Financial accounting 9th kieso kimmel chapter 10

Preview of Chapter 1

Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
10-1


Preview of Chapter 10

Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
10-2


10

Liabilities

Learning Objectives
After studying this chapter, you should be able to:
[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] Explain why bonds are issued, and 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 or converted.
[7] Describe the accounting for long-term notes payable.
10-3

[8] Identify the methods for the presentation and analysis of long-term
liabilities.


Current Liabilities
A current liability is 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.

10-4

LO 1


Current Liabilities
Question
To be classified as a current liability, a debt must be expected
to be paid within:
a. one year.
b. the operating cycle.

c. 2 years.
d. (a) or (b), whichever is longer

10-5

LO 1


10

Liabilities

Learning Objectives
After studying this chapter, you should be able to:
[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] Explain why bonds are issued, and 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 or converted.
[7] Describe the accounting for long-term notes payable.
10-6

[8] Identify the methods for the presentation and analysis of long-term
liabilities.


Current Liabilities
Notes Payable

10-7



Written promissory note.



Frequently issued to meet short-term financing needs.



Requires the borrower to pay interest.



Issued for varying periods.

LO 2


Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2015, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
Instructions
a) Prepare the entry on September 1st.
b) Prepare the adjusting entry on December 31st, assuming
monthly adjusting entries have not been made.

c) Prepare the entry required on January 1, 2016, the
maturity date.

10-8

LO 2


Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2015, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
a) Prepare the entry on September 1st.
Cash

100,000

Notes Payable
100,000
b) Prepare the adjusting entry on December 31st.
Interest Expense

4,000

Interest Payable
4,000

$100,000 x 12% x 4/12 = $4,000
10-9

LO 2


Current Liabilities
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2015, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1, 2016.
c) Prepare the entry at maturity.
Notes Payable

100,000

Interest Payable

4,000

Cash
104,000

10-10

LO 2


10

Liabilities

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

[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] Explain why bonds are issued, and 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 or converted.
[7] Describe the accounting for long-term notes payable.
10-11

[8] Identify the methods for the presentation and analysis of long-term
liabilities.


Current Liabilities
Sales Taxes Payable

10-12



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.
LO 3


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
Sales Tax Payable

10,000

600

10-13

LO 3


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
Sales tax payable

10,000

* $10,600 ÷ 1.06 = $10,000
600
10-14

LO 3

Accounting for 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.

10-15

LO 3


Payroll and Payroll Taxes Payable

10-16

Illustration 10-2
Payroll deductions

LO 3


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
7,650
Federal Income Taxes Payable
21,864
State Income Taxes Payable
2,922
Salaries and Wages Payable
67,564
Record the payment of this payroll on March 7.
Salaries and Wages Payable

10-17

Cash
67,564

67,564
LO 3


Payroll and Payroll Taxes Payable
Payroll tax expense results from additional taxes that
governmental agencies levy on employers.
These taxes are:

10-18



Employer’s share of Social Security (FICA) taxes



Federal unemployment taxes



State unemployment taxes

LO 3


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
800
Federal Unemployment Taxes Payable

5,400

10-19

LO 3


Payroll and Payroll Taxes Payable
Question
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.

10-20

LO 3


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.
10-21

Advance slide in presentation mode to reveal missing controls.

LO 3


Accounting for Current Liabilities
Unearned Revenue
Revenues received before the company

10-22



delivers goods or



provides services.

Illustration 10-3
Unearned revenue and
revenue accounts

LO 3


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
As each game500,000
is completed, Superior records the recognition of
revenue with the following entry.
Sept. 7

Unearned Ticket Revenue

100,000

Ticket Revenue
10-23

100,000

LO 3


Accounting for 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, 2014. This note specifies that each January 1,
starting January 1, 2015, Wendy should pay $5,000 of the note. When the
company prepares financial statements on December 31, 2014,

$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? _________
10-24

LO 3

Accounting for Current Liabilities
Statement
Presentation
and
Analysis

10-25

Illustration 10-4
Balance sheet
presentation of current
liabilities