ACCT 201 ACCT 201 ACCT 201

Reporting and Analyzing Current Liabilities

Chapter

UAA ACCT 201 Principles of Financial Accounting Dr. Fred Barbee

1

No homework is due today!

Problem 9-2A is due

Wednesday!

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Chapter 9 - Day 1
Topic
Characteristics of Liabilities

LO
C1

Read
376378 378386

HW
QS1, E1 E4, E5, E6, E7

Known (Determinable) C2, P1, Liabilities P2, P3

Agenda
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Reporting and Analyzing Current Liabilities

Chapter

Characteristics of Liabilities
7

Characteristics of Current Liabilities

From a past event...

...comes a present obligation...

...for future sacrifices.

Past

Present

Future

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Liabilities are obligations that use assets (usually cash) when they are paid as required.
Payment

Source Source

Liabilities (and Equity) are sources of assets when they are incurred. ACCT 201 ACCT 201 ACCT 201

Classifying Liabilities
Current Liabilities Long-Term Liabilities

Due within one year or the companys operating cycle, whichever is longer. ACCT 201

Due after one year or the companys operating cycle, whichever is longer. ACCT 201

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Current and Long-Term Liabilities

Exh. 9.2

Harley-Davidson I2 Technologies Sports Authority AMF Bow ling $$0 $200 $400 $600 $800 $1,000 $1,200

Current Noncurrent

$ in Millions

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Characteristics of Current Liabilities

Who to pay? When to pay?

How much to pay?

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Reporting and Analyzing Current Liabilities

Chapter

Known (Determinable) Liabilities

13

Known (Determinable) Liabilities

Accounts Payable

Sales Taxes Payable Unearned Revenues

Notes Payable ACCT 201 ACCT 201 ACCT 201

Known (Determinable) Liabilities

Accounts Payable

Sales Taxes Payable Unearned Revenues

Notes Payable ACCT 201 ACCT 201 ACCT 201

Unearned Revenues
On June 10, 2002, JJs Catering received $1,500 in advance for catering a party on July 4, 2002. Prepare the entry for June 10, 2002.
GENERAL JOURNAL
Date Jun. 10 Cash Unearned Catering Revenue Description PR Debit 1,500 1,500

Page 34
Credit

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Unearned Revenues
On July 4, 2002, JJs Catering provided the catering services for the party. Prepare the entry for July 4, 2002.
GENERAL JOURNAL
Date Jul. Description Catering Revenue PR Debit 1,500 1,500 4 Unearned Catering Revenue

Page 43
Credit

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Known (Determinable) Liabilities

Accounts Payable

Sales Taxes Payable Unearned Revenues

Notes Payable ACCT 201 ACCT 201 ACCT 201

Note Given to Extend Credit Period

On August 15, 2002, Neeley Co. exchanged a $500 account payable with JJs Catering for a 60-day, 12%, $500 note payable. Prepare the August 15 entry for Neeley Co.
GENERAL JOURNAL
Date Description Notes Payable PR Debit 500 500 Aug. 15 Accounts Payable--JJ's Catering

Page 50
Credit

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Note Given to Extend Credit Period

On October 14, 2002, Neeley Co. pays the note and interest to JJs Catering. Prepare the October 14 entry for Neeley

$500 12% 60/360 = $10

GENERAL JOURNAL
Date Oct. 14 Notes Payable Interest Expense Cash Description PR Debit 500 10 510

Page 55
Credit

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Note Given to Borrow from Bank

Face Value Equals Amount Borrowed Cash Received Equals Face Value

Face Value Equals Amount Borrowed Plus Interest

Cash Received Is Less Than Face Value

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Face Value Equals Amount Borrowed

PROMISSORY NOTE $2,000 Face Value Sixty days after date

Exh. 9.3

Sept. 30, 2002 Date

promise to pay to the order of I National Bank

Boston, MA Two thousand and no/100------------------------------------ Dollars plus interest at the annual rate of 12%.

Janet Lee

Face Value Equals Amount Borrowed

On September 30, 2002, Janet Lee would make the following entry.
GENERAL JOURNAL
Date Sep. 30 Cash Notes Payable Description PR Debit 2,000 2,000

Page 43
Credit

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

Face Value Equals Amount Borrowed

On the maturity date of the note (Nov. 29), Janet Lee would make the following entry.
GENERAL JOURNAL
Date Description Interest Expense Cash PR Debit 2,000 40 2,040 Nov. 29 Notes Payable

Page 46
Credit

$2,000 12% 60/360 = $40

Face Value Equals Amount Borrowed plus Interest

PROMISSORY NOTE $2,040 Face Value

Exh. 9.4

Sept. 30, 2002 Date promise to pay to the order of I National Bank

Sixty days after date

Boston, MA Two thousand forty and no/100---------------------------- Dollars.

