Chapter 9 Accounting for Current Liabilities

Chapter 9 Accounting for Current Liabilities

Financial & Managerial Accounting Information for Decisions Seventh Edition Chapter 9 Accounting for Current Liabilities McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives (1 of 2) CONCEPTUAL C1 Describe current and long-term liabilities and their characteristics.

C2 Identify and describe known current liabilities. C3 Explain how to account for contingent liabilities. ANALYTICAL A1 Compute the times interest earned ratio and use it to analyze liabilities. McGraw-Hill Education. 9-2 Learning Objectives (2 of 2) PROCEDURAL

P1 Prepare entries to account for short-term notes payable. P2 Compute and record employee payroll deductions and liabilities. P3 Compute and record employer payroll deductions and liabilities. P4 Account for estimated liabilities, including warranties and bonuses. P5 Appendix 9A Identify and describe the details of payroll reports, records, and procedures.

McGraw-Hill Education. 9-3 Learning Objective C1: Describe current and long-term liabilities and their characteristics. McGraw-Hill Education. 9-4 Defining Liabilities Learning Objective C1: Describe current and long-term liabilities and their characteristics.

Exhibit 9.1 McGraw-Hill Education. 9-5 Classifying Liabilities Learning Objective C1: Describe current and long-term liabilities and their characteristics. Current Liabilities Due within one year or the companys operating cycle, whichever is longer.

Long-Term Liabilities Due after one year or the companys operating cycle, whichever is longer. McGraw-Hill Education. 9-6 Exhibit 9.2 Current and Long-Term Liabilities (1 of 2) Learning Objective C1: Describe current and long-term liabilities and their characteristics. Current liabilities are obligations due within

one year or the companys operating cycle, whichever is longer. Long-term liabilities are obligations due after one year or the companys operating cycle, whichever is longer. McGraw-Hill Education. 9-7 Exhibit 9.2 Current and Long-Term Liabilities (2 of 2) Learning Objective C1: Describe current and long-term liabilities and their characteristics. McGraw-Hill Education.

9-8 Uncertainty of Liabilities Learning Objective C1: Describe current and long-term liabilities and their characteristics. Uncertainty in Whom to Pay Uncertainty in When to Pay Uncertainty in How Much to Pay McGraw-Hill Education.

9-9 Learning Objective C2: Identify and describe known current liabilities. McGraw-Hill Education. 9-10 Known Liabilities Learning Objective C2: Identify and describe known current liabilities.

Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable Payroll Liabilities Multi-Period Known Liabilities McGraw-Hill Education. 9-11

Sales Tax Payable Learning Objective C2: Identify and describe known current liabilities. On August 31, Home Depot sold materials for $6,000 that are subject to a 5% sales tax. $6,000 5% = $300 McGraw-Hill Education. 9-12 Unearned Revenues (1 of 2) Learning Objective C2: Identify and describe known current

liabilities. On June 30, Rihanna sells $5,000,000 in tickets for eight concerts. McGraw-Hill Education. 9-13 Unearned Revenues (2 of 2) Learning Objective C2: Identify and describe known current liabilities. On Oct. 31, Rihanna performs a concert. $5,000,000 / 8 = $625,000

McGraw-Hill Education. 9-14 Learning Objective P1: Prepare entries to account for short-term notes payable. McGraw-Hill Education. 9-15 Short-Term Notes Payable Learning Objective P1: Prepare entries to account for short-term notes payable.

A written promise to pay a specified amount on a stated future date within one year or the companys operating cycle, whichever is longer. McGraw-Hill Education. 9-16 Note Given to Extend Credit Period (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On August 23, Brady Company asks McGraw to accept $100 cash and a 60-day, 12% $500 note to

replace its existing $600 Account Payable. McGraw-Hill Education. 9-17 Note Given to Extend Credit Period (2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On October 22, Brady pays the note plus interest to McGraw. Interest expense = $500 12% (60 360) = $10

McGraw-Hill Education. 9-18 Note Given To Borrow From Bank (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days. McGraw-Hill Education. 9-19

Note Given To Borrow From Bank (2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On Nov. 29, the company repays the principal of the note plus interest. Interest expense = $2,000 12% (60 360) = $40 McGraw-Hill Education. 9-20 When Note Extends over Period-End Learning Objective P1: Prepare entries to account for short-term

notes payable. Note Date End of Period An adjusting entry is required to record Interest Expense incurred to date. Maturity Date McGraw-Hill Education.

