Chap009wildtextbook

62400 52 weeks 1200 62400 50 weeks 1248 weekly

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$62,400 ÷ 52 weeks = $1,200 $62,400 ÷ 50 weeks = $1,248 Weekly vacation benefit $ 48 not responsible for entry DR CR Jan. 5 Vacation Benefits Expense 48 Vacation Benefits Payable 48 To record weekly vacation for one employee 9-29
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Many bonuses paid to employees are based on reported net income. Bonus Plans Assume the annual yearly bonus to the store manager is equal to 10% of the company’s annual net income minus the bonus. The store earned $100,000 net income this year. not responsible for entry DR CR Dec. 31 Employee Bonus Expense 9,091 Bonus Payable 9,091 9-30
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Warranty Liabilities Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To conform with the matching principle, the seller reports expected warranty expense in the period when revenue from the sale is reported. Not responsible for recording entries. 9-31
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Probability of future sacrifice . . . Reasonably Probable Possible Remote Record the Disclose the Can be contingent liability in the No Estimated liability. notes to the action. financial stmts. Disclose the Disclose the Cannot be liability in the liability in the No Estimated notes to the notes to the action. financial stmts. financial stmts. Amount . . . Contingent Liabilities Potential obligation that depends on a future event arising out of a past transaction or event. 9-32
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Accounting for Contingent Liabilities 9-33
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Reasonably Possible Contingent Liabilities Potential Legal Claims – A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable. Debt Guarantees – The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability. 9-34
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Current Ratio Current ratio Current assets Current liabilities = This ratio is an important measure of a company’s ability to pay its short-term obligations. 3-35
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Acid-Test Ratio A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. =       Quick assets       Current liabilities Acid-test ratio Acid-test ratio = Cash + S/T investments + receivables     Current liabilities 4-36
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