Accounting tools for business decision making 7 kieo ch10

Accounting: Tools for Business Decision Making

Seventh Edition

Kimmel; Weygandt; Kieso

Chapter 10

Reporting and Analyzing Liabilities
Prepared by
COBY HARMON
University of California, Santa Barbara
Westmont College

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Chapter Outline:
Learning Objectives
LO 1

Explain how to account for current liabilities.

LO 2

Describe the major characteristics of bonds.

LO 3

Explain how to account for bond transactions.

LO 4

Discuss how liabilities are reported and analyzed.

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Learning Objective 1
Explain How to Account for Current Liabilities

LO 1

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What Is a Current Liability?

•

A debt that a company expects to pay

•
•

•

from existing current assets or through the creation of other current liabilities, and
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.

LO 1

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What Is a Current Liability?
Review Question

To be classified as a current liability, a debt must be expected to be paid within
a. 1 year.
b. the operating cycle.
c. 2 years.
d. (a) or (b), whichever is longer.

LO 1

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What Is a Current Liability?

Review Question Answer

To be classified as a current liability, a debt must be expected to be paid within
a. 1 year.
b. the operating cycle.
c. 2 years.
d. Answer: (a) or (b), whichever is longer.

LO 1

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Notes Payable

•

Written promissory note

•

Usually requires borrower to pay interest

•

Frequently issued to meet short-term financing needs

•

Issued for varying periods of time

•

Usually classified as current liability if due for payment within one year of balance sheet date

LO 1

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Accounting for Notes Payable (1 of 3)

Illustration: First National Bank agrees to lend $100,000 on September 1, 2022, 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

LO 1

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100,000

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Accounting for Notes Payable (2 of 3)

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

4
Interest Expense = $100,000 × 12% ×
= $4,000
12
Dec. 31

Interest Expense

4,000

Interest Payable

LO 1

4,000

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Accounting for Notes Payable (3 of 3)

Illustration: At maturity (January 1, 2023), Cole Williams Co. must pay the face value of the note
plus interest.
It records payment as follows.

Jan. 1

Notes Payable

100,000

Interest Payable

4,000

Cash

LO 1

104,000

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Sales Taxes Payable (1 of 3)

•

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

•

Selling company

•
•

LO 1

Collects tax from customer
Remits collections to state’s department of revenue

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Sales Taxes Payable (2 of 3)

Illustration: The March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600
based on a sales tax rate of 6%.
Journal entry to record the sales and sales taxes

Mar. 25

Cash

10,600

Sales Revenue

10,000

Sales Taxes Payable

LO 1

600

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Sales Taxes Payable (3 of 3)

If sales taxes are not rung up separately on the cash register
Illustration: Cooley Grocery rings up total receipts of $10,600 and has a 6% sales tax rate. Because the amount
received from the sale is equal to the sales price 100% plus 6% of sales, the journal entry is

Sales revenue = $10,600 ÷ 1.06 = $10,000

Mar. 25

Cash

10,600

Sales Revenue

10,000

Sales Taxes Payable

LO 1

600

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Unearned Revenues (1 of 2)

Revenues that are received before goods are delivered or services are performed.

1.

Company increases (debits) Cash and increases (credits) a current liability account, Unearned
Revenue.

2.

When the company recognizes revenue, it decreases (debits) the unearned revenue account and
increases (credits) a revenue account.

Type of Business = Airline, Magazine publisher, Hotel

LO 1

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Unearned Revenues (2 of 2)

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

Aug. 6

Cash (10,000 × $50)

500,000

Unearned Ticket Revenue

500,000

As each game is completed, Superior records the earning of revenue.

Sep. 7

Unearned Ticket Revenue

100,000

Ticket Revenue

LO 1

100,000

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Current Maturities of Long-term Debt

•

Portion of long-term debt that comes due within one year

•

No adjusting entry required

Illustration: Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, 2022. This
note specifies that each January 1, starting January 1, 2023, Wendy should pay $5,000 of the note. When the
company prepares financial statements on December 31, 2022, what amount should be reported as a

LO 1

1.

Current liability?

2.

Long-term liability?

$5,000
$20,000
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Do It! 1a: Current Liabilities (1 of 2)

You and several classmates are studying for the next accounting examination. Answer the following
questions.

1.

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

4
Interest expense = $50,000ì12%ì = $2,000
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LO 1

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Do It! 1a: Current Liabilities (2 of 2)
Answer the following questions.

2.

How is the sales tax amount determined when the cash register total includes sales taxes?

Sales revenue = $23,320 ÷ 1.06 = $22,000
Sales taxes = $23,320 − $22,000 = $1,320

3.

If $15,000 is collected in advance on November 1 for 3 months’ rent, what amount of rent revenue should be
recognized by December 31?

2
Rent revenue = $15,000ì = $10,000
3
LO 1

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Payroll and Payroll Taxes Payable (1 of 4)
•

The term “payroll” pertains to both

•

Salaries

•
•

Wages

•
•

LO 1

managerial, administrative, and sales personnel (fixed monthly or yearly rate)

Store clerks, factory employees, and manual laborers (rate per hour)

Determining the payroll involves computing

ã

Gross earnings

ã

Payroll deductions

ã

Net pay

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Payroll and Payroll Taxes Payable (2 of 4)
Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows:

Mar. 7

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.
Mar. 7

Salaries and Wages Payable

67,564

Cash

LO 1

67,564

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Payroll and Payroll Taxes Payable (3 of 4)

Payroll tax expense results from three taxes that governmental agencies levy on employers
These taxes are

ã

FICA tax

ã

Federal unemployment tax

ã

State unemployment tax

LO 1

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Payroll and Payroll Taxes Payable (4 of 4)

Illustration: Based on Cargo Corp.’s $100,000 payroll, the company would record the employer’s
payroll tax expense and liability for these payroll taxes on March 7 as follows.

Mar. 7

Payroll Tax Expense

13,850

FICA Taxes Payable

7,650

Federal Unemployment Taxes Payable
State Unemployment Taxes Payable

LO 1

800
5,400

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Payroll Taxes
Review Question

Employer payroll taxes do not include
a. federal unemployment taxes.
b. state unemployment taxes.
c. federal income taxes.
d. FICA taxes.

LO 1

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Payroll Taxes
Review Question Answer

Employer payroll taxes do not include
a. federal unemployment taxes.
b. state unemployment taxes.
c. Answer: federal income taxes.
d. FICA taxes.

LO 1

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Do It! 1b: Wages and Payroll Taxes (1 of 2)
During September, Lake Corporation’s employees earned wages of $60,000. Withholdings related to these wages were $4,590
for 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.

Sept. 30

LO 1

Salaries and Wages Expense

60,000

FICA Taxes Payable

4,590

Federal Income Taxes Payable

6,500

State Income Taxes Payable

2,000

Salaries and Wages Payable

46,910
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