ACG 3141: INTERMEDIATE ACCOUNTING

1. ACG 3141:INTERMEDIATE ACCOUNTING University of Central Florida Lecturer: Mary Walsh

2. Class Schedule • Week 1, Class 1: Begin Chapter 13 Lecture and In-Class Problems • Current vs. Long-Term Liabilities • Accounting for Short-Term Notes Payable • Interest-bearing • Non interest-bearing • Week 1, Class 2: Continue Chapter 13 Lecture and In-Class Problems • Accounting for Advance Collections • Refundable Deposits • Advances from Customers • Collections for Third Parties • Classification of a current liability as a long-term liability. • Contingencies • Loss Contingencies • Warranties • Premiums • Litigation Claims • Subsequent Events • Gain Contingencies

3. Chapter 13 Learning Objectives • Define liabilities and distinguish between current and long-term liabilities. • Account for the issuance and payment of various forms of notes and record the interest on notes. • Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded. • Determine when a current liability can be classified as a noncurrent obligation. • Identify situations that constitute contingencies and the circumstances under which they should be accrued. • Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments. • Demonstrate the appropriate accounting treatment for payroll related liabilities.

4. Learning Objectives Define liabilities and distinguish between current and long-term liabilities. LO1

5. Liabilities Probable future sacrifices of economic benefits . . . . . . Arising from present obligations to other entities . . . . . . Resulting from past transactions or events.

6. What is a Current Liability? LIABILITIES Current Liabilities Long-term Liabilities Obligations payable within one year or one operating cycle, whichever is longer. Expected to be satisfied with current assets or by the creation of other current liabilities.

7. Accounts payable Cash dividends payable Accrued expenses Current Liabilities Taxes payable Unearned revenues Short-term notes payable Current Liabilities

8. Open Accounts and Notes • Accounts Payable • Obligations to suppliers for goods purchased on open account. • Trade Notes Payable • Similar to accounts payable, but recognized by a written promissory note. • Short-term Notes Payable • Cash borrowed from the bank and recognized by a promissory note.

9. Credit Lines Prearranged agreements with a bank that allow a company to borrow cash without following normal loan procedures and paperwork. Opening a line of credit is NOT an accounting event

10. Learning Objectives Account for the issuance and payment of various forms of notes and record the interest on notes. LO2

11. Interest Interest on notes is calculated as follows: Amount borrowed Interest rate is always stated as an annual rate. Interest owed is adjusted for the portion of the year that the face amount is outstanding.

12. Interest-Bearing Notes On September 1, Eagle Boats borrows $80,000 from Cooke Bank. The note is due in 6 months and has a stated interest rate of 9%. Record the borrowing on September 1.

13. Interest-Bearing Notes How much interest is due to Cooke Bank at year-end, on December 31? a. $2,400 b. $3,600 c. $7,200 d. $87,200

14. Interest is calculated as: Face Annual Time to Amount Rate maturity $80,000 9% 4/12 $2,400 interest due to Cooke Bank. × × = × × = Interest-Bearing Notes How much interest is due to Cooke Bank at year-end, on December 31? a. $2,400 b. $3,600 c. $7,200 d. $87,200

15. Assume Eagle Boats’ year-end is December 31. Record the necessary adjustment at year-end. Interest-Bearing Notes

16. Assume Eagle Boats’ year-end is December 31. Record the necessary adjustment at year-end. Interest-Bearing Notes

17. Assume Eagle Boats’ year-end is December 31. Record the necessary journal entry when the note matures on February 28. Interest-Bearing Notes

18. Assume Eagle Boats’ year-end is December 31. Record the necessary journal entry when the note matures on February 28. Interest-Bearing Notes

19. Let’s do Lecture Problem 1 – Notes Payable (interest-bearing) Problem. See the Chapter 13 Lecture Problems Handout.

20. Short-Term Notes PayableNoninterest-Bearing • Notes without a stated interest rate carry an implicit, or effective, rate. • The face of the note includes the amount borrowed and the interest.

21. On May 1, Batter-Up, Inc. issued a one-year, noninterest-bearing note with a face amountof $10,600 in exchange for equipmentvalued at $10,000. How much interest will Batter-Up pay on the note? Short-Term Notes PayableNoninterest-Bearing Interest = Face Amount - Amount Borrowed = $10,600 - $10,000 = $600

22. Short-Term Notes PayableNoninterest-Bearing On May 1, Batter-Up, Inc. issued a one-year, noninterest-bearing note with a face amountof $10,600 in exchange for equipmentvalued at $10,000. What is the effective interest rate on the note?

23. Let’s do Lecture Problem 2 – Notes Payable (non interest-bearing) Problem. See the Chapter 13 Lecture Problems handout.

24. Learning Objectives Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded. LO3

25. Accrued Liabilities • Accrued Liabilities represent expenses already incurred but not yet paid. • Recorded at period end through AJEs. The entry will always involve a debit to expense and a credit to an accrued liability. • Examples of Accrued Liabilities • Interest Payable • Income Tax Payable • Salaries Payable • Regular Compensation and Bonuses • Accrued Vacation: Let’s do Lecture Problem 3 – Vacation Pay Accrual. See the Chapter 13 Lecture Problems handout.

