Financial Accounting - Current Liabilities
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Questions and Answers

What is recorded as a liability when a company receives cash in advance for a service or product?

  • Sales Revenue
  • Accounts Receivable
  • Deferred Revenue (correct)
  • Sales Tax Payable
  • When a customer downloads $15 worth of music from a gift card, what is the appropriate journal entry to record this transaction?

  • Debit Cash $15; Credit Deferred Revenue $15
  • Debit Deferred Revenue $15; Credit Sales Revenue $15 (correct)
  • Debit Sales Revenue $15; Credit Deferred Revenue $15
  • Debit Deferred Revenue $15; Credit Cash $15
  • In a sales transaction, what does sales tax payable represent?

  • Income tax the company will pay
  • Refundable taxes from the state
  • Expenses related to sales commissions
  • Tax collected from customers that must be remitted to the government (correct)
  • If a company has a current portion of long-term debt, what is true about this liability?

    <p>It must be paid within the next year. (D)</p> Signup and view all the answers

    How is the sales tax calculated on a $15 meal with a tax rate of 10%?

    <p>$1.50 (A)</p> Signup and view all the answers

    What is the total cash entry recorded for a $15 meal including a 10% sales tax?

    <p>$16.50 (B)</p> Signup and view all the answers

    What effect does cash received for an iTunes gift card have on a company's accounting records?

    <p>Increase in Cash and increase in Deferred Revenue. (B)</p> Signup and view all the answers

    Which of the following liabilities represents obligations that are contingent based on uncertain future events?

    <p>Contingent Liabilities (C)</p> Signup and view all the answers

    What is the total amount recorded as Salaries Expense for employer-provided fringe benefits in January?

    <p>$15,000 (C)</p> Signup and view all the answers

    What is the amount recorded as FICA Tax Payable for the month of January?

    <p>$7,650 (D)</p> Signup and view all the answers

    What is the total Payroll Tax Expense recorded as a liability for the month of January?

    <p>$13,850 (A)</p> Signup and view all the answers

    Which of the following represents a current liability on the January balance sheet?

    <p>Health Insurance Payable (A), Salaries Payable (C)</p> Signup and view all the answers

    What is the Federal and state unemployment tax rate mentioned for the payroll?

    <p>6.2% (D)</p> Signup and view all the answers

    Which employer-provided benefit is not subject to FICA tax?

    <p>None of the above (D)</p> Signup and view all the answers

    What entry would be made to debit the FICA Tax Payable account at month-end?

    <p>Debit Payroll Tax Expense (B)</p> Signup and view all the answers

    Which of the following best describes the total liabilities related to employee benefits in January?

    <p>Total liabilities include both employer-provided fringe benefits and taxes withheld. (C)</p> Signup and view all the answers

    Which type of tax is an employer required to match alongside the employee FICA taxes?

    <p>Social Security tax (C)</p> Signup and view all the answers

    What type of taxes do employers pay specifically for unemployment coverage on behalf of employees?

    <p>FUTA and SUTA taxes (A)</p> Signup and view all the answers

    Which of the following is NOT a cost typically borne by employers?

    <p>Federal and state income taxes (D)</p> Signup and view all the answers

    How much do employees contribute to Social Security and Medicare collectively?

    <p>7.65% (A)</p> Signup and view all the answers

    Which expense is classified as a fringe benefit paid for by the employer?

    <p>Disability insurance (D)</p> Signup and view all the answers

    In addition to health insurance, which type of contribution is typically an employer cost?

    <p>Contributions to retirement or savings plans (A)</p> Signup and view all the answers

    Which of the following best describes the employer's responsibility for FICA taxes?

    <p>Providing matching contributions (C)</p> Signup and view all the answers

    What type of taxes might be withheld from an employee's paycheck in addition to federal taxes?

    <p>State income taxes (B)</p> Signup and view all the answers

    Flashcards

    Deferred Revenue

    A liability account used to record cash received in advance of providing a good or service.

    Sales Tax Payable

    A current liability for sales taxes collected from customers and owed to the government.

    Current Portion of Long-term Debt

    Part of a company's long-term debt that is due within a year.

    Unemployment Tax Payable

    A liability for taxes related to unemployment benefits.

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    Gift Cards (Deferred Revenue)

    A common example of deferred revenue; company receives cash for a gift card but earns revenue later when the card is used for a purchase.

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    Recording Sales

    The process of recording revenue when earned.

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    Accounting Equation

    Assets = Liabilities + Equity

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    Current Liability

    A liability that must be paid within one year.

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    Payroll Expense

    The total cost of employee compensation, including salaries and benefits.

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    Payroll Taxes

    Taxes withheld or paid by an employer related to employee wages.

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    FICA tax

    Federal Insurance Contributions Act tax, the employer's share to Social Security and Medicare.

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    Income Tax Payable

    Amount of income tax owed to the government by the employer.

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    Employer-Provided Fringe Benefits

    Benefits offered to employees by the company, like health insurance, retirement contributions.

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    Payroll Tax Expense

    The total cost of payroll taxes for the employer.

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    Salaries Expense

    Costs for employee wages during payroll period.

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    Payroll

    The money paid to employees for their work during a period.

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    Employee Payroll Costs

    Costs incurred by employees, including federal and state income taxes, Social Security and Medicare taxes (FICA), and contributions to health, dental, disability, and life insurance, and retirement/savings plans.

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    Employer Payroll Costs

    Costs incurred by employers, including matching portions of Social Security and Medicare taxes, federal and state unemployment taxes (FUTA & SUTA), and contributions towards health, dental, disability, life insurance, and retirement/savings plans.

