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ACCT 3001 CH13

ACCT 3001 CH13 - CHAPTER 13 CURRENT LIABILITIES&...

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Unformatted text preview: CHAPTER 13 - CURRENT LIABILITIES & CONTINGENCIES 1.Current Liabilities 2 . Contingencies 3. Presentation and Analysis 1. Current Liabilities a.What is a liability? FASB, defines liabilities as: “Probable Future Sacrifices of Economic Benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events." b.What is a current liability? Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities." Typical Current Liabilities: . Accounts payable - chp 8 . Customer advances and deposits - chp 3 0 Notes payable - chp 11 . Unearned revenues - chp 3 . Current maturities on long 0 Sales taxes payable term debt - chp 5 o Short-term obligations . Income taxes payable expected to be refinanced o Dividends payable - Employee«related liabilities CHAPTER 13 - CURRENT LIABILITIES <3: CONTINGENCIES Dividends Payable (006m ai-vimoig Amount owed by a corporation to its stockholders as a result of board of directors' authorization - dividends are a liability when declared. Kama/W imafimfl REB . Generally paid within three months. 0 Undeclared dividends on cumulative preferred stock . not recognized as a liability. ' . Dividends payable in the form of shares of stock are not recognized as a liability. Reported in equity. Sales Taxes Payable Retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then remit to the proper governmental authority. BE13—6: Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) prepare the entry to record Dillons' credit sales. (b) Prepare the entry to record Dillons' cash AB Alia 31,9200 Sales ”Ra-am (570,000 6am TM’Paxfia/bifi WW) haw Cash as is. LP» 0m £01m 8am ”mm W500 8&0, L010 6m TM/RLflnJom ll 7 o f" [.00 CMLL 97:: W30 {01,600 mu 2 some CHAPTER 13 - CURRENT LIABILITIES & CONTINGENCIES Income Taxes Payable Businesses must prepare an income tax return'and compute the income tax payable resulting from the operations of the current period. . Taxes payable are a current liability o Corporations must make periodic tax payments throughout the year. 0 Differences between taxable income and accounting income sometimes occur (Chapter 19). Employee Related Liabilities Amounts owed to employees for salaries or wages are reported as a current liability. In addition, current liabilities may include: > Payroll deductions. > Compensated absences. >> Bonuses. Payroll Taxes Payroll taxes come in two forms: the amount the company takes out of your paycheck (the difference between your gross and net pay) - these are payroll withholding taxes that represent the employees' liabilities. r The second type is called payroll tax expense, additional taxes due by a company because of the employees on its payroll. These represent employer liabilities. a F\ MA "MA (Witt/r WW9 WWW—WC Each pay period, a company must account for payroll withholding and payroll tax expense CHAPTER 13 - CURRENT LIABILITIES <3: CONTINGENCIES Payroll taxes include: a) Federal and state income taxes on employees - deducted from employee's paycheck. b) Federal social security and medicare taxes (FICA) Rate Base k6 Social Security 6.2% to $106,800 (,po Q. Medicare 13652:; Total salary “if Employees and Employers pay eqlJa amounts c) Federal and state unemployment taxes Rate Base 30 Federal (FUTA) 0.8% to $7,000 ‘9 ' State (SUTA) 070—1870 varies oi . 3f Onl emplo ers ay - no deduction from employee paycheck. Recording payroll deductions and payroll taxes a) Employees' obligations: 0 Federal withholding taxes 0 State withholding taxes 0 FICA b) Employer’s obligations: . Gross Salary . Matching FICA o FUTA o SUTA CHAPTER 13 - CURRENT LIABILITIES 6: CONTINGENCIES P13-4 -Below is a payroll sheet for Otis Import Company for the month of September 2010. The company is allowed a 1% unemployment compensation rate by the state: the federal unemployment tax rate is 0.8%: and the maximum for both is $7,000. Assume a 10% federal income tax rate for employees and a 7.65% FICA tax on employee and employer on a maximum of 0%?! $102,000. In addition, 1.45% is charged both employer and employee for an employee's wages in excess of $102,000 per em-lo ee. Earnings Sept Income State UC Federal to Aug Earnings Tax [0% fl lgbtgofoll 46 Atria/:09. 00mm U60 6% withholdin- indium m... D Q, 009 . ' '7; I' 4'5 r2 'i I no __—__ mm mm Imam-an mam-Im- Instructions: TOMS 53 500 1) Complete the payroll sheet and make the necessary entry to record the payment of the payroll. 2) Make the entry to record the payroll tax expense of Otis Import Company. 3) Make the entry to record the payment of the payroll liabilities created. Assume that the company pays all payroll “L95 liabilities at the end of each month. (7“ 4‘73 3 WA 7) l 5510; 50 D 671377575 67W" 88/500 Fed 70/??673 3,350 01> 7.00 5 (470 #ICA (P ‘7Lo4. 76 If 73% _ 00rd “14 {4’77} 5 M0 (RWW Emma Winmg W .5350 02> 87m; 722% 70b Saflanfl, womb. W CWMQ‘? 3%‘5 :95 3M6”, 79% (939? 