© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 9 9 Reporting and Analyzing Current Liabilities

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Slide 9-1

99 Reporting and Analyzing Current Liabilities


Slide 9-2

Exh.9.1

Past Present Future

From a past event...

...for future sacrifices.

...comesa present

obligation...

Characteristics of Liabilities


Slide 9-3

Current LiabilitiesCurrent

Liabilities

Due within one year or the company’s

operating cycle, whichever is

longer.

Due within one year or the company’s

operating cycle, whichever is

longer.

Long-Term Liabilities


Due after one year or the company’s operating cycle,

whichever is longer.

Due after one year or the company’s operating cycle,

whichever is longer.

Classifying Liabilities


Slide 9-4

Exh.9.2

$- $200 $400 $600 $800 $1,000 $1,200

$ in Millions

AMF Bow ling

Sports Authority

I2 Technologies

Harley-Davidson

Current

Noncurrent

Current and Long-Term Liabilities

$0


Slide 9-5

Who to pay?

When to pay?

How much to pay?

Uncertainty in Liabilities


Slide 9-6

Accounts Payable

Accounts Payable

Sales Taxes Payable

Sales Taxes Payable

Unearned Revenues

Unearned Revenues

Notes Payable

Notes Payable

Known (Determinable) Liabilities


Slide 9-7

GENERAL JOURNAL Page 34Date Description PR Debit Credit

On June 10, 2002, JJ’s Catering received $1,500 in advance for catering a party on

July 4, 2002.

Prepare the entry for June 10, 2002.

Unearned Revenues


Slide 9-8


Jun. 10 Cash 1,500

Unearned Catering Revenue 1,500

On June 10, 2002, JJ’s Catering received $1,500 in advance for catering a party on

July 4, 2002.

Prepare the entry for June 10, 2002.

Unearned Revenues


Slide 9-9


On July 4, 2002, JJ’s Catering provided the catering services for the party.

Prepare the entry for July 4, 2002.

Unearned Revenues


Slide 9-10


Jul. 4 Unearned Catering Revenue 1,500

Catering Revenue 1,500

On July 4, 2002, JJ’s Catering provided the catering services for the party.

Prepare the entry for July 4, 2002.

Unearned Revenues


Slide 9-11


On August 15, 2002, Neeley Co. exchanged a $500 account payable with JJ’s Catering

for a 60-day, 12%, $500 note payable.

Prepare the August 15 entry for Neeley Co.

Note Given to Extend Credit Period


Slide 9-12


Aug. 15 Accounts Payable--JJ's Catering 500

Notes Payable 500

On August 15, 2002, Neeley Co. exchanged a $500 account payable with JJ’s Catering

for a 60-day, 12%, $500 note payable.

Prepare the August 15 entry for Neeley Co.



Slide 9-13

On October 14, 2002, Neeley Co. pays the note and interest to JJ’s Catering.

Prepare the October 14 entry for Neeley Co.




Slide 9-14


Oct. 14 Notes Payable 500

Interest Expense 10

Cash 510

$50012% 60/360 = $10

On October 14, 2002, Neeley Co. pays the note and interest to JJ’s Catering.

Prepare the October 14 entry for Neeley Co.



Slide 9-15

Cash Received Equals Face Value

Cash Received Equals Face Value

Face Value Equals Amount Borrowed


Cash Received Is Less Than Face

Value

Cash Received Is Less Than Face

Value


Plus Interest


Plus Interest

Note Given to Borrow from Bank


Slide 9-16

Exh.9.3


PROMISSORY NOTE

Face Value Date

after date promise to pay to the order of

National Bank

Boston, MA

Dollars

plus interest at the annual rate of .

PROMISSORY NOTE

Face Value Date


National Bank

Boston, MA

Dollars

plus interest at the annual rate of .