9-21 End-of-Period Adjustment to Notes (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On Dec. 16, 2017, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31. McGraw-Hill Education. 9-22 End-of-Period Adjustment to Notes

(2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. On Feb. 14, 2018, the company repays this principal and interest on the note. McGraw-Hill Education. 9-23 NEED-TO-KNOW 9-1 Part 1 (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. Part 1. A retailer sells merchandise for $500 cash on

June 30 (cost of merchandise is $300). The sales tax law requires the retailer to collect 7% sales tax on every dollar of merchandise sold. Record the entry for the $500 sale and its applicable sales tax. Also record the entry that shows the remittance of the 7% tax on this sale to the state government on July 15. McGraw-Hill Education. 9-24 NEED-TO-KNOW 9-1 Part 1 (2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable.

McGraw-Hill Education. 9-25 NEED-TO-KNOW 9-1 Part 2 (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. Part 2. A ticket agency receives $40,000 cash in advance ticket sales for a four-date tour of Haim. Record the advance ticket sales on April 30. Record the revenue earned for the first concert date of May 15,assuming it represents one- fourth of the advance ticket sales.

McGraw-Hill Education. 9-26 NEED-TO-KNOW 9-1 Part 2 (2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable. McGraw-Hill Education. 9-27 NEED-TO-KNOW 9-1 Part 3 (1 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable.

Part 3. On November 25 of the current year, a company borrows $8,000 cash by signing a 90-day, 5% note payable with a face value of $8,000. (a) Compute the accrued interest payable on December 31 of the current year, (b) prepare the journal entry to record the accrued interest expense at December 31 of the current year, and (c) prepare the journal entry to record payment of the note at maturity. McGraw-Hill Education. 9-28 NEED-TO-KNOW 9-1 Part 3 (2 of 2) Learning Objective P1: Prepare entries to account for short-term notes payable.

McGraw-Hill Education. 9-29 Learning Objective P2: Compute and record employee payroll deductions and liabilities. McGraw-Hill Education. 9-30 Payroll Liabilities Learning Objective P2: Compute and record employee payroll deductions and liabilities.

Employers incur expenses and liabilities from having employees. McGraw-Hill Education. 9-31 Exhibit 9.3 Employee Payroll Deductions Learning Objective P2: Compute and record employee payroll deductions and liabilities. McGraw-Hill Education. 9-32

Employee FICA Taxes Learning Objective P2: Compute and record employee payroll deductions and liabilities. Federal Insurance Contributions Act (FICA) FICA Taxes Soc. Sec. 2016: 6.2% of the first $118,500 earned in the year. FICA Taxes Medicare 2016: 1.45% of all wages earned in the year.

Employers must pay withheld taxes to the Internal Revenue Service (IRS). McGraw-Hill Education. 9-33 Employee Income Tax Learning Objective P2: Compute and record employee payroll deductions and liabilities. Federal Income Tax

State and Local Income Taxes Amounts withheld depend on the employees earnings, tax rates, and number of withholding allowances. Employers must pay the taxes withheld from employees gross pay to the appropriate government agency. McGraw-Hill Education. 9-34 Employee Voluntary Deductions Learning Objective P2: Compute and record employee payroll deductions and liabilities.

Amounts withheld depend on the employees request. Examples include union dues, savings accounts, pension contributions, insurance premiums, and charities. Employers owe voluntary amounts withheld from employees gross pay to the designated agency. McGraw-Hill Education.

9-35 Recording Employee Payroll Deductions Learning Objective P2: Compute and record employee payroll deductions and liabilities. An entry to record payroll expenses and deductions for an employee might look like this. *Amounts taken from employees employment records McGraw-Hill Education. 9-36 Learning Objective P3: Compute

and record employer payroll deductions and liabilities. McGraw-Hill Education. 9-37 Employer Payroll Taxes Learning Objective P3: Compute and record employer payroll deductions and liabilities. Employers pay amounts equal to that withheld from the employees gross pay. FICA Taxes

Medicare Taxes Federal and State Unemployment Taxes McGraw-Hill Education. 9-38 Federal and State Unemployment Taxes Learning Objective P3: Compute and record employer payroll deductions and liabilities.

