© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 9 9 Reporting and Analyzing...
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Transcript of © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 9 9 Reporting and Analyzing...
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-1
99 Reporting and Analyzing Current Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-2
Exh.9.1
Past Present Future
From a past event...
...for future sacrifices.
...comesa present
obligation...
Characteristics of Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-5
Who to pay?
When to pay?
How much to pay?
Uncertainty in Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-6
Accounts Payable
Accounts Payable
Sales Taxes Payable
Sales Taxes Payable
Unearned Revenues
Unearned Revenues
Notes Payable
Notes Payable
Known (Determinable) Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-8
GENERAL JOURNAL Page 34Date Description PR Debit Credit
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-9
GENERAL JOURNAL Page 43Date Description PR Debit Credit
On July 4, 2002, JJ’s Catering provided the catering services for the party.
Prepare the entry for July 4, 2002.
Unearned Revenues
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-10
GENERAL JOURNAL Page 43Date Description PR Debit Credit
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-11
GENERAL JOURNAL Page 50Date Description PR Debit Credit
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-12
GENERAL JOURNAL Page 50Date Description PR Debit Credit
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.
Note Given to Extend Credit Period
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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.
GENERAL JOURNAL Page 55Date Description PR Debit Credit
Note Given to Extend Credit Period
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-14
GENERAL JOURNAL Page 55Date Description PR Debit Credit
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.
Note Given to Extend Credit Period
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-15
Cash Received Equals Face Value
Cash Received Equals Face Value
Face Value Equals Amount Borrowed
Face Value Equals Amount Borrowed
Cash Received Is Less Than Face
Value
Cash Received Is Less Than Face
Value
Face Value Equals Amount Borrowed
Plus Interest
Face Value Equals Amount Borrowed
Plus Interest
Note Given to Borrow from Bank
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-16
Exh.9.3
Face Value Equals Amount Borrowed
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
after date promise to pay to the order of
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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?
Face Value Equals Amount Borrowed
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-18
On the maturity date of the note (Nov. 29), Janet Lee would make the following entry.
$2,00012% 60/360 = $40
Face Value Equals Amount Borrowed
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-19
PROMISSORY NOTE
Face Value Date
after date promise to pay to the order of
National Bank
Boston, MA
Dollars.
PROMISSORY NOTE
Face Value Date
after date promise to pay to the order of
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-20
GENERAL JOURNAL Page 43Date Description PR Debit Credit
Sep. 30 Cash 2,000
Discount on Notes Payable 40
Notes Payable 2,040
On September 30, 2002, Janet Lee received $2,000 from the bank so she would make
the following entry.
Contra-liability
Face Value Equals Amount Borrowed plus Interest
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-21
Notes payable 2,040$ 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?
Face Value Equals Amount Borrowed plus Interest
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-22
GENERAL JOURNAL Page 46Date Description PR Debit Credit
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.
Face Value Equals Amount Borrowed plus Interest
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
End-of-Period Adjustment to Notes
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-25
On December 16, 2002, Janet Lee would make the following entry.
What entry would she make on December 31, 2002?
GENERAL JOURNAL Page 43Date Description PR Debit Credit
Dec. 16 Cash 2,000
Notes Payable 2,000
End-of-Period Adjustment to Notes
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-26
On December 31, 2002, Janet Lee would make the following entry.
$2,00012% 15/360 = $10
GENERAL JOURNAL Page 55Date Description PR Debit Credit
Dec. 31 Interest Expense 10
Interest Payable 10
End-of-Period Adjustment to Notes
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-27
GENERAL JOURNAL Page 3Date Description PR Debit Credit
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
End-of-Period Adjustment to Notes
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-28
Employers incur several expenses
and liabilities from having employees.
Payroll Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-29
Exh.9.5
Payroll Deductions
FICA TaxesMedicare
TaxesFederal
Income TaxState and Local Income Taxes
Voluntary Deductions
Gross Pay
Net Pay
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-33
GENERAL JOURNAL Page 3Date Description PR Debit Credit
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-37
An estimated liability is a known
obligation of an uncertain amount, but one that can be
reasonably estimated.
Estimated Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-38
GENERAL JOURNAL Page 33Date Description PR Debit Credit
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.
Estimated Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-39
GENERAL JOURNAL Page 55Date Description PR Debit Credit
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.
Estimated Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-41
Corporations pay income taxes
quarterly.
Income Tax Liabilities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-44
Am
ou
nt
. . .
Contingent LiabilitiesPotential obligation depends on a future event
arising out of a past transaction or event.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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
Long-Term Liabilities
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.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-47
End of Chapter 9