$2,000 Sept. 30, 2002

Sixty days I

Two thousand and no/100------------------------------------

12%

Janet Lee


Slide 9-17

On September 30, 2002, Janet Lee would make the following entry.

What entry would she make on the maturity date of the note?



Slide 9-18

On the maturity date of the note (Nov. 29), Janet Lee would make the following entry.

$2,00012% 60/360 = $40



Slide 9-19

PROMISSORY NOTE

Face Value Date


National Bank

Boston, MA

Dollars.

PROMISSORY NOTE

Face Value Date


National Bank

Boston, MA

Dollars.

$2,040 Sept. 30, 2002

Sixty days I

Two thousand forty and no/100----------------------------

Janet Lee

Exh.9.4

Face Value Equals Amount Borrowed plus Interest


Slide 9-20


Sep. 30 Cash 2,000

Discount on Notes Payable 40

Notes Payable 2,040

On September 30, 2002, Janet Lee received $2,000 from the bank so she would make

the following entry.

Contra-liability



Slide 9-21

Notes payable 2,040$ Less: Discount on note payable 40 2,000$

Partial Balance Sheet

September 30, 2002

Net amount borrowed

What entry would Janet Lee make on the maturity date of the note?



Slide 9-22


Nov. 29 Notes Payable 2,040

Interest Expense 40

Cash 2,040

Discount on Notes Payable 40

On the maturity date of the note (Nov. 29), Janet Lee would pay off

the note and recognize interest expense.



Slide 9-23

Note Date

End of Period

Maturity Date

An adjusting entry is required to

record Interest Expense incurred

to date.

End-of-Period Adjustment to Notes


Slide 9-24

Dec. 16, 2002

Dec. 31, 2002

Feb. 14, 2003

Janet Lee borrowed $2,000 on Dec. 16, 2002, by signing a 12%, 60-day note payable.

Note Date

End of Period

Maturity Date



Slide 9-25

On December 16, 2002, Janet Lee would make the following entry.

What entry would she make on December 31, 2002?


Dec. 16 Cash 2,000

Notes Payable 2,000



Slide 9-26

On December 31, 2002, Janet Lee would make the following entry.

$2,00012% 15/360 = $10


Dec. 31 Interest Expense 10

Interest Payable 10



Slide 9-27


Feb. 14 Interest Expense 30

Interest Payable 10

Notes Payable 2,000

Cash 2,040

On February 14, 2003, Janet Lee would make the following entry.

$2,00012% 45/360 = $30



Slide 9-28

Employers incur several expenses

and liabilities from having employees.

Payroll Liabilities


Slide 9-29

Exh.9.5

Payroll Deductions

FICA TaxesMedicare

TaxesFederal

Income TaxState and Local Income Taxes

Voluntary Deductions

Gross Pay

Net Pay


Slide 9-30

FICA Taxes Medicare Taxes

2000: 6.2% of the first $76,200 earned in the

year.

2000: 1.45% of all wages earned in the

year.

Employers owe the FICA amount withheld from employees’ gross pay to the IRS.

Employee FICA Taxes


Slide 9-31

Amounts withheld depend on the employee’s earnings and

the tax rates.

Employers owe the income tax amounts withheld from employees’ gross pay to the appropriate government

agency.

Federal Income Tax

State and Local Income

Taxes

Employee Income Tax


Slide 9-32

Amounts withheld depend on the employee’s request.

Employers owe the voluntary deductions withheld from employees’ gross pay to the designated agency.

Voluntary Deductions

Union Dues

Savings Accounts

Pension Contributions

Insurance Premiums

Charities

Employee Voluntary Deductions


Slide 9-33


Jan. 15 Salaries Expense 4,000

FICA--Social Security Tax Payable 248

FICA--Medicare Tax Payable 58

Employee's Federal Income Tax Payable 420

Employee's Medical Insurance Payable 48

Employee's Pension Contribution Payable 100

Accrued Payroll Payable 3,126

The entry to record payroll expenses and deductions for an employee might look like this.