Federal Unemployment Tax (FUTA) 6.0% on the first $7,000 of wages paid to each employee. A credit up to 5.4% is given for SUTA paid, therefore the net rate is 0.6%. State Unemployment Tax (SUTA) 5.4% on the first $7,000 of wages paid to each employee. Merit ratings may lower SUTA rates. McGraw-Hill Education. 9-39

Recording Employer Payroll Taxes Learning Objective P3: Compute and record employer payroll deductions and liabilities. An entry to record the employer payroll taxes for January might look like this. SUTA: $2,000 5.4% = $108 FUTA: $2,000 (0.6) = 12 FICA amounts are the same as that withheld from the employees gross pay. McGraw-Hill Education. 9-40 Internal Control of Payroll

Learning Objective P3: Compute and record employer payroll deductions and liabilities. Four key areas of payroll activities that should be separated and monitored: 1. 2. 3. 4. Employee Hiring Payroll Preparation Timekeeping Payroll Payment

McGraw-Hill Education. 9-41 Multi-Period Known Liabilities Learning Objective C2: Identify and describe known current liabilities. Includes Unearned Revenues and Notes Payable Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced. Notes Payable often extend over more than one

accounting period. A three-year note would be classified as a current liability for one year and a long-term liability for two years. McGraw-Hill Education. 9-42 NEED-TO-KNOW 9-2 Part 1 (1 of 3) Learning Objective P2: Compute and record employee payroll deductions and liabilities. Learning Objective P3: Compute and record employer payroll deductions and liabilities. A companys first weekly pay period of the year ends on January 8. On that date, the column totals in its payroll register show that sales employees earned $30,000, and

office employees earned $20,000 in salaries. The employees are to have withheld from their salaries FICA Social Security taxes at the rate of 6.2%, FICA Medicare taxes at the rate of 1.45%, $9,000 of federal income taxes, $2,000 of medical insurance deductions, and $1,000 of pension contributions. No employee earned more than $7,000 in the first pay period. McGraw-Hill Education. 9-43 NEED-TO-KNOW 9-2 Part 1 (2 of 3) Learning Objective P2: Compute and record employee payroll deductions and liabilities. Learning Objective P3: Compute and record employer payroll deductions and liabilities.

Part 1) Compute FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record the companys January 8 (employee) payroll expenses and liabilities. McGraw-Hill Education. 9-44 NEED-TO-KNOW 9-2 Part 1 (3 of 3) Learning Objective P2: Compute and record employee payroll deductions and liabilities. Learning Objective P3: Compute and record employer payroll deductions and liabilities.

McGraw-Hill Education. 9-45 NEED-TO-KNOW 9-2 Part 2 (1 of 2) Learning Objective P2: Compute and record employee payroll deductions and liabilities. Learning Objective P3: Compute and record employer payroll deductions and liabilities. Part 2) Prepare the journal entry to record the companys (employer) payroll taxes resulting from the January 8 payroll. Its merit rating reduces its state unemployment tax rate to 3.4% of the first $7,000 paid to each employee. The federal unemployment tax rate is 0.6%.

McGraw-Hill Education. 9-46 NEED-TO-KNOW 9-2 Part 2 (2 of 2) Learning Objective P2: Compute and record employee payroll deductions and liabilities. Learning Objective P3: Compute and record employer payroll deductions and liabilities. McGraw-Hill Education. 9-47 Learning Objective P4: Account

for estimated liabilities, including warranties and bonuses. McGraw-Hill Education. 9-48 Estimated Liabilities Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. McGraw-Hill Education.

9-49 Health and Pension Benefits Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Employer expenses for pensions or medical, dental, life, and disability insurance Assume an employer agrees to pay an amount for medical insurance equal to $8,000, and contribute an additional 10% of the employees $120,000 gross salary to a retirement program. McGraw-Hill Education.

9-50 Vacation Benefits Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Assume an employee earns $20,800 per year and earns two weeks of paid vacation each year. $20,800 50 weeks = $ 416 $20,800 52 weeks = $ 400 Weekly vacation benefit $ 16 McGraw-Hill Education. 9-51

Bonus Plans Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Assume that a bonus of $10,000 will be paid to employees to be shared by all: McGraw-Hill Education. 9-52 Warranty Liabilities (1 of 2) Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.

