Question 1 of 4) 1. 20.00 points The following items appear on the balance sheet

Question

Question 1 of 4) 1. 20.00 points The following items appear on the balance sheet of a company with a two-month operating cycle. Identify the proper classification of each item as follows: C if it is a current liability, L if it is a long-term liability, or N if it is not a liability Item Classification 1. Notes payable (due in 13 to 24 months). 2. Notes payable (due in 6 to 12 months). 3. Notes payable (mature in five years) 4. Current portion of long-term debt. 5. Notes payable (due in 120 days) 6. FUTA taxes payable. 7. Accounts receivable 8. Sales taxes payable. 9. Salaries payable. 10. Wages payable. References eBook & Resources E Search the web and Windows Save & Exit submit 12/1/2015

Explanation / Answer

1. Paragraph 69a–d of IAS 1 “PRESENTATION OF FINANCIAL STATEMENTS” states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:

a) It expects to settle the liability in its current operating cycle

b) It holds the liability primarily for trading

c) The liability is due to be settled within 12 months

d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

All other liabilities are to be classified as non-current or long-term liability.

Item

Classification

Comment

1

Notes Payable (due in 13 to 24 months)

L

Liability is due after 12 months

2

Notes Payable (due in 6 to 12 months)

C

Liability is not due in its current operating cycle of 2 months. But due to be settled within 12 months

3

Notes Payable (mature in five years)

L

Liability is due after 12 months

4

Current portion of long-term debt

C

This is the portion of the long-term liability which is to be settled in the next 12 months.

5

Notes Payable (due in 120 days)

C

Liability is not due in its current operating cycle of 2 months. But due to be settled within 12 months

6

FUTA Taxes Payable

C

Payroll liabilities are due by their due date. These will be generally less than 12 months.

7

Accounts Receivable

N

Accounts receivable is an asset.

8

Sales tax payable

C

Sales tax liabilities are due by their due date. These will be generally less than 12 months.

9

Salaries payable

C

Salaries payable generally is an accrual of salary expense which is to be paid in the following month.

10

Wages payable

C

Wages payable generally is an accrual of salary expense which is to be paid in the following month.

2. First let us calculate the employer and employee taxes on the Sales Salaries.

Sales Salaries - $40,000

FICA is contributed equally both by employer and employee.

Employer Social Security tax @ 6.2% is $40,000 * 6.2% = $2,480

Employee Social Security tax @ 6.2% is $40,000 * 6.2% = $2,480

Employer Medicare Tax @ 1.45% is $40,000 * 1.45% = $580

Employee Medicare Tax @ 1.45% is $40,000 * 1.45% = $580

Federal income tax withheld - $ 3,100

Medical Insurance deduction - $593

Union dues - $230

FUTA @0.6% is $40,000 * 0.6% = $240

Employee taxes are withheld from the gross salary. So net salary payable is

Gross salary – Employee Social Security - Employee Medicare – Federal Income Tax – Medical Insurance – Union dues

= $40,000 - $2,480 - $580 - $3,100 - $593 - $230 = $33,017

Total FICA taxes will be employee and employer contribution of Social security and Medicare taxes = $2,480 + $2,480 + $580 + $580 = $6,120

The Journal entry of North Company on January 15 will be as below:

Date

General Journal

Debit

Credit

Jan 15

Sales Salaries A/c Dr.

$40,000

FICA – Employer A/c Dr.

$ 3,060

FUTA A/c Dr.

$     240

To FICA Payable

$ 6,120

To Federal Income Tax A/c

$ 3,100

To Medical Insurance A/c

$    593

To Union Dues A/c

$    230

To FUTA Payable A/c

$    240

To Sales Salaries Payable A/c

$33,017

(Record Payroll expenses and liabilities for the payperiod)

Item

Classification

Comment

1

Notes Payable (due in 13 to 24 months)

L

Liability is due after 12 months

2

Notes Payable (due in 6 to 12 months)

C

Liability is not due in its current operating cycle of 2 months. But due to be settled within 12 months

3

Notes Payable (mature in five years)

L

Liability is due after 12 months

4

Current portion of long-term debt

C

This is the portion of the long-term liability which is to be settled in the next 12 months.

5

Notes Payable (due in 120 days)

C

Liability is not due in its current operating cycle of 2 months. But due to be settled within 12 months

6

FUTA Taxes Payable

C

Payroll liabilities are due by their due date. These will be generally less than 12 months.

7

Accounts Receivable

N

Accounts receivable is an asset.

8

Sales tax payable

C

Sales tax liabilities are due by their due date. These will be generally less than 12 months.

9

Salaries payable

C

Salaries payable generally is an accrual of salary expense which is to be paid in the following month.

10

Wages payable

C

Wages payable generally is an accrual of salary expense which is to be paid in the following month.

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