Janet Lee

Face Value Equals Amount Borrowed plus Interest

On September 30, 2002, Janet Lee received $2,000 from the bank.

Contra-liability
GENERAL JOURNAL
Date Sep. 30 Cash Discount on Notes Payable Notes Payable Description PR Debit 2,000 40 2,040

Page 43
Credit

Face Value Equals Amount Borrowed plus Interest

Partial Balance Sheet September 30, 2002

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

Net amount borrowed

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

Face Value Equals Amount Borrowed plus Interest

On the maturity date of the note (Nov. 29), Janet Lee would pay off the note and recognize interest expense.
GENERAL JOURNAL
Date Description Interest Expense Cash Discount on Notes Payable PR Debit 2,040 40 2,040 40 Nov. 29 Notes Payable

Page 46
Credit

End-of-Period Adjustment to Notes

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

Dec. 16, 2002
Note Date

Dec. 31, 2002

End of Period

Feb. 14, 2003

Maturity Date

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

End-of-Period Adjustment to Notes

On December 16, 2002, Janet Lee would make the following entry.
GENERAL JOURNAL
Date Dec. 16 Cash Notes Payable Description PR Debit 2,000 2,000

Page 43
Credit

What entry would she make on December 31, 2002?

End-of-Period Adjustment to Notes

On December 31, 2002, Janet Lee would make the following entry.
GENERAL JOURNAL
Date Description Interest Payable PR Debit 10 10 Dec. 31 Interest Expense

Page 55
Credit

$2,000 12% 15/360 = $10

End-of-Period Adjustment to Notes

On February 14, 2003, Janet Lee would make the following entry.
GENERAL JOURNAL
Date Description Interest Payable Notes Payable Cash PR Debit 30 10 2,000 2,040 Feb. 14 Interest Expense

Page 3
Credit

$2,000 12% 45/360 = $30

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Known (Determinable) Liabilities

Payroll Liabilities
34

Payroll Deductions
Gross Pay

Exh. 9.5

FICA Taxes

Medicare Taxes

Federal Income Tax

State and Local Income Taxes

Voluntary Deductions

Net Pay

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Employee FICA Taxes

FICA Taxes

Medicare Taxes

2002: 6.2% of the first $84,900 earned in the year.

2002: 1.45% of all wages earned in the year.

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

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Employee Income Tax

Federal Income Tax State and Local Income Taxes

Amounts withheld depend on the employees earnings and the tax rates. Employers owe the income tax amounts withheld from employees gross pay to the appropriate government agency.

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Employee Voluntary Deductions

Union Dues

Voluntary Deductions

Savings Accounts Pension Contributions Insurance Premiums Charities

Amounts withheld depend on the employees request. Employers owe the voluntary deductions withheld from employees gross pay to the designated agency.

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Recording Payroll Expenses and Deductions

The entry to record payroll expenses and deductions for an employee might look like this.
$4,000 .062 = $248
GENERAL JOURNAL
Date Jan. 15 Salaries Expense FICA--Social Security Tax Payable FICA--Medicare Tax Payable Employee's Federal Income Tax Payable Employee's Medical Insurance Payable Employee's Pension Contribution Payable Accrued Payroll Payable Description

$4,000 .0145 = $58

PR Debit 4,000

Page 3
Credit 248 58 420 48 100 3,126

Employer Payroll Taxes

FICA Taxes

Medicare Taxes

Federal and State Unemployment Taxes

Employers pay amounts equal to that withheld from the employees gross pay.

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Federal and State Unemployment Taxes

Federal Unemployment Tax (FUTA)
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.) 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)

Recording Employer Payroll Taxes

The entry to record the employer payroll taxes related to the employees salary recorded earlier might look like this.
FICA amounts are the same as that withheld from the employees gross pay.

SUTA: $4,000 .054 = $216

FUTA: $4,000 (.062-.054) = $32
Page 3
PR Debit 554 248 58 216 32 Credit

GENERAL JOURNAL
Date Description FICA--Social Security Tax Payable FICA--Medicare Tax Payable State Unemployment Taxes Payable Federal Unemployment Taxes Payable Jan. 15 Payroll Taxes Expense