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Chapter 13

Chapter 13. Intermediate Accounting II Otto Chang Professor of Accounting. Definition of A Liability.

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Chapter 13

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  1. Chapter 13 Intermediate Accounting II Otto Chang Professor of Accounting Chang, Otto

  2. Definition of A Liability • Probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services to other entities in the future as a result of past transactions or events. Chang, Otto

  3. Current Liabilities • Liabilities whose liquidation is reasonably expected to require use of existing current assets or the creation of other current liabilities • No discounting is necessary if less than one year. • Include liability due on demand (callable by the creditor) Chang, Otto

  4. Determinable current liabilities • Accounts payable • Notes payable • Current portion of long-term debt* • other short-term obligation* • Dividends payable • Returnable deposits • Unearned revenues • Taxes payable • Employee related liabilities * unless liquidated with non-current assets or refinanced on a L-T basis, or converted into equity Chang, Otto

  5. S-T Notes Expected to be Refinanced • An entity can exclude a S-T note from C.L. if it intends to refinance on a L-T basis and demonstrates an ability to refinance • Ability to refinance can be evidenced by: • actual refinancing before issuing B/S or • entering into a financing agreement • S-T debt paid off after B/S date and later replaced by L-T debt can not be excluded Chang, Otto

  6. Sales Taxes Payable • Sales taxes(5%) separable from sales ($100) Dr. Cash or A/R $105 Cr. Sales $100 Cr. Sales Taxes payable $5 • Sales taxes (5%) included in sales ($105) Dr. Sales $5 Cr. Sales Taxes Payable $5 Chang, Otto

  7. Property Taxes Payables • Property taxes should be accrued monthly before payments, and amortized monthly after payment. • Example: $36,000 assessed for 5/1-4/30, two equal installments due on 7/1 and 9/1 • Journal entries on 5/31 and 6/30 Dr. Property taxes expenses $3,000 Cr. Property taxes payable $3,000 • Journal entries on 7/1: Dr. Prepaid Property Taxes $12,000 Property taxes payable 6,000 Cr. Cash $18,000 Chang, Otto

  8. Payroll Taxes Payables • Recording salaries payment: Dr. Wages and salaries expense $10,000 Cr. Withheld taxes payable $1,320 FICA taxes payable 765 Union dues payable 88 Cash 7,827 • Recording payroll taxes expense: Dr. Payroll taxes expense $1,245 Cr. FICA taxes payable $765 FUTA taxes payable 80 State unemployment taxes payable 400 Chang, Otto

  9. Compensated Absences • The expense and related liability should be accrued if • employee already rendered the services • benefits vested or accumulated • payment is probable and can be estimated • Journal entries: Dr. Wages expenses $9,600 Cr. Vacation wages payable $9,600 Chang, Otto

  10. Bonus Agreement • Amount of Bonus = applicable rate x (Net income - Bonus - Income taxes) • Where Income taxes = Tax rate x (Net income - Bonus) • Simultaneously solve the two equations to determine the amount of bonus Chang, Otto

  11. Contingencies • Gain contingencies: disclosed in footnote if highly probable. • Losses contingencies: • Probable & can be reasonably estimated: accrue • Probable but can not be estimated: disclose • Reasonably possible: disclose • remotely possible: ignore • Amount accrued: lower bound of an estimate. Disclose higher bound in footnote Chang, Otto

  12. Product Warranty Costs • Cash basis: recognize expense when it is incurred • Accrual basis: • Expense warranty approach: recognize estimated liability under warranty as expense • Sales warranty approach: used when warranty is sold separately from the product. Revenue is deferred ( Cr. Unearned Warranty Rrevenues) and amortized in proportion to costs incurred. Chang, Otto

  13. Premiums and Coupons • To record purchase of premium inventory Inventory of premium goods $15,000 Cash $15,000 • To record actual redemption of premium Cash $1,500 Premium expense $3,000 Inventory of premium goods $4,500 • End of year adjusting entries: Premium expenses $6,000 Estimated Liabilities for premiums $6,000 Chang, Otto

  14. Other Contingencies • Environmental liabilities: difficult to estimate legal implications, therefore disclosure is the most common treatment. • Self-insurance: accrual is not required prior to the occurrence of the loss event. Chang, Otto

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