Chapter 8
Current Liabilities
QUESTIONS
Question 8-1
Liabilities have three essential characteristics. Liabilities are: (1) probable future sacrifices of
economic benefits; (2) arising from present obligations to other entities; (3) resulting from past
Question 8-2
In most cases, current liabilities are payable within one year and long-term liabilities are payable
Question 8-3
Distinguishing between current and long-term liabilities is important in helping investors and
Question 8-4
Question 8-5
The accrual basis requires expenses to be recorded when incurred. The cash basis requires
expenses to be recorded when the cash is paid. Financial accounting requires use of the accrual basis
Question 8-6
A line of credit is an informal agreement that permits a company to borrow up to a prearranged
limit without having to follow formal loan procedures and paperwork. The line of credit works like a
answers to Questions (continued)
Question 8-7
If a company borrows from another company rather than from a bank, the note is referred to as
Question 8-8
Four items commonly withheld from employee payroll checks include (1) federal and state
income taxes, (2) Social Security and Medicare, (3) health, dental, disability, and life insurance
Question 8-9
Four common employer costs in addition to the employee’s salary include (1) federal and state
unemployment taxes, (2) the employer portion of Social Security and Medicare, (3) employer
Question 8-10
Both the employer and the employee pay equal portions of social security taxes. Employers
withhold from employee paychecks a 6.2% Social Security tax up to a maximum base amount and a
Question 8-11
When a company receives cash in advance through the sale of gift cards, it debits cash and
Question 8-12
(a) When Business Week sells magazine subscriptions, they debit cash and credit deferred
answers to Questions (continued)
Question 8-13
The sales tax rate for Hollister is 6.5% calculated as $325 in sales taxes divided by sales of
Question 8-14
Question 8-15
Question 8-16
Question 8-17
Question 8-18
Question 8-19
If one amount within a range of potential losses appears more likely than other amounts within
answers to Questions (continued)
Question 8-20
In a pending lawsuit, one side—the defendant—faces a loss contingency, while the other side—
Question 8-21
Question 8-22
Working capital is simply the difference between current assets and current liabilities. The
current ratio is calculated by dividing current assets by current liabilities. The acid-test ratio is
Question 8-23
(a) The purchase of inventory with cash would have no effect on the current ratio as one current
asset (inventory) would increase while another current asset (cash) would decrease. The purchase of
inventory with cash would decrease the acid-test ratio due to the decrease in cash. (b) The sale of
BRIEF EXERCISES
Brief Exercise 8-1
November 1
Debit
Credit
Cash
4,000,000
Notes Payable
Interest Payable
Brief Exercise 8-2
Debit
Credit
4,000,000
Brief Exercise 8-3
Brief Exercise 8-4
April 1
Debit
Credit
Cash
13,000,000
Notes Payable- Commercial Paper
13,000,000
December 31
Notes Payable- Commercial Paper
Cash
Brief Exercise 8-5
Total withheld for:
Social Security
$118,500 x .062
=
Brief Exercise 8-6
Debit
Credit
260,000
Deferred Revenue
(to record advance receipt of cash)
January 23
Cash
2,340,000
Deferred Revenue
260,000
Sales
Cost of Goods Sold
1,600,000
Inventory
(to complete the sale)
Brief Exercise 8-7
Debit
Credit
Brief Exercise 8-8
Southwest Airlines
Partial Balance Sheet
December 31, 2018
Current Liabilities:
Current portion of long-term debt
$ 10,000,000
Brief Exercise 8-9
Debit
Credit
930,000
The Warranty Liability at the end of the year is $630,000, calculated using a T-
account as follows:
Warranty Liability
Brief Exercise 8-10
The loss contingency is probable and reasonably estimable, so a loss and a liability for
Brief Exercise 8-11
Electronic Innovators has a contingent liability that is probable, and reasonably
Brief Exercise 8-12
Aviation Systems has a contingent gain that is probable and reasonably estimable,
Brief Exercise 8-13
Northwest Forest Products has a contingent liability that is reasonably possible and
Brief Exercise 8-14
Brief Exercise 8-15
÷
=
=
2.67
÷
=
=
1.33
EXERCISES
Exercise 8-1
Reporting Method
C. Current liability
Item
__C__ 1. Accounts payable.
__C__ 2. Current portion of long-term debt.
__C__ 3. Sales tax collected from customers.
__C__ 4. Notes payable due next year.
__L__ 5. Notes payable due in two years.
__C__ 6. Customer advances.
__C__ 7. Commercial paper.
__D__ 8. Unused line of credit.
Exercise 8-2
1. November 1, 2018
Debit
Credit
Cash
60,000
Notes Payable
60,000
2. December 31, 2018
Interest Expense ($60,000 x 7% x 2/12)
700
(Interest expense incurred, but not paid)
3. January 31, 2019
Notes Payable
60,000
Interest Expense ($60,000 x 7% x 1/12)
Interest Payable ($60,000 x 7% x 2/12)
Cash
Exercise 8-3
1. August 1, 2018
Debit
Credit
2. December 31, 2018
3. January 31, 2019
Notes Payable
21,000,000
Interest Expense ($21 million x 9% x 1/12)
Interest Payable ($21 million x 9% x 5/12)
Exercise 8-4
1. August 1, 2018
Debit
Credit
2. December 31, 2018
3. January 31, 2019
Cash
21,945,000
Exercise 8-5
1.
Exercise 8-6
January 13
No Entry
February 1
Cash
Notes Payable
Notes Payable
Cash
Exercise 8-7
Requirement 1
Total Salary Expense
(100 x 40 hours x $20)
$80,000
Federal Income Taxes
(80,000 x .15)
State Income Taxes
(80,000 x .05)
FICA Taxes
(80,000 x .0765)
Total Withholdings
$57,880
Requirement 2
FICA Taxes
(80,000 x .0765)
Unemployment Taxes
(80,000 x .062)
Total Payroll Tax Expense
Requirement 3
The company does not make an accounting entry to record the free skiing given to
Exercise 8-8
Requirement 1
January 31
Salaries Expense
3,000,000
Income Tax Payable
637,500
Requirement 2
January 31
Salaries Expense (fringe benefits)
90,000
Requirement 3
January 31
Payroll Tax Expense
415,500
FICA Tax Payable
Exercise 8-9
January 31
Salaries Expense
600,000
Income Tax Payable
120,000
Salaries Payable (to balance)
434,100
January 31
Payroll Tax Expense (total)
83,100
Exercise 8-10
Requirement 1
November 30
Cash
21,000,000
Deferred Revenue
Requirement 2
Deferred Revenue
Sales Revenue
December 31
Requirement 3
The ending balance in Deferred Revenue is $7,000,000.
Deferred Revenue
Exercise 8-11
Requirement 1
The contingent liability is probable and reasonably estimable, so it must be reported.
Exercise 8-12
Requirement 1
The contingent liability is probable and reasonably estimable, so it must be recorded
as follows:
Requirement 2
Pacific Cruise Lines should record a loss and a liability for the minimum amount ($1.1
million) and disclose the nature of the contingency in the disclosure notes to the
financial statements. The journal entry is as follows:
Requirement 3
If the likelihood of loss is reasonably possible rather than probable, we record no entry