Financial accounting tools for business decision making 9 KIeso ppt ch10
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Financial Accounting: Tools for Business Decision Making
Ninth Edition
Kimmel ● Weygandt ● Kieso
Chapter 10
Reporting and Analyzing Liabilities
Prepared by
COBY HARMON
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University of California, Santa Barbara
Westmont College
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
LO1
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3
What Is a Current Liability? (1 of 3)
•.
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.
LO1
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4
What Is a Current Liability? (2 of 3)
Review Question
To be classified as a current liability, a debt must be expected to be paid within
LO1
a.
1 year.
b.
the operating cycle.
c.
2 years.
d.
(a) or (b), whichever is longer.
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What Is a Current Liability? (3 of 3)
Review Question
To be classified as a current liability, a debt must be expected to be paid within
LO1
a.
1 year.
b.
the operating cycle.
c.
2 years.
d.
(a) or (b), whichever is longer.
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6
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
LO1
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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
LO1
Cash
Notes Payable
100,000
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100,000
8
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.
Interest Expense = $100,000 x 12% x 4/12 = $4,000
Dec. 31
LO1
Interest Expense
Interest Payable
4,000
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4,000
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Accounting for Notes Payable (3 of 3)
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
Cash
LO1
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100,000
4,000
104,000
10
Sales Taxes Payable
•
Sales taxes are expressed as a stated percentage of the sales price
•
Selling company
LO1
Collects tax from customer
Remits collections to the state’s department of revenue
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11
Sales Taxes Payable (1 of 2)
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
10,600
Sales Revenue
10,000
Sales Taxes Payable
600
LO1
Cash
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Sales Taxes Payable (2 of 2)
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
10,600
Sales Revenue
10,000
Sales Taxes Payable
600
LO1
Cash
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13
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
LO1
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14
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)
Unearned Ticket Revenue
500,000
500,000
As each game is completed, Superior records the earning of revenue.
Sep. 7
LO1
Unearned Ticket Revenue
Ticket Revenue
100,000
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100,000
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Current Maturities of Long-Term Debt
•
Portion of long-term debt that comes due in current 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
LO1
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?
Interest expense = $50,000 × 12% × 4/12 = $2,000
LO1
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Do It! 1a: Current Liabilities (2 of 2)
Answer the following questions.
2.
The cash register total including sales taxes is $23,320, and the sales tax rate is 6%. What is the sales
taxes payable?
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?
Rent revenue = $15,000 x 2/3 = $10,000
LO1
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Payroll and Payroll Taxes Payable (1 of 4)
•
The term “payroll” pertains to both
•
Salaries
•
•
Wages
•
•
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
LO1
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
LO1
Salaries and Wages Payable
Cash
67,564
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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
LO1
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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
13,850
7,650
Federal Unemployment Taxes Payable
800
State Unemployment Taxes Payable
5,400
LO1
Payroll Tax Expense
FICA Taxes Payable
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22
Payroll Taxes (1 of 2)
Review Question
Employer payroll taxes do not include
LO1
a.
federal unemployment taxes.
b.
state unemployment taxes.
c.
federal income taxes.
d.
FICA taxes.
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Payroll Taxes (2 of 2)
Review Question
Employer payroll taxes do not include
LO1
a.
federal unemployment taxes.
b.
state unemployment taxes.
c.
federal income taxes.
d.
FICA taxes.
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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 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.
Sept. 30
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
LO1
Salaries and Wages Expense
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