chapter_11 - CHAPTER 11 Current Liabilities and Payroll...

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Unformatted text preview: CHAPTER 11 Current Liabilities and Payroll Accounting ANSWERS TO QUESTIONS 1. Jill is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer. 2. In the balance sheet, Notes Payable of $40,000 and Interest Payable of $900 ($40,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $900 should be reported under other expenses and losses. 3. (a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry to record the proceeds is: Cash................................................................................................. 7,400 Sales......................................................................................... 7,000 Sales Taxes Payable................................................................ 400 4. (a) The entry when the tickets are sold is: Cash........................................................................................... 800,000 Unearned Football Ticket Revenue.................................... 800,000 (b) The entry after each game is: Unearned Football Ticket Revenue............................................ 160,000 Football Ticket Revenue..................................................... 160,000 5. Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected needs for cash. Two measures of liquidity are working capital (current assets current liabilities) and the current ratio (current assets current liabilities). 6. A contingent liability is an existing situation involving uncertainty as to a possible obligation which will be resolved when one or more future events occur or fail to occur. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. Warranty costs are a contingent liability usually recorded in the accounts since they are both probable in incurrence and subject to estimation. 7. If an event is only reasonably possible, then only note disclosure is required. If the possibility of a contingent liability occurring is only remote, then neither recording in the accounts nor note disclosure is required. 8. Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense....
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chapter_11 - CHAPTER 11 Current Liabilities and Payroll...

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