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Current Liabilities

11. Current Liabilities. Principles of Financial Accounting, 11e Reeve • Warren • Duchac. 1. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 11-4. 1.

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Current Liabilities

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  1. 11 Current Liabilities Principles of Financial Accounting, 11e Reeve • Warren • Duchac

  2. 1 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 11-4

  3. 1 Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. • Accounts payable • Current portion of long-term debt • Notes payable

  4. 1 Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.

  5. 1 Accounts Payable as a Percent of Total Current Liabilities Exhibit 1

  6. 1 Current Portion of Long-Term Debt Long-term liabilities are often paid back in periodic payments, called installments. Installmentsthat are due within the coming year must be classified as a current liability.

  7. 1 The total amount of the installments due after the coming year is classified as a long-term liability.

  8. 1 Short-Term Notes Payable A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account.

  9. 1 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360). Interest Expense appears on the income statement as an “Other Expense.”

  10. 1 On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.

  11. Mdse. Inventory 10,000 Accounts Payable 10,000 Bowden Co. (Borrower) Description Debit Credit 1 Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500

  12. Bowden Co. (Borrower) Description Debit Credit Accounts Payable 10,000 Notes Payable 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 1 On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

  13. Bowden Co. (Borrower) Description Debit Credit Notes Payable 10,000 Interest Expense 200 Cash 10,200 Coker Co. (Creditor) Description Debit Credit Cash 10,200 Interest Revenue 200 Notes Receivable 10,000 1 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.

  14. 1 On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.

  15. 1 On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).

  16. 1 Discounting a Note A discounted note has the following characteristics: • The creditor (lender) requires an interest rate, called the discount rate. • Interest, called the discount, is computed on the face amount of the note. • The debtor (borrower) receives the face amount of the note less the discount, called the proceeds. • The debtor pays the face amount of the note on the due date.

  17. 1 On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%. Proceeds Discount: $20,000 × .15 × 90/360 Discount rate

  18. The amount paid is the face amount of the note. 1 On November 8 the note is paid in full.

  19. Follow My Example 11-1 Follow My Example 6-1 a. $60,000 1 Example Exercise 11-1 Example Exercise 10-2 Proceeds from Notes Payable On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product Company for merchandise inventory. Determine the proceeds of the note, assuming the note carries an interest rate of 6%. Determine the proceeds of the note, assuming the note is discounted at 6%. b. $59,400 [$60,000 – ($60,000 × 6% × 60/360)] 11-21 For Practice: PE 11-1A, PE 11-1B

  20. 5 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. 11-79

  21. 5 Contingent Liabilities Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.

  22. 5 The accounting for contingent liabilities depends on the following two factors: • Likelihood of occurring: Probable, reasonably possible, or remote. • Measurement: Estimable or not estimable.

  23. 5 Recording Contingent Liabilities During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period.

  24. 5 If a customer required a $200 part replacement on August 16, the entry would be:

  25. 5 Example Exercise 10-2 Example Exercise 11-7 Estimated Warranty Liability Cook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty. Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work. 11-85

  26. For Practice: PE 11-7A, PE11-7B Follow My Example 11-7 5 Example Exercise 11-7 (continued) a. Product Warranty Expense………………… 8,400 Product Warranty Payable…………….. 8,400 To record warranty expense for August, 6% × $140,000. b. Product Warranty Payable…………………. 290 Supplies…………………………………… 200 Wages Payable…………………………… 90 Replaced defective part under warranty. 11-86

  27. Quick Ratio = Quick assets Current liabilities 5 Quick Ratio Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000 Current liabilities $220,000 $740,000 The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.

  28. Quick Ratio = Quick assets Current liabilities $231,000 $220,000 = 1.05 Noble Company = 5 Quick Ratio Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000 Current liabilities $220,000 $740,000

  29. Quick Ratio = Quick assets Current liabilities $592,000 $740,000 = 0.80 Hart Company = 5 Quick Ratio Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000 Current liabilities $220,000 $740,000

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