Sellers obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. Seller reports expected warranty expense in the period when revenue from the sale is reported. Seller reports warranty obligation as a liability. McGraw-Hill Education. 9-53

Warranty Liabilities (2 of 2) Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. On Dec. 1, 2017, a dealer sells a car for $16,000 with a maximum one-year or 12,000 mile warranty covering parts. Past experience indicates warranty expenses average 4% of a cars selling price. On Jan. 9, 2018, the customer returns the car for repairs. The dealer replaces parts costing $200. McGraw-Hill Education. 9-54

NEED-TO-KNOW 9-3 Part 1 (1 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. A companys salaried employees earn two weeks vacation per year. It pays $208,000 in total employee salaries for 52 weeks but its employees work only 50 weeks. This means its total weekly expense is $4,160 ($208,000 / 50 weeks) instead of the $4,000 cash paid weekly to the employees ($208,000 / 52 weeks). Record the companys regular weekly vacation benefits expense.

McGraw-Hill Education. 9-55 NEED-TO-KNOW 9-3 Part 1 (2 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. McGraw-Hill Education.

9-56 NEED-TO-KNOW 9-3 Part 2 (1 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. For the current year ended December 31, a company has implemented an employee bonus program based its net income, which employees will share equally. Its bonus expense is $40,000. a) Prepare the journal entry at December 31 of the current year to record the bonus due. b) Prepare the journal entry at January 20 of the following year to record the payment of that

bonus to employees. McGraw-Hill Education. 9-57 NEED-TO-KNOW 9-3 Part 2 (2 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. McGraw-Hill Education.

9-58 NEED-TO-KNOW 9-3 Part 3 (1 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. On June 11 of the current year, a retailer sells a trimmer for $400 with a one-year warranty that covers parts. Warranty expense is estimated at 5% of sales. On March 24 of the next year, the trimmer is brought in for repairs covered under the warranty requiring $15 in materials taken from the Repair Parts Inventory. Prepare the (a) June 11 entry to record the trimmer sale, and (b) March 24

entry to record warranty repairs. McGraw-Hill Education. 9-59 NEED-TO-KNOW 9-3 Part 3 (2 of 2) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. McGraw-Hill Education.

9-60 Learning Objective C3: Explain how to account for contingent liabilities. McGraw-Hill Education. 9-61 Accounting for Contingent Liabilities Learning Objective C3: Explain how to account for contingent liabilities. Exhibit 9.5

McGraw-Hill Education. 9-62 Reasonably Possible Contingent Liabilities Learning Objective C3: Explain how to account for contingent liabilities. Potential Legal Claims A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable.

Debt Guarantees The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability. McGraw-Hill Education. 9-63 NEED-TO-KNOW 9-4 (1 of 3) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.

The following legal claims exist for a company. Identify the accounting treatment for each claim as either (i) a liability that is recorded or (ii) an item described in notes to its financial statements. If an item is to be recorded, prepare the entry. McGraw-Hill Education. 9-64 NEED-TO-KNOW 9-4 (2 of 3) Learning Objective C3: Explain how to account for contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.

a. The company (defendant) estimates that a pending lawsuit could result in damages of $500,000; it is reasonably possible that the plaintiff will win the case. (ii) Is reasonably estimated but not a probable loss. b. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable. (ii) Probable loss but cannot be reasonably estimated. McGraw-Hill Education. 9-65 NEED-TO-KNOW 9-4 (3 of 3) Learning Objective C3: Explain how to account for

contingent liabilities. Learning Objective P4: Account for estimated liabilities, including warranties and bonuses. c. The company estimates environmental damages in a pending case at $900,000 with a high probability of losing the case. For contingent liability to be recorded, the loss must be both probable and reasonably estimable. McGraw-Hill Education. 9-66 Learning Objective A1: Compute the times interest earned ratio and

use it to analyze liabilities. McGraw-Hill Education. 9-67 Times Interest Earned (1 of 3) Learning Objective A1: Compute the times interest earned ratio and use it to analyze liabilities. Time interest earned Income before interest and income taxes Interest expense

If income before interest and taxes varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges. McGraw-Hill Education. 9-68 Times Interest Earned (2 of 3) Learning Objective A1: Compute the times interest earned ratio and use it to analyze liabilities. Exhibit 9.6

$ millions 2017 Sales .. 2018 Projection: Sales Increase 2018 Projections: Sales Decrease