35315.15 @350 0Q) W70“. TM 777. 35 am 34, {17735 (My Fl CA Wm 704.75 02% lv , 0W Oman; m TA .. 5. [go 493. W Rudd) SMTA , h 700 ‘rlfiég/i. 5 CHAPTER 13 - CURRENT LIABILITIES & CONTINGENCIES Compensated Absences Paid absences for vacation, illness, and holidays. Accrue a liability if all the following conditions exist. . The employer's obligation is attributable to employees' services already rendered. . The obligation relates to rights that vest or accumulate. . Payment of the compensation is probable. . The amount can be reasonably estimated. Bonus Agreements Result in payments to certain or all employees in addition to their regular salaries or wages. . Bonuses paid are an operating expense. . Unpaid bonuses should be reported as a current liability. 2. Contingencies “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur." (SFAS No.5, para. 1). Gain contingencies o Are not recorded. - Disclosed only if probability of receipt is high. . Include possible tax refunds from disputes, pending court cases with probable favorable outcomes, and tax loss carryforwards. CHAPTER 13 - CURRENT LIABILITIES & CONTINGENCIES Contingent Liability The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote. FASB uses three areas of probability: . Probable. . Reasonably possible. . Remote. Probabili OUnCl Probable Mi mmtm Reasonabl nossble ham to have happomol afircacbij Common loss contingencies: 34 W Fwy, mag 1. Litigation, claims, and assessments. 2. Guarantee and warranty costs. 3. Premiums and coupons. 4. Environmental liabilities. ll Guarantee and Warranty Costs . Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product. 0 If it is probable that customers will make warranty claims and a company can reasonably estimate the costs involved, the company must record an expense. CHAPTER 13 - CURRENT LIABILITIES 6: CONTINGENCIES Two basic methods of accounting for warranty costs: a)Cash—Basis method > Expense warranty costs as incurred, because > it is not probable that a liability has been incurred, or > it cannot reasonably estimate the amount of the liability. b) Accrual—Basis method > Charge warranty costs to operating expense in the year of sale. > Method is the generally accepted method. > Referred to as the expense warranty approach. P13-5 Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2010 the corporation sells for cash 400 computers at a unit price of $2,500. On the basis of past experience, the 2-year warranty costs are estimated to be $155 for parts and $185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2010). The warranty is not sold separately from the computer. CHAPTER 13 - CURRENT LIABILITIES 6: CONTINGENCIES Instructions : a) Record any necessary journal entries in 2010, applying the cash-basis method. Come (400% am} l, 000,000 _ W ng/gJQ/fifl lJODO)OlSD ‘ '00 WWW-l3 wig/In QQ [W no WW?- -__.. b) Record any necessary journal entries in 2010, applying the expense warranty accrual method. 0030/9 l ,DD 0, Oljb Sam 19.9» momma 92.00-ch aflfiafgficfici W map, _ Wazi‘rwnfilgg @xépwmgei alga-rips" x400) $0,000 0 0-0 Umllilj WWW” wwwfiw‘m‘ lam/O or Cam ‘3le lO/uo Curran!- ‘lL-T. c) What liability relative to these transactions would appear on the December 31, 2010, balance sheet and how would it be classified if the cash-basis methog is applied? [limb (lilo Liam l 1 l3 CHAPTER 13 - CURRENT LIABILITIES d: CONTINGENCIES d) What liability relative to these Transactions would appear on the December 31, 2010, alliance sheeL »——-vx:- u raw-4."-.. :; and how would it be classified if the expense warranty accrual method is applied? Tam flaming a? Eamooo Wu —:> Mei an : cwrmd \Mn v) mile/r; : long term Our-(Mr? L {ct-bi lk—l «0° LL‘CLbilMMS, umvarF' WWWMTQ UQD! DOD l; T Liam; r. i-xm henna-m M-Mcrlwv' - .. ($6,001). In 2011, the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor. e) Record any necessary journal entries in 2011, applying the cash-basis method. —- 01rd not (of: mm. Mflwnfj 6,4212%]96. lfll/ €300 (swim? a g ’Pwfi Imam mg $11,400 F d mac. Lox/wr Wot/bide 801,01069 {(Dr mg MW Mama i+ heap-paw... 1’) Record any necessary journal entries in 2011, applying the expense warranty accrual method. F H7 — whamm- "Hume.“ ,_,, _ ....... .. ”Mg" x.___ LIQJHWLQ, bum/1.0M warren/03 LQM‘EDD wow; Ihvevrtovy -:9.\,4OD Wow ‘ngodom . $0,000 aflm cum accrmd k89,. M. u.) 10 CHAPTER 13 - CURRENT LIABILITIES 6: CONTINGENCIES 3. Presentation and Analysis 0 Usually reported at their full maturity value. 0 Difference between present value and the maturity value is considered immaterial. Presentation of Contingencies Disclosure should include: > Nature of the contingency. > An estimate of the possible loss or range of loss. Companies should disclose certain other contingent liabilities. 1. Guarantees of indebtedness of others. 2. Obligations of commercial banks under “stand-by letters of credit." 3. Guarantees to repurchase receivables (or any related property) that have been sold or assigned. 11 ...
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