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Accounting for Current LiabilitiesChapter 9
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
11 - 4
Classifying Liabilities
Expected to be paid within one year or the company’s operating
cycle, whichever is longer.
Current Liabilities
Not expected to be paid within one year
or the company’s operating cycle,
whichever is longer.
Long-Term Liabilities
C 14
11 - 6
Uncertainty of Liabilities
Uncertainty in When to Pay
C 1
Uncertainty in Whom to Pay
Uncertainty in How Much to Pay
6
11 - 8
Accounts Payable
Sales Taxes Payable
Unearned Revenues
Short-Term Notes Payable
Known Liabilities
Payroll Liabilities
Multi-Period Known LiabilitiesC 2
8
11 - 9
On August 31, Home Depot sold materials for $6,000 that are subject to a 5% sales tax.
Sales Tax Payable
C 2$6,000 × 5% = $300
9
11 - 10
On June 30, Rihanna sells $5,000,000 in tickets for eight concerts.
Unearned Revenues
C 2
On Oct. 31, Rihanna performs a concert.
$5,000,000 / 8 = $625,000 10
11 - 11
Multi-Period KnownLiabilities
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.
C 211
11 - 13
A written promise to pay a specified amount on a definite future date within one year or the
company’s operating cycle, whichever is longer.
A written promise to pay a specified amount on a definite future date within one year or the
company’s operating cycle, whichever is longer.
Short-Term Notes Payable
P 113
11 - 14
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.
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.
Note Given to ExtendCredit Period
P 114
11 - 15
On October 22, Brady pays the note plus interest to McGraw.
On October 22, Brady pays the note plus interest to McGraw.
Note Given to ExtendCredit Period
P 1
Interest expense = $500 × 12% × (60 ÷ 360) = $10
15
11 - 17
Note Given To Borrow From Bank
On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days.
P 1
On Nov. 29, the company repays the principal of the note plus interest.
Interest expense = $2,000 × 12% × (60 ÷ 360) = $40 17
11 - 18
Note Date
End of Period
Maturity Date
An adjusting entry is required to record Interest Expense incurred to date.
End-of-Period Adjustmentto Notes
P 118
11 - 19
End-of-Period Adjustmentto Notes
P 1
On Dec. 16, 2015, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31.
On Feb. 14, 2014, the company repays this principal and interest on the note.
19
NEED-TO-KNOW
Debit CreditJun. 30 Cash 535
Sales 500Sales taxes payable ($500 x .07) 35
Jun. 30 Cost of goods sold 300Merchandise inventory 300
Jul. 15 Sales taxes payable 35Cash 35
General Journal
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.
P 120
NEED-TO-KNOW
Debit CreditApr. 30 Cash 40,000
Unearned ticket revenue 40,000
May 15 Unearned ticket revenue $40,000 / 4 concerts 10,000Earned ticket revenue 10,000
General Journal
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.
P 121
NEED-TO-KNOW
Debit CreditNov. 25 Cash 8,000
Notes payable 8,000
Dec. 31 Interest expense ($8,000 x .05 x 36/360) 40Interest payable 40
Feb. 23 Interest expense ($8,000 x .05 x 54/360) 60Interest payable ($8,000 x .05 x 36/360) 40Notes payable 8,000
Cash 8,100
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.
General Journal
36 days
54days
P 122
11 - 26
Employers must pay withheld taxes tothe Internal Revenue Service (IRS).
FICA Taxes — Soc. Sec.2014: 6.2% of the first $117,000 earned in the
year.
Employee FICA TaxesFederal Insurance Contributions Act (FICA)
FICA Taxes — Medicare2014: 1.45% of all
wages earned in the year.
P 226
11 - 27
Amounts withheld depend on the employee’s earnings, tax rates, and number of withholding allowances.
Employers must pay the taxes withheld from employees’ gross pay to the appropriate government agency.
Federal Income Tax
Employee Income TaxState and Local Income Taxes
P 227
11 - 28
Amounts withheld depend on the employee’s request.
Employers owe voluntary amounts withheld from employees’ gross pay to the designated agency.
Examples include union dues, savings accounts, pension contributions, insurance premiums, and charities.
Employee Voluntary Deductions
P 228
11 - 29
An entry to record payroll expenses and deductions for an employee might look like this.
Recording Employee Payroll Deductions
P 2
*Amounts taken from employee’s employment records
29
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Employers pay amounts equal to that withheld from the employee’s gross pay.
Employers pay amounts equal to that withheld from the employee’s gross pay.
Employer Payroll Taxes
FICA TaxesFederal and State
Unemployment Taxes
Medicare Taxes
P 331
11 - 32
2014: 6.2% 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%.
Federal Unemployment Tax
(FUTA)
2014: 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 StateUnemployment Taxes
P 332
11 - 33
An entry to record the employer payroll taxes for January might look like this.
FICA amounts are the same as that withheld from the employee’s gross pay.
Recording EmployerPayroll Taxes
P 3
SUTA: $2,000 x 5.4% = $108FUTA: $2,000 x (0.6) = 12
33
NEED-TO-KNOW
Debit CreditJan. 8 Sales salaries expense 30,000
Office salaries expense 20,000FICA - Social security taxes payable ($50,000 x .062) 3,100FICA - Medicare taxes payable ($50,000 x .0145) 725Employee federal income taxes payable 9,000Employee medical insurance payable 2,000Employee pensions payable 1,000Salaries payable 34,175
Part 1) Compute FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record the company’s January 8 (employee) payroll expenses and liabilities.