$ 600 $ 900 $ 300 Expenses (75% of sales) .. 450 675 225

Income before interest 150 225 75 60 60 60 $ 90

$ 165 $ 15 Expense interest (fixed) .. Net income McGraw-Hill Education. 9-69 Times Interest Earned (3 of 3) Learning Objective A1: Compute the times interest earned ratio and

use it to analyze liabilities. Exhibit 9.7 Time Income before interest and income taxes interest Interest expense earned McGraw-Hill Education. 9-70 Learning Objective P5: Appendix 9A Identify and describe the details

of payroll reports, records, and procedures. McGraw-Hill Education. 9-71 Appendix 9A: Payroll Reports, Records, and Procedures (1 of 2) Learning Objective P5: Identify and describe the details of payroll reports, records, and procedures.

Payroll Reports IRS Form 941 IRS Form 940 W-2 Payroll Records

Payroll Register Payroll Checks Employee Earnings Report McGraw-Hill Education. 9-72 Appendix 9A: Payroll Reports, Records, and Procedures (2 of 2) Learning Objective P5: Identify and describe the details of payroll

reports, records, and procedures. Payroll Procedures Withholding Tables W-4 McGraw-Hill Education. 9-73 Appendix 9B: Corporate Income Taxes

Corporations must pay taxes on income. Deferred Income Tax Liabilities McGraw-Hill Education. 9-74 End of Presentation McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 9-75

Recently Viewed Presentations

  • Stress Management - cghsbng.gov.in

    Stress Management - cghsbng.gov.in

    Yoga club/ Meditation club. Classical music club. Listen/ appreciate/ discuss with like-minded people. Reading club ! Benefits of listening to classical music: It can decrease. stress, anxiety, and . depression . It heightens emotions, makes people more expressive,
  • Alameda Creek: Negociating Barriers and Other Hurdles in a ...

    Alameda Creek: Negociating Barriers and Other Hurdles in a ...

    Alameda Creek: Negotiating Barriers and Other Hurdles in a South Bay Stream Gordon Becker Center for Ecosystem Management and Restoration Spawning and Rearing Habitat Alameda Creek Flooding Land Use Impacts Restoration Drivers Dedicated People Public Appeal Endangered Species Stakeholder Forum...
  • BioTech Startup School@KU

    BioTech Startup [email protected]

    Of course the answer is yes…what have youlearned? Don't presume that you know what a "great movie"is "Is my script going to make for a greatmovie"? Good, but it risks a Yes/Noanswer ... BioTech Startup [email protected] Last modified by:
  • Presentation template

    Presentation template

    Methodology or description of the type of activities used in the section or module (opener, facilitated discussion, small group exercise, role-play, scenario analysis, etc.) Corresponding section of the toolkit . Instructions for the facilitator Effective training. To be effective, the...
  • Human-nonhuman Interspecies Embryos An Ethical Discussion Dr. Calum

    Human-nonhuman Interspecies Embryos An Ethical Discussion Dr. Calum

    "The state is called upon to produce creatures made in the likeness of the Lord and not create monsters that are a mixture of man and ape". Adolf Hitler [1927] 1939. Mein Kampf. "The state is called upon to produce...
  • 80 71 Number of Corrections 70 60 50

    80 71 Number of Corrections 70 60 50

    Kaitlin Number of Corrections Commas Assignment 2 Assignment 11 1 1 Verb 2nd Assignment 2 Assignment 11 1 0 Verb Last Assignment 2 Assignment 11 0 1 Gender Assignment 2 Assignment 11 1 0 Accusative Case Assignment 2 Assignment 11...
  • Conjunctions - PC\|MAC

    Conjunctions - PC\|MAC

    Grade Seven An interjection is something that interrupts a sentence. It is something that also expresses your emotions like happiness, fear, anger, or pain. Some examples of interjections are: ouch, wow, uh oh, oh no, gosh, shhhh If an interjection...
  • Our Amazing Moon - Illinois State University

    Our Amazing Moon - Illinois State University

    Arial MS Pゴシック Tahoma Monotype Sorts Full Moon 1_Full Moon 2_Full Moon 3_Full Moon 4_Full Moon 5_Full Moon 6_Full Moon 7_Full Moon 8_Full Moon 9_Full Moon 10_Full Moon 11_Full Moon 12_Full Moon Our Amazing Moon Basic Lunar Data A Lunar...