?
As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000
Loss contingencies, if probable and reasonably estimated, must be accrued and reported on the balance sheet. In this case, the attorney as made an estimate that is probable and reasonably estimated of $5,400,000. This amount must be accrued and reported on the financial statement. The additional $3,600,000, since it is not probable (but possible), must be disclosed in the notes to the financial statements.
