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Financial Accounting: Tools for Business Decision Making, 4th Edition

Financial Accounting: Tools for Business Decision Making, 4th Edition. Kimmel ∙ Weygandt ∙ Kieso. CHAPTER 10 Prepared by Ellen L. Sweatt Georgia Perimeter College and Barbara Muller Arizona State University West. Chapter 10. REPORTING AND ANALYZING LIABILITIES.

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Financial Accounting: Tools for Business Decision Making, 4th Edition

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  1. Financial Accounting:Tools for Business Decision Making, 4th Edition Kimmel ∙ Weygandt ∙ Kieso CHAPTER 10 Prepared by Ellen L. Sweatt Georgia Perimeter College and Barbara Muller Arizona State University West

  2. Chapter 10 REPORTING AND ANALYZING LIABILITIES

  3. Chapter 10 Reporting and Analyzing Liabilities After studying this chapter, you should be able to: • Explain a current liability and identify the major types of current liabilities. • Describe the accounting for notes payable. • Explain the accounting for other current liabilities. • Identify the types of bonds.

  4. Chapter 10 Reporting and Analyzing Liabilities After studying this chapter, you should be able to: • Prepare the entries for the issuance of bonds and interest expense. • Describe the entries when bonds are redeemed. • Identify the requirements for the financial statement presentation and analysis of liabilities.

  5. 11 1 Current Liabilities • Current liabilities are debts which can reasonably be expected to be paid • From existing current assets or through the creation of other current liabilities, and • Within 1 year or the operating cycle, whichever is longer • Debts that do not meet both criteria are Long-Term Liabilities

  6. Types of Current Liabilities • Notes Payable • Accounts Payable • Unearned Revenues • Accrued Liabilities • Taxes • Salaries and Wages • Interest

  7. Review Question The time period for classifying a liability as current is one year or the operating cycle, whichever is? • Probable. • Shorter. • Possible. • Longer.

  8. Review Question The time period for classifying a liability as current is one year or the operating cycle, whichever is? • Probable. • Shorter. • Possible. • Longer.

  9. 11 2 Notes Payable Notes payable are • Obligations in the form of written notes • Often used instead of accounts payable; they give written documentation if needed for legal remedies • Used for short-term and long-term financing needs • Most often interest-bearing, requiring the borrower to pay interest

  10. Note Payable

  11. Journal On 9/1/07 First National Bank lends $100,000 to Cole Williams Co. on a four-month, 12% note maturing 1/1/08. Sept 1 Cash 100,000 Notes Payable 100,000 (To record issuance of 12%, 4-month note to bank) Dec 31 Interest Expense 4,000 Interest Payable 4,000 (To accrue interest for 4 months on note. Interest accrues over life of the note and must be recorded periodically.) $100,000 x .12 x 4\12 months

  12. Journal Jan 1 Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 (To record payment of 1st National Bank interest-bearing note and accrued interest at maturity.)

  13. 11 3 Sales Taxes Payable • Are collected from customers • Are expressed as a % of sales price • Are required by state law. • Remitted to the state monthly • Usually rung separately from sales on the cash register.

  14. Journal Mar 25 Cash 10,600 Sales 10,000 Sales Taxes Payable 600 (To record daily sales and sales taxes).

  15. Payroll Deductions

  16. Payroll Taxes Various payroll taxes are required by law to be withheld from employees’ gross pay • Social Security (FICA) taxes withheld, employer and employee make equal contributions • Federal income taxes • State income taxes (if applicable)

  17. Journal Mar 7 Salaries and Wages Expense 100,000 FICA Taxes Payable (employee’s share) 7,250 Federal Income Taxes Payable 21,864 States Income Taxes Payable 2,922 Salaries and Wages Payable 67,964 Mar 7 Salaries and Wages Payable 67,964 Cash 67,964

  18. Journal Employers incur a second type of payroll-related activity. 1) Employer’s share of FICA 2) Federal unemployment 3) State unemployment Mar 7 Payroll Tax Expense 13,450 FICA Taxes Payable (employer’s share) 7,250 Federal Unemployment Taxes Payable 800 State Unemployment Taxes Payable 5,400

  19. Unearned Revenue • Unearned revenue is cash received before service or product is delivered (that is, before revenue is earned) • Recorded as a liability until it is earned

  20. Unearned Revenues • Examples of unearned revenues • Magazine subscriptions • Rent received in advance • Customer deposits for future service • Sale of airline tickets for future travel • Sale of season tickets to sporting events

  21. Journal Aug 6 Cash 500,000 Unearned Ticket Revenue 500,000 (To record sale of 10,000 tickets at $50 each) As each game is completed Sept 7 Unearned Ticket Revenue 100,000 Ticket Revenue 100,000 (To record ticket revenue earned)

  22. Current Maturities of Long-Term Debt Current maturities of long-term debt • The portion of long-term debt due within the current year or operating cycle • Classified as a current liability • No adjusting entry is necessary

  23. Review Question On July 1, 2007, Madeline, Inc. borrowed $70,000 from Gramy Bank via a 6-month, 9% note payable. At December 31, 2007, what amount of cash will Madeline, Inc. pay the bank? • $70,000. • $66,850. • $76,300. • $73,150.

  24. Review Question On July 1, 2007, Madeline, Inc. borrowed $70,000 from Gramy Bank via a 6-month, 9% note payable. At December 31, 2007, what amount of cash will Madeline, Inc. pay the bank? • $70,000. • $66,850. • $76,300. • $73,150.

  25. Review Question Amounts withheld from employee paychecks for FICA taxes and federal income taxes withheld should be reported by the employer as? Prepaid expensesCurrent liabilitiesDeferred Revenues • Yes Yes No • No Yes No • No No Yes • Yes No No

  26. Review Question Amounts withheld from employee paychecks for FICA taxes and federal income taxes withheld should be reported by the employer as? Prepaid expensesCurrent liabilitiesDeferred Revenues • Yes Yes No • No Yes No • No No Yes • Yes No No

  27. Review Question Windy Co. borrowed $10,000 cash on July 1, 2007, from Main Bank by signing a one-year, 10% note payable. Windy Co.’s financial statements at December 31, 2007, should reflect? • $1,000 interest expense. • $11,000 note payable. • $500 interest payable. • $1,000 interest revenue.

  28. Review Question Windy Co. borrowed $10,000 cash on July 1, 2007, from Main Bank by signing a one-year, 10% note payable. Windy Co.’s financial statements at December 31, 2007, should reflect? • $1,000 interest expense. • $11,000 note payable. • $500 interest payable. • $1,000 interest revenue.

  29. 11 4 Bonds Bonds • A form of long-term, interest-bearing note payable issued by corporations, universities and governmental agencies • Sold in small denominations, (usually multiples of $1,000) which makes them attractive to investors • Are in the form of a legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate, and the maturity date

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