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    FICA Taxes

    Federal Insurance Contributions Act taxes; collectively Social Security and Medicare taxes.

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    Employer Matching FICA

    The portion of FICA taxes that employers pay, in addition to the employee's contribution.

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    Federal and State Unemployment Taxes

    Taxes employers pay to fund unemployment benefits for employees.

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    Fringe Benefits

    Additional employee benefits provided and paid for by employers, such as health, dental, disability, life insurance, and retirement or savings plans.

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    FUTA

    Federal Unemployment Tax Act

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    SUTA

    State Unemployment Tax Act

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    Study Notes

    Financial Accounting - Current Liabilities

    • Current Liabilities: Obligations a company expects to pay within one year or an operating cycle. The operating cycle is the time it takes to produce revenues (e.g., buy inventory, sell to customers, collect cash).
    • Notes Payable: A firm promises to repay a borrowed amount plus interest. Interest is calculated as: Face value × Annual interest rate × Fraction of the year

    Recording Notes Payable

    • Example: Southwest Airlines borrows $100,000 on September 1, 2018, for six months at 6%. Debit Cash $100,000, Credit Notes Payable $100,000 (to record note payable).

    Recording Interest Payable

    • Adjusting entry for interest payable (e.g., from September 1 to December 31 in 2018). Debit Interest Expense, Credit Interest Payable. Interest expense is calculated as the amount borrowed multiplied by the interest rate by the fraction of the year: $100,000 × 6% × 4/12).

    Recording Repayment of Notes Payable

    • Example: On March 1, 2019, the $100,000 note is repaid. Debit Notes Payable $100,000, Interest Expense $1,000, Credit Cash $101,000.

    Accounts Payable

    • Amounts owed to suppliers for merchandise or services. Often called trade accounts payable.

    Payroll Costs for Employees and Employers

    • Employee Costs: Federal and state income taxes, Employee portion of Social Security and Medicare, Employee contributions for health, dental, disability, and life insurance, Employee investments in retirement or savings plans.
    • Employer Costs: Federal and state unemployment taxes, Employer matching portion of Social Security and Medicare, Employer contributions for health, dental, disability, and life insurance, Employer contributions to retirement or savings plans.

    Payroll Example

    • Using Hawaiian Travel Agency example: total payroll $100,000, federal/state income tax withheld $24,000, health insurance $5,000, Fidelity contribution $10,000, debit "Salaries Expense" $100,000, credit "Income Tax Payable" $24,000, credit "FICA Tax Payable" $7,650

    Recording Employer-Provided Fringe Benefits

    • Journal entries for employer-provided fringe benefits (e.g., January 31). Debit "Salaries Expense", Credit "Accounts Payable (to Blue Cross)" $5,000 and Credit "Accounts Payable (to Fidelity)" $10,000

    Recording Employer Payroll Taxes

    • Example journal entries (January 31) for payroll taxes; debit Payroll Tax Expense, credit FICA Tax Payable, credit Unemployment Tax Payable

    Other Current Liabilities

    • Deferred Revenues: Liability used to record cash received in advance of a sale or service.
    • Sales Tax Payable: Sales taxes collected from customers for the seller.
    • Current Portion of Long-Term Debt: Portion of long-term debt that will be paid within the next year

    Example Deferred Revenues

    • Example: When a company receives cash for a gift card before delivering.
      • Debit Cash, Credit Deferred Revenue
      • When the company delivers the service/sells the goods, Debit Deferred Revenue, Credit Sales Revenue

    Example Sales Tax Payable

    • Assume $15 lunch with 10% tax.
      • Debit Cash $16.50, Credit Sales Revenue $15, Credit Sales Tax Payable $1.50

    Current Portion of Long-Term Debt

    • Debt expected to be paid within the next year. A 20-year mortgage payment is split into current and non-current portions.

    Contingencies

    • An existing uncertain situation that might result in a loss depending on the outcome of a future event

    Criteria for Reporting a Contingent Liability

    • Likelihood of payment (probable, reasonably possible, remote)
    • Amount of payment - must be reasonably estimable

    Accounting Treatment of Contingent Liabilities

    • Contingent liability recorded (if loss is probable and reasonably estimable) or not (if not probable and/or not reasonably estimable)
      • Example: If a December 31 estimate of loss was probable and reasonably estimable, record the estimate as a contingent liability for the year.

    Accounting for Warranties

    • Warranty expense is estimated as a percentage of sales (e.g., 3% of $1.5 million in sales=$45,000). If a warranty claim occurs in the next period (e.g., $12,000), the warranty liability is reduced.

    Contingent Gains

    • Situation where there's uncertainty about a gain, not recorded until the gain is certain.
    • Example example: if a company wins a lawsuit, the gain is recorded when the outcome is certain.

    Liquidity Analysis

    • Liquidity: Sufficient cash or current assets to settle current debts.
    • Lack of liquidity can cause financial problems.
    • Measures of liquidity: Working Capital, Current Ratio, Acid-Test ratio

    Working Capital

    • Current assets less current liabilities.
    • Large positive working capital indicates better liquidity.
    • Not the best measure for comparing across companies

    Current Ratio

    • Current assets ÷ Current liabilities
    • Higher ratio indicates greater liquidity

    Acid-Test Ratio

    • (Cash + current investments + accounts receivable) ÷ current liabilities.
    • Excludes inventory and prepaid rent, better measure of short-term liquidity than current ratio.

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    Description

    Test your understanding of current liabilities, including notes payable and interest payable. This quiz covers the recording of obligations and the calculation of interest in financial accounting. Refresh your knowledge and solidify your grasp on these essential concepts.

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