Chapter 12
Questions
Accounts Payable can be set up as a line of credit between a purchaser and a supplier. The terms of the invoice usually state that payment is due within a year, or a shorter time frame. Since accounts payable amounts are due within a company’s operating cycle, this account type would be considered a current liability.
A noncurrent liability is due in more than one year or outside a standard company operating period. A current liability is payable within a company’s operating period, or less than a year.
The likelihood of occurrence and the measurement requirement are the FASB required conditions. A contingent liability must be recognized and disclosed if there is a probable liability determination before the preparation of financial statements has occurred, and the company can reasonably estimate the amount of loss.
A short-term notes payable does not have any long-term characteristics and is meant to be paid in full within the company’s operating period (less than a year). The current portion of a noncurrent note payable is based off of a long-term debt but is only recognized as a current liability when a portion of the long-term note payable is due. The remainder stays a long-term liability.
A business borrows money from a bank, and the bank makes the note payable within a year, with interest. For example, this could come from a capital expenditure need or when expenses exceed revenues.
Examples include FICA Social Security, FICA Medicare, Federal Unemployment Compensation Tax (FUTA), State Unemployment Compensation Tax (SUTA), federal income tax, state income tax, Additional Medicare Tax, and local income tax.
FUTA and SUTA are the acronyms for the Federal Unemployment Tax Act and the State Unemployment Tax Act. They are unemployment insurance systems that collect funds from employers to cover employees in case of job disruption beyond their control. The FUTA tax rate is 6% but can be reduced by paying on time to the state unemployment system. This rate can be reduced down to as low as 0.6%.