26. Liabilities from Advance Collections • Liabilities are created when amounts are received from customers that will be returned to the customers. • Refundable Deposits: Let’s do Lecture Problem 4 – Customer Deposits. See the Chapter 13 Lecture Problems handout. • Advances from Customers: Let’s do Lecture Problem 5 – Advance Collections. See the Chapter 13 Lecture Problems handout.

27. Collections for Third Parties • Similar to liabilities for advance collections, companies often make collections for third parties from customers and employees and remit the amounts to the appropriate governmental (or other) parties. These amounts are never revenue to the company, nor do they represent expenses to the company – they are liabilities until remitted or returned. Examples include sales tax payable (collected from customers) and employment taxes payable (i.e., the employee portion of FICA collected from employees). Let’s skip to the Appendix 13 slides (slide 43).

28. Learning Objectives Determine when a current liability can be classifiedas a noncurrent obligation. LO4

29. A company may reclassify a short-term liability as long-term only if two conditions are met: • The ability to refinance on a long-term basiscan be demonstrated by: • An existing refinancing agreement, or • By actual financing prior to issuance of the financial statements. Short-Term ObligationsExpected to Be Refinanced • It has the intent to refinance on a long-term basis. • It has demonstrated the ability to refinance. and

30. Learning Objectives Identify situations that constitute contingencies and the circumstances under which they should be accrued. LO5

31. A loss contingencyis an existing uncertain situation involving potential loss depending on whether some future event occurs. Contingencies

32. Two factors affect whether a loss contingency must be accrued and reported as a liability (i.e., recorded): the likelihood that the confirming event will occur. whether the loss amount can be reasonably estimated. Contingencies

33. Contingencies –Likelihood of Occurrence • Probable • A confirming event is likely to occur. • Reasonably Possible • The chance the confirming event will occur is more than remote, but less than likely. • Remote • The chance the confirming event will occur is slight.

34. Contingencies A loss contingency is accrued (recorded) only if a loss is probable and the amount is either known, or can reasonably be estimated.

35. Learning Objectives Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments. LO6

36. If a product is sold under warranty, the matching principle requires that warranty costs (i.e., warranty expense) should be recorded at the time of the sale. The amount of those costs can be reasonably estimated using commonly available estimation techniques. The estimate requires the following entry: Product Warranties and Guarantees Let’s do Lecture Problem 6 – Warranties. See the Chapter 13 Lecture Problems handout.

37. Extended warranties are sold separately from the product. The related revenue is not earned until Claims are made against the extended warranty, or The extended warranty period expires. Extended Warranties

38. Premiums (i.e., rebate) included with the product are expensed in the period of sale (matching principle). Premiums that are contingent on action by the customer require accounting similar to warranties. Let’s do Lecture Problem 7 – Premiums Problem. See the Chapter 13 Lecture Problems handout. Premiums

39. The majority of medium and large-size corporations annually report loss contingencies due to litigation. The most common disclosure is a note to the financial statements. Why? It’s hard to estimate the amount. Litigation Claims

40. Events occurring between the year-end date and report date can affect the appearance of disclosures on the financial statements. Cause of Loss Contingency Clarification Fiscal Year Ends Financial Statements Subsequent Events

41. Unasserted Claims and Assessments Is a claim orassessmentprobable? End No Yes Can amountbe estimated? Disclosureof claim orassessment Recordestimated claimor assessment No Yes

42. Gain Contingencies Note that the prior rules have supported the recording of LOSS contingencies. As a general rule, we never record GAIN contingencies. Generally, gain is ONLY recorded when the gain is actually REALIZED...why?? CONSERVATISM

43. Learning Objectives Demonstrate the appropriate accounting treatment for payroll related liabilities (Appendix 13). LO7

44. Payroll-Related Liabilities Employers incur several expenses and liabilities from having employees.

45. Net Pay Payroll-Related Liabilities Gross Pay FICA Taxes Medicare Taxes Federal Income Tax State and Local Income Taxes Voluntary Deductions

46. Employee FICA Taxes Federal Insurance Contributions Act (FICA) FICA Taxes Medicare Taxes 6.2% of the first $90,000 earned in the year. 1.45% of all wages earned in the year. Employers must pay withheld taxesto the Internal Revenue Service (IRS). Additionally, Employers OWE an equivalent amount of FICA taxes.

47. Employee Income Taxes State and Local Income Taxes Federal Income Tax Amounts withheld depend on the employee’s earnings, tax rates, and number of withholding allowances. Employers must pay the taxes withheld from employees’ gross pay to the appropriate government agency.

48. Employee Voluntary Deductions Voluntary Deductions Amounts withheld depend on the employee’s request. Examples include union dues, savings accounts, pension contributions, insurance premiums, charities Employers owe voluntary amounts withheld from employees’ gross pay to the designated agency.

49. Employers pay amounts equal to that withheld from the employee’s gross pay. The amount owed by the employer is an expense to the employer Employer Payroll Taxes Medicare Taxes Federal and State Unemployment Taxes FICA Taxes

50. 6.2% on the first $7,000 of wages paid to each employee (A credit up to 5.4% is given for SUTA paid.) Federal Unemployment Tax (FUTA) Basic rate of 5.4% on the first $7,000 of wages paid to each employee (Merit ratings may lower SUTA rates.) State Unemployment Tax (SUTA) Federal and StateUnemployment Taxes