Operating liabilities and Contingencies

Question 1

Define Liabilities

Answer 1

1) “probable future sacrifices of economic benefits “
2) “ present obligations of a particular entity to transfer assets or provide services to other entities”
3) “The future is a result from past transactions or events”

Question 2

What are a liability ‘s three characteristics?

Answer 2

1) The entity will make a future sacrifice to satisfy the obligation (for example, disburse cash).
2) The entity has little or no option to avoid a future.sacrifice.
3) The transaction or event giving rise to the obligation has already occurred.

Question 3

Define Operating liabilities

Answer 3

“obligations arising from the firm’s primary business operations”

Question 4

What entries are operating liabilities?

Answer 4

Accounts and trade notes payable

Unearned revenues
Gift cards

Deposits

Sales and payroll taxes payable

Income tax payable

Compensated absences

Question 5

Define trade notes

Answer 5

1) Formal, written promises to pay a certain sum of money on a specified date.

the purchase of goods, supplies, or services are paid in the future

Question 6

Define Unearned revenues

Answer 6

1) a.k.a. deferred credits or deferred revenues
2) amounts received from customers for goods and services to be provided at some future date.
3) The liability arises from the obligation to deliver goods or services.
4) The seller recognizes revenue when it delivers the goods or provides the service.

Question 7

Gift cards define

Answer 7

1) An issuer’s certificate authorizes a holder to receive goods or services of a specific value.
2) if not redeemed, breakage occurs after surpassing a specific time limit.

Question 8

Define Deposit

Answer 8

is an amount a buyer remits to a seller that will be returned to the buyer when a specific event occurs.

Question 9

Define Compensated absences

Answer 9

employer-paid time off for vacation, illness, holidays, military service, jury duty, and maternity leave.

Question 10

What is the criteria of compensated absences?

Answer 10

A future payment is a result of services already performed ( that is an obligation) by the employee:

The benefits to be paid either vest or accumulate.

The future payment must be probable.

The future payment must be reasonably estimable.

Question 11

If unreasonable payment of compensated absences cannot be made, should it be footnoted?

Answer 11

yes

Question 12

Define Contingency

Answer 12

1) existing condition, situation, or set of circumstances involving uncertainty that will ultimately be resolved when one or more future events occur or fail to occur.

Question 13

What are situations that are loss contingencies?

Answer 13

lawsuits, warranties, premiums, coupons, and environmental remediation liabilities

Question 14

What are measurements of loss contingencies?

Answer 14

The criteria loss contingency are based on two factors:

1) The probability that the company will ultimately incur a loss.
2) The ability to reasonably estimate the amount of the potential loss.

Management must determine whether the loss is probable, remote, or reasonably possible:

Probable: If the loss is likely to occur, it is considered probable. (Not defined by ASC – 70-75% used in practice)

Remote: The probability of occurrence is only slight.

Reasonably possible: The probability of occurrence is less than likely, but more than remote.

Question 15

When do you accrue a loss contingency?

Answer 15

The evidence is is probable. The company has incurred a liability (or an asset has been impaired) as of the date of the financial statements.

The company can reasonably estimate the amount of the loss.

Management team can estimate a range for the loss, but a single outcome is unidentified within that range. it accrues the minimum point of the range of loss.

Question 16

When a loss contingency is reasonably possible, what is required procedure?

Answer 16

document or footnote the loss contingency

Question 17

Define Warranty

Answer 17

1) company’s promise or guarantee repair or replace any defective purchased goods within a specific time period.

Question 18

What are two types of warranties?

Answer 18

assurance type warranty (the manufacturer’s promise for repairing or replacing the product that is free of charge.
The product failure must occur within a specified period of time.

service type warranty (extended warranty, is usually purchased separately from the product it warrants.)

Question 19

Define Premiums

Answer 19

promotional items

Firms estimate costs associated with the premiums including contingent liabilities. sales revenue is recognized with these other costs.

Question 20

Payroll taxes payable define

Answer 20

liabilities that companies incur related to the payment of employee salary and wages. Payroll taxes include:

Social Security taxes.
Unemployment taxes.
Income taxes withheld.

Question 21

What taxes is a employer responsible to pay?

Answer 21

An employer is responsible for paying certain taxes, such as unemployment taxes and a portion of Social Security taxes.

Question 22

How does an employer deduct from their employee’s wage?

Answer 22

A employer deducts from their employee’s gross wages when employees pay their payroll taxes. The employer remits these tax payments to appropriate jurisdictions and/or agencies.

Question 23

Are social security taxes are FICA?

Answer 23

yes

Question 24

Define Federal insurance contribution act tax ( FICA)

Answer 24

1) employees contribute to FICA when working, and employees receive benefits upon retirement.

Question 25

Is FICA taxed 12.4%? Who pays this tax?

Answer 25

yes

payments are split between employer and employee.

Question 26

Define wage maximum

Answer 26

the maximum salary or wages on which taxes are levied.

Employee’s earnings exceeding the wage base of $118,500 per year are not subject to the tax.

Question 27

What is medicare’s rate?

Answer 27

1) 2.9%

2) payments are split between employee and employer.

Question 28

Is Futa unemployment taxes?

Answer 28

yes

Question 29

How does Federal unemployment tax act work?

Answer 29

The federal tax, referred to as the Federal Unemployment Tax Act (FUTA), is applicable to most businesses.

The rate is 6% on the first $7,000 paid to each employee during the year.

The employer receives a credit for up to 5.4% of unemployment taxes paid to the state.

Question 30

What is criteria to determine the income tax withholding tax?

Answer 30

The amount of withholding is based on a number of factors, such as income level, marital status, and number of dependents.

The tax is on the employee, not the employer.

The employer serves as an intermediary, collecting the tax from the employee and remitting it to the government.