Question

indicate which of the following items should appear in the financial statement of a hotel and where they would appear.

a. A $100,000 lawsuit pending against the hotel that the hotel's attorney believes the hotel will probably lose.

b. FICA taxes payable.

c. Estimated property taxes.

d. A commitment to pay a certain entertainer $30,000 if he performs at the hotel in six months.

e. Estimated income taxes.

f. The guarantee of $250,000 worth of a subsidiary's debt.

Answer 1

a. The amount which is estimated to be lost should be shown as a contingent liability in the notes to accounts section. Contigent liability is a liabilty which depends on happening of an event whose conditions exist on the balance sheet date. Hence, the hotel should make a contingent liability of $100,000 in the financial statement.

b. FICA Taxes payable

It should be shown under current liabilities.

c. Estimated Property Taxes

It should be shown under current liabilities.

d. In this case a provision will be created under liabilities side of balance sheet.

e. Estimated income taxes.

Create a provision for income tax in the liability side of balance sheet under current liabilities.

f. The guarantee of $250,000 worth of a subsidiary's debt. It should be shown as a contingent liability in the notes to accounts section of balance sheet.