Financial and managerial accounting 2nd kimel kieso willey chapter 10

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10

Liabilities

Learning Objectives
1

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Explain how to account for current liabilities.

2

Describe the major characteristics of bonds.

3

Explain how to account for bond transactions.

4

Explain how to account for long-term notes payable.

5

Discuss how liabilities are reported and analyzed.

LEARNING

1

OBJECTIVE

Explain how to account for current liabilities.

What Is a Current Liability?
A debt that a



company expects to pay 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
payable, salaries and wages payable, and interest payable.

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What Is a Current Liability?

Question

To be classified as a current liability, a debt must be expected to be paid within:

10-4

a.

one year.

b.

the operating cycle.

c.

2 years.

d.

(a) or (b), whichever is longer

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Current Liabilities

Notes Payable

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

Written promissory note.



Frequently issued to meet short-term financing needs.



Requires the borrower to pay interest.



Issued for varying periods.

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Notes Payable

Illustration: First National Bank agrees to lend $100,000 on September 1, 2017, if Cole Williams Co. signs a
$100,000, 12%, four-month note maturing on January 1.
Instructions

a)

st
Prepare the entry on September 1 .

b)

st
Prepare the adjusting entry on December 31 , assuming monthly adjusting entries have not been
made.

c)

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Prepare the entry required on January 1, 2018, the maturity date.

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Notes Payable

Illustration: First National Bank agrees to lend $100,000 on September 1, 2017, if Cole Williams Co. signs a
$100,000, 12%, four-month note maturing on January 1.
a)

st
Prepare the entry on September 1 .

Cash

100,000
Notes Payable

b)

st
Prepare the100,000
adjusting entry on December 31 .
Interest Expense

4,000

Interest Payable
$100,000 x 12% x 4/12 = $4,000

4,000
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Notes Payable

Illustration: First National Bank agrees to lend $100,000 on September 1, 2017, if Cole Williams Co. signs a
$100,000, 12%, four-month note maturing on January 1, 2018.
c)

Prepare the entry at maturity.

Notes Payable
Interest Payable

100,000
4,000

Cash

104,000

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Current Liabilities

Sales Taxes Payable

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

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



Selling company (retailer)

►

collects tax from the customer.

►

enters tax separately in cash register or includes in total receipts.

►

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

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Sales Taxes Payable

Illustration: The March 25 cash register reading for Cooley Grocery shows 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

10,000

Sales Taxes Payable

600

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Sales Taxes Payable

Sometimes companies do not enter sales taxes separately in the cash register.

Illustration: Cooley Grocery enters 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

10,000

*

Sales Tax Payable

* $10,600 ÷ 1.06 = $10,000

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600
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Current 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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Payroll and Payroll Taxes Payable

Illustration 10-2
Payroll deductions
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Payroll and Payroll Taxes Payable

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

Salaries and Wages Expense

100,000

FICA Taxes Payable
Federal Income Taxes Payable
State Income Taxes Payable

7,650
21,864

Salaries and Wages Payable

2,922
67,564

Record the payment of this payroll on March 7.

Salaries and Wages Payable

67,564

Cash
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67,564


Payroll and Payroll Taxes Payable

Payroll tax expense results from additional taxes that governmental agencies levy on employers.

These taxes are:

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

Employer’s share of Social Security (FICA) taxes



Federal unemployment taxes



State unemployment taxes

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Payroll and Payroll Taxes Payable

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 Taxes Payable
7,650
State Unemployment Taxes Payable
Federal Unemployment Taxes Payable

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800
5,400

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Payroll and Payroll Taxes Payable

Question
Employer payroll taxes do not include:

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a.

Federal unemployment taxes.

b.

State unemployment taxes.

c.

Federal income taxes.

d.

FICA taxes.

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ANATOMY OF A FRAUD

Art was a custodial supervisor for a large school district. The district was supposed to employ between 35 and 40 regular custodians, as well as 3 or 4
substitute custodians to fill in when regular custodians were absent. Instead, in addition to the regular custodians, Art “hired” 77 substitutes. In fact, almost
none of these people worked for the district. Instead, Art submitted time cards for these people, collected their checks at the district office, and personally
distributed the checks to the “employees.” If a substitute’s check was for $1,200, that person would cash the check, keep $200, and pay Art $1,000.

Total take: $150,000

THE MISSING CONTROLS
Human resource controls. Thorough background checks should be performed.
No employees should begin work until they have been approved by the Board of
Education and entered into the payroll system. No employees should be entered
into the payroll system until they have been approved by a supervisor. All paychecks
should be distributed directly to employees at the official school locations by designated
employees.
Independent internal verification. Budgets should be reviewed monthly to identify
situations where actual costs significantly exceed budgeted amounts.

Source: Adapted from Wells, Fraud Casebook (2007), pp. 164–171.

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Advance slide in slide show to reveal missing controls.

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DO IT!

1a

Wages and Payroll Taxes

During the month of September, Lake Corporation’s employees earned wages of $60,000. Withholdings related to
these wages were $4,590 for Social Security (FICA), $6,500 for federal income tax, and $2,000 for state income tax.
Costs incurred for unemployment taxes were $90 for federal and $150 for state.

Prepare the September 30 journal entries for

a)

salaries and wages expense and salaries and wages payable, assuming that all September wages will be paid
in October, and

b)

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the company’s payroll tax expense.

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DO IT!

1a

Wages and Payroll Taxes

Prepare the September 30 journal entries for

a)

salaries and wages expense and salaries and wages payable, assuming that all September wages will be paid
in October.

Salaries and Wages Expense

60,000

FICA Taxes Payable

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4,590

Federal Income Taxes Payable

6,500

State Income Taxes Payable

2,000

Salaries and Wages Payable

46,910

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DO IT!

1a

Wages and Payroll Taxes

Prepare the September 30 journal entries for

b)

the company’s payroll tax expense.

Payroll Tax Expense

4,830

FICA Taxes Payable

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4,590

Federal Unemployment Taxes Payable

90

State Unemployment Taxes Payable

150

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Current Liabilities

Unearned Revenue
Revenues received before the company



delivers goods or



provides services.

Illustration 10-3
Unearned revenue and revenue accounts

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Unearned Revenue

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

Aug. 6

Cash

500,000
Unearned Ticket Revenue

500,000
As each game is completed, Superior records the recognition of revenue with the following entry.

Sept. 7

Unearned Ticket Revenue

100,000

Ticket Revenue

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100,000

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Current 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, 2017. This note specifies that each
January 1, starting January 1, 2018, Wendy should pay $5,000 of the note. When the company prepares financial statements on
December 31, 2017,

1.

What amount should be reported as a current liability? ___________

2.

What amount should be reported as a long-term liability? _________

$5,000

$20,000

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DO IT!

1b

Current Liabilities

You and several classmates are studying for the next accounting examination. They ask you to answer the following
questions.

1.

If cash is borrowed on a $50,000, 6-month, 12% note on September 1, how much interest expense would be
incurred by December 31?

Solution

$50,000 x 12% x 4/12 = $2,000

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