$4,000.062 = $248

$4,000 .0145 = $58

Recording Payroll Expenses and Deductions


Slide 9-34

FICA TaxesMedicare

TaxesFederal and

State Unemployment

Taxes

Employers pay amounts equal to that withheld from the employee’s gross

pay.

Employer Payroll Taxes


Slide 9-35

2000: 6.2% on the first $7,000 of wages

paid to each employee (A credit up

to 5.4% is given for SUTA paid.)

Federal Unemployment Tax

(FUTA)

2000: Basic rate of 5.4% on the first

$7,000 of wages paid to each employee (Merit ratings may lower SUTA rates.)

State Unemployment Tax

(SUTA)

Federal and State Unemployment Taxes


Slide 9-36

The entry to record the employer payroll taxes related to the employee’s salary recorded earlier

might look like this.

SUTA: $4,000.054 = $216

FUTA: $4,000 (.062-.054) = $32

FICA amounts are the same as that withheld from the employee’s gross pay.

Recording Employer Payroll Taxes


Slide 9-37

An estimated liability is a known

obligation of an uncertain amount, but one that can be

reasonably estimated.

Estimated Liabilities


Slide 9-38


Oct. 1 Warranty Expense 200

Estimated Warranty Liability 200

On October 1, a dealer sold a car with a 12-month warranty. Past experience indicates that the

average warranty expense for this car is $200.

The dealer would prepare the following entry on October 1.



Slide 9-39


Mar. 6 Estimated Warranty Liability 200

Auto Parts Inventory 200

On March 6, the customer brings the car in for $200 of repairs.

The dealer would make the following entry.



Slide 9-40

Employer expenses for pensions or

medical, dental, life and disability

insurance

Employer expenses for pensions or

medical, dental, life and disability

insurance

Employer expenses for paid vacation by

employees

Employer expenses for paid vacation by

employees

Employee Health and Pension Benefits

Employee Health and Pension Benefits

Vacation Pay

Vacation Pay

Other Estimated Liabilities


Slide 9-41

Corporations pay income taxes

quarterly.

Income Tax Liabilities


Slide 9-42

Determined by applying measurement rules

established by Internal Revenue Service.

Taxable Income

Financial Statement Income

GA

AP

GA

AP

GA

AP

GA

AP

Determined by applying Generally Accepted

Accounting Principles (GAAP).

Deferred Income Tax Liabilities


Slide 9-43

Taxable Income Financial Statement Income

The difference between taxable income and financial statement

income results in temporary differences.

Deferred Income Tax Liabilities

GA

AP

GA

AP

GA

AP

GA

AP


Slide 9-44

Am

ou

nt

. . .

Contingent LiabilitiesPotential obligation depends on a future event

arising out of a past transaction or event.


Slide 9-45

Estimated Long-Term Liabilities

Estimated Long-Term Liabilities

Noncurrent portion of employee benefits, warranties,

deferred income taxes, etc.

Noncurrent portion of employee benefits, warranties,

deferred income taxes, etc.

Contingent Long-Term Liabilities

Contingent Long-Term Liabilities

Noncurrent portion of debt related to litigation, debt

guarantees, environmental assessments, etc.

Noncurrent portion of debt related to litigation, debt

guarantees, environmental assessments, etc.

Long-Term LiabilitiesKnown


Known Long-Term Liabilities

Known obligations of a business such as unearned revenue and notes payable.

Known obligations of a business such as unearned revenue and notes payable.


Slide 9-46

Times Interest Earned =

Income Before Interest Expense and Income Taxes

Interest Expense

If income before interest 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.

Exh.9.7

Times Interest Earned

When this ratio falls below 1.5 and remains at that level or lower for several periods, the default rate on liabilities

increases sharply.


Slide 9-47

End of Chapter 9

Documents

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 9 9 Reporting and Analyzing Current Liabilities