Financial accounting 7e harmon chapter 10 reporting and analyzing

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10

REPORTING
AND ANALYZING
LIABILITIES

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Financial Accounting, Seventh Edition


Learning
Learning Objectives
Objectives
After studying this chapter, you should be able to:

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1.

Explain a current liability and identify the major types of current
liabilities.

2.

Describe the accounting for notes payable.

3.

Explain the accounting for other current liabilities.

4.

Identify the types of bonds.

5.

Prepare the entries for the issuance of bonds and interest expense.

6.

Describe the entries when bonds are redeemed.

7.

Identify the requirements for the financial statement presentation and
analysis of liabilities.


Preview of Chapter 10

Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
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Current

Current Liabilities
Liabilities
What is a Current Liability?
Two key features:
1. Company expects to pay the debt from existing current
assets or through the creation of other current
liabilities.
2. Company will pay the debt within one year or the
operating cycle, whichever is longer.
Current liabilities include notes payable, accounts payable, unearned
revenues, and accrued liabilities such as taxes, salaries and wages, and
interest.
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LO 1 Explain a current liability and identify the
major types of current liabilities.


Current
Current Liabilities
Liabilities
Question
To be classified as a current liability, a debt must be
expected to be paid:
a. out of existing current assets.
b. by creating other current liabilities.
c. within 2 years.
d. both (a) and (b).

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LO 1 Explain a current liability and identify the
major types of current liabilities.


Current
Current Liabilities
Liabilities
Notes Payable

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

Written promissory note.



Usually require the borrower to pay interest.



Those due within one year of the balance sheet date are
usually classified as current liabilities.

LO 2 Describe the accounting for notes payable.


Current
Current Liabilities

Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2014, if Cole Williams Co. signs a $100,000, 12%,
four-month note maturing on January 1. When a company
issues an interest-bearing note, the amount of assets it receives
generally equals the note’s face value.
Sept. 1

Cash

100,000

Notes payable
100,000

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LO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Illustration: If Cole Williams Co. prepares financial statements
annually, it makes an adjusting entry at December 31 to recognize
interest.
Dec. 31

Interest expense

4,000 *

Interest payable
4,000

* $100,000 x 12% x 4/12 = 4,000
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LO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Illustration: At maturity (January 1), Cole Williams Co. must pay
the face value of the note plus interest. It records payment as
follows.
Jan. 1

Notes payable
Interest payable

100,000
4,000

Cash
104,000

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LO 2 Describe the accounting for notes payable.


Current
Current Liabilities
Liabilities
Sales Tax Payable

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

Sales taxes are expressed as a stated percentage of the
sales price.



Selling company
►

collects tax from the customer.

►

remits the collections to the state’s department of
revenue.

LO 3 Explain the accounting for other current liabilities.

Current
Current Liabilities
Liabilities
Illustration: The March 25 cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600 (sales tax
rate of 6%), the journal entry is:
Mar. 25

Cash

10,600

Sales revenue
Sales tax payable

10,000

600

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LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Sometimes companies do not ring up sales taxes separately on
the cash register.
Illustration: Cooley Grocery rings up total receipts of $10,600.

Because the amount received from the sale is equal to the sales
price 100% plus 6% of sales, (sales tax rate of 6%), the journal
entry is:
Mar. 25

Cash

10,600

Sales revenue
Sales tax payable

*

10,000

600
* $10,600 / 1.06 = $10,000
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LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Unearned Revenue
Revenues that are received before the company delivers
goods or provides service.
1. Company debits Cash, and credits a

current liability account (Unearned
Revenue).
2. When the company earns the
revenue, it debits the Unearned
Revenue account, and credits a
revenue account.

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LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The entry for
the sales of season tickets is:
Aug. 6

Cash

500,000

Unearned ticket revenue
As each game500,000
is completed, Superior records the earning of
revenue.
Sept. 7

Unearned ticket revenue

100,000

Ticket revenue
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100,000

LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Current Maturities of Long-Term Debt


Portion of long-term debt that comes due in the current
year.



No adjusting entry required.

Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2011. This note specifies that each January 1,
starting January 1, 2012, Wendy should pay $5,000 of the note. When the
company prepares financial statements on December 31, 2011,

$5,000
1. What amount should be reported as a current liability? ___________
$20,000
2. What amount should be reported as a long-term liability? _________
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LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities
Liabilities
Payroll and Payroll Taxes Payable
The term “payroll” pertains to both:
Salaries - managerial, administrative, and sales personnel
(monthly or yearly rate).
Wages - store clerks, factory employees, and manual
laborers (rate per hour).

Determining the payroll involves computing three amounts:
(1) gross earnings, (2) payroll deductions, and (3) net
pay.

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LO 3 Explain the accounting for other current liabilities.


Current
Current Liabilities

Liabilities
Illustration: Assume Cargo Corporation records its payroll for the
week of March 7 as follows:
Mar. 7

Salaries and wages expense

100,000

FICA tax payable

7,650

Federal income tax payable

21,864

State income tax payable

2,922

Salaries and wages payable

67,564

Record the payment of this payroll on March 7.
Mar. 7

Salaries and wages payable
Cash

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67,564
67,564
LO 3


Current
Current Liabilities
Liabilities
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:

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

FICA tax



Federal unemployment tax



State unemployment tax

LO 3 Explain the accounting for other current liabilities.

Current
Current Liabilities
Liabilities
Illustration: Based on Cargo Corp.’s $100,000 payroll,
the company would record the employer’s expense and liability
for these payroll taxes as follows.
Payroll tax expense

13,850

FICA tax payable

7,650

State unemployment taxes payable

5,400

Federal unemployment taxes payable

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800

LO 3 Explain the accounting for other current liabilities.


Current

Current Liabilities
Liabilities
Question
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.

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LO 3 Explain the accounting for other current liabilities.


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Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Bonds are a form of interest-bearing notes payable issued
by corporations, universities, and governmental agencies.
Sold in small denominations (usually $1,000 or multiples of
$1,000).
When a corporation issues bonds, it is borrowing money. The
person who buys the bonds (the bondholder) is investing in
bonds.

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LO 4 Identify the types of bonds.


Bond:
Bond: Long-Term
Long-Term Liabilities
Liabilities
Types of Bonds

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

Secured



Unsecured



Convertible



Callable

LO 4 Identify the types of bonds.

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