Chapter 9 Reporting and Analyzing Current Liabilities Characteristics of Liabilities A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events Current liabilities short term liabilities are obligations due within one year or the company s operating cycle whichever is longer expected to be paid using current assets or by creating other current liabilities accounts payable short term notes payable wages payable warranty liabilities lease liabilities taxes payable unearned revenues Long term liabilities when a companies obligations are not expected to be paid within the longer of one year or the company s operating cycle long term notes payable warranty liabilities lease liabilities bonds payable Sometimes there is uncertainty in whom to pay uncertainty in when to pay legal firm can accept fees in advance from a client who plans to use the firm s services in the future uncertainty in how much to pay a company using electrical power is billed only after the meter has been read Known Liabilities Known liabilities definitely determinable liabilities set by agreements contracts laws are measurable little uncertainity o Accounts payable o Sales taxes payable Sellers collect taxes from their customers and since sellers currently owe these taxes to the government it is considered a current liability Debit cash 6 300 Credit sales 6 000 Credit sales taxes payable 300 o Unearned revenues Airline ticket sales magazine subscriptions construction projects hotel reservations custom orders sporting events concerts o Short term notes payable is 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 Notes given to extend credit period a company can replace an account payable with a note payable Debit accounts payable Credit cash Credit notes payable When the note comes due o Debit Notes payable o Debit interest expense o Credit cash o Payroll liabilities Note given to borrow from bank Debit cash Credit notes payable When principle interest are paid by the borrower o Debit notes payable o Debit interest expense o Credit cash End of period interest adjustment Debit interest expense for the 15 60 days Credit interest payable When the note actually matures o Debit interest expense the remaining 45 days o Debit interest payable o Debit note payable o Credit cash Gross pay is the total compensation an employee earns including wages salaries commissions bonuses and any compensation earned before deductions such as taxes Net pay take home pay is gross pay less all deductions Payroll deductions withholdings are amounts withheld from an employee s gross pay either required or voluntary Required deductions result from laws income taxes social security taxes Voluntary deductions pension health contributions health life insurance premiums union dues charitable giving The employer records payroll deductions as current liabilities until these amounts are transmitted Major payroll deductions EMPLOYEE Employee Federal Insurance Contributions Act FICA taxes retirement disability and survivorship social security AND medical medicare until these taxes are sent to the Internal Revenue Service it is a liability to the employer Employee income tax Employee voluntary deductions Debit salaries expense 2000 the actual salary Credit FICA 124 FICA 29 federal income tax payable 213 medical insurance payable 85 union dues payable 25 salaries payable 1524 salaries payable is what the employee will actually take home EMPLOYER payroll taxes Employer FICA tax credited to the same FICA taxes payable accounts used to record those withheld from employees Federal and state unemployment taxes FUTA SUTA a payroll tax on employers helps states support their unemployment insurance programs o Merit rating reflects a company s stability or instability in employing workers a good rating mreflects stability pay lower SUTA Debit payroll taxes expense 277 credit FICA 124 credit FICA 29 credit state unemployment taxes payable 108 credit federal unemployment taxes payable 16 o Multi period know liabilities Current portion of long term debt refers to that part of long term debt due within one year or the operating cycle whichever is longer Long term debt is reported under long term liabilities but the current portion due is reported under current liabilities Estimated Liabilities Estimated liability is a known obligation that is of an uncertain amount but that can be reasonably estimated employee benefits such as pensions healthcare vacation pay property taxes certain contracts to provide future services Health and pension benefits o Employee benefits medical dental life and disability insurance o Debit employee benefit expense o Credit employee medical insurance payable o Credit employee retirement program payable Vacation benefits o Employee is paid 20 800 for 52 weeks 20 800 52 400 expense to employer is 400 o When an employee goes on vacation for 2 weeks but gets paid 20 800 50 416 expense to employer is 416 o 416 400 16 o Debit vacation benefits expense 16 o Credit vacation benefits payable 16 Bonus plans o Debit employee bonus expense o Credit bonus payable o Company expected to have net income of 210 000 bonus is 5 of company s net income 05 210 000 B Warranty liabilities o Warranty is a seller s obligation to replace or correct a product service that fails to perform as expected within a specified period o Debit warranty expense 640 o Credit estimated warranty liability 640 o Car 16 000 experience shows that warranty expense averages 4 16 000 04 640 o Person brings back car for 200 dollars of replacing parts Debit estimated warranty liability 200 Credit auto parts inventory 200 Multi period estimated liabilities o Pension liabilities depending on when you retire health benefits warranties Contingent Liabilities Contingent liability is a potential obligation that depends on a future event arising from a past transaction or event pending lawsuit Accounting for contingent liabilities depends on the likelihood that a future event will occur and the ability to estimate the future amount owed if the event occurs 1 Future event is probable the amount owed can be reasonably estimated 2 Future event is reasonably possible disclose info in notes motivated by record amount as liability full disclosure principle 3 Future event is remote do not record or disclose in note
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