General Journal
A company’s 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.
P2/P 334
NEED-TO-KNOW
Debit CreditJan. 8 Sales salaries expense 30,000
Office salaries expense 20,000FICA - Social security taxes payable ($50,000 x .062) 3,100FICA - Medicare taxes payable ($50,000 x .0145) 725Employee federal income taxes payable 9,000Employee medical insurance payable 2,000Employee pensions payable 1,000Salaries payable 34,175
Jan. 8 Payroll taxes expense 5,825FICA - Social security taxes payable ($50,000 x .062) 3,100FICA - Medicare taxes payable ($50,000 x .0145) 725SUTA - State unemployment taxes payable ($50,000 x .034) 1,700FUTA - Federal unemployment taxes payable ($50,000 x .006) 300
General Journal
Part 2) Prepare the journal entry to record the company’s (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%.
35P2/P3
11 - 37
Estimated Liabilities
An estimated liability is a known
obligation of an uncertain amount, but one that can be
reasonably estimated.
An estimated liability is a known
obligation of an uncertain amount, but one that can be
reasonably estimated.
P 437
11 - 38
Employer expenses for pensions or medical,dental, life, and disability insurance
Health and Pension Benefits
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.
P 438
11 - 39
Vacation Benefits
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
P 439
11 - 40
Bonus Plans
P 4
B = .05 ($210,000 - B)B = $10,500 - 0.05B
1.05B = $10,500B = $10,500 / 1.05
*B = $10,000
B = .05 ($210,000 - B)B = $10,500 - 0.05B
1.05B = $10,500B = $10,500 / 1.05
*B = $10,000
Assume that a bonus will be paid to employees equal to 5% of the company’s annual net income
of $210,000.
40
11 - 41
Warranty LiabilitiesSeller’s obligation to replace or correct a product (or
service) that fails to perform as expected within a specified period. To comply with the full disclosure
and matching principles, the seller reports expected warranty expense in the period when revenue from
the sale is reported.
P 441
11 - 42
Warranty Liabilities
P 4
On Dec. 1, 2015, 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 car’s selling price.
On Jan. 9, 2016, the customer returns the car for repairs. The dealer replaces parts costing $200.
42
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Reasonably PossibleContingent 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.
C 345
NEED-TO-KNOW
Debit CreditWeekly Vacation benefits expense ($4,160 - $4,000) 160
Vacation benefits payable 160
A company’s 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 company’s regular weekly vacation benefits expense.
General Journal
Expense recognition principleExpense is recognized in the same period as
the revenue it helped generate.
P4/C346
NEED-TO-KNOW
B = .05($840,000 - B)B = $42,000 - .05B
1.05 B = $42,000 B = $40,000
Debit CreditDec. 31 Employee bonus expense 40,000
Bonus payable 40,000
Jan. 20 Bonus payable 40,000Cash 40,000
For the current year ended December 31, a company has implemented an employee bonus program equal to 5% of its net income, which employees will share equally. Its net income (pre-bonus) is expected to be $840,000, and bonus expense is deducted in computing net income. (a) Compute the bonus payable to the employees at year-end using the method described in the chapter and round to the nearest dollar; then, 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 payment of that bonus to employees.
General Journal
Expense recognition principleExpense is recognized in the same period as
the revenue it helped generate.
47P4/C3
NEED-TO-KNOW
Debit CreditJun. 11 Cash 400
Sales 400
Jun. 11 Warranty expense ($400 x .05) 20Estimated warranty liability 20
Mar. 24 Estimated warranty liability 15Repair parts inventory 15
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.
General Journal
Expense recognition principleExpense is recognized in the same period as
the revenue it helped generate.
48P4/C3
NEED-TO-KNOW
(ii) Is reasonably estimated but not a probable loss.
(ii) Probable loss but cannot be reasonably estimated.
Debit Credit(i) Environmental contingent expense 900,000
Environmental contingent liability 900,000
General Journal
The following legal claims exist for a company. Identify the accounting treatment for each claimas either (i) a liability that is recorded or (ii) an item described in notes to its financial statements. If anitem is to be recorded, prepare the entry.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.
b. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable.
c. The company estimates environmental damages in a pending case at $900,000 with a high probability of losing the case.
For a contingent liability to be recorded, the loss must be both probable and reasonably
estimable.
49P4/C3
11 - 50
Global ViewCharacteristics of Liabilities
Accounting definitions and characteristics of current liabilities are similar for U.S. GAAP and IFRS. Sometimes IFRS will use the
word “provision” to refer to a “liability.”
Known (Determinable) LiabilitiesBoth U.S. GAAP and IFRS require companies to treat known (or determinable) liabilities in a similar manner. Examples would be accounts payable, unearned revenues, and payroll liabilities.
Estimated LiabilitiesRegarding estimated liabilities, when a known current obligation
that involves an uncertain amount, but one that can be reasonably estimated, both U.S. GAAP and IFRS require similar treatment. 50
11 - 52
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.
Times Interest Earned
Times interestearned
Income before interestand income taxes
Interest expense=
A 152
11 - 54
Appendix 9A: PayrollReports, Records, and Procedures
P 5
Payroll Reports
IRS Form 941 IRS Form 940
W-2
Payroll Records
Payroll Register Payroll Checks
Employee Earnings Report
Payroll Procedures
Withholding Tables W-4
54
11 - 55
Appendix 9B: Corporate Income Taxes
Corporations must pay taxes on income.
Deferred Income Tax Liabilities
55