Accounting 2001 Chapter 10 Notes Liabilities 1 Explain a current liability and identify the major types of current liabilities 2 Describe the accounting for notes payable 3 Explain the accounting for other current liabilities 4 5 Prepare the entries for the issuance of bonds and interest expense 6 Describe the entries when bonds are redeemed 7 Identify the types of bonds Identify the requirements for the financial statement presentation and analysis of liabilities Current Liabilities 1 Company expects to pay the debt from existing current assets or through the creation of other current liabilities 2 Company will pay the debt within one year or the operating cycle whichever is longer 3 Current liabilities include notes payable accounts payable unearned revenues and accrued liabilities such as taxes salaries and wages and interest payable Notes Payable Written promissory note Require the borrower to pay interest Those due within 1 year of the balance sheet date are usually classified as current liabilities Illustration First National Bank agrees to lend 100 000 on September 1 2014 if Cole Williams Co signs a 100 000 12 four month note maturing on January 1 When a company issues an interest bearing note the amount of assets it receives generally equals the note s face value Cash Notes Payable 100 000 100 000 If Cole Williams Co prepares financial statements annually it makes an adjusting entry at December 31 to recognize interest Interest Expense Interest Payable 4 000 4 000 1 Accounting 2001 Chapter 10 Notes Liabilities At maturity January 1 Cole Williams Co must pay the face value of the note plus interest It records payment as follows Notes Payable Interest Payable Cash 100 000 4 000 104 000 Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price Retailer collects tax from the customer Retailer remits the collections to the state s department of revenue Illustration The March 25 cash register readings for Cooley Grocery show sales of 10 000 and sales taxes of 600 sales tax rate of 6 the journal entry is 10 600 10 000 600 Cash Sales Revenue Sales Tax Payable Sales Tax Payable Cash Cooley Grocery rings up total receipts of 10 600 Because the amount received from the sale is equal to the sales price 100 plus 6 of sales sales tax rate of 6 the journal entry is Cash Sales Revenue Sales Tax payable 10600 10000 6000 2 Accounting 2001 Chapter 10 Notes Liabilities Unearned Revenue Revenues that are received before the company delivers goods or provides services 1 Company debits cash and credits Unearned Revenue 2 When the company earns the revenue it debits the Unearned Revenue account and credits a Revenue account Illustration Superior University sells 10 000 season football tickets at 50 each for its five game home schedule The entry for the sales of season tickets is Cash Unearned Revenue As each game is completed Superior records the earning of revenue 500 000 500 000 Unearned Revenue Service Revenue 100 000 100 000 Current Maturities of Long term Debt Portion of long term debt that comes due in the current year No adjusting entry required Illustration Wendy Construction issues a five year interest bearing 25 000 note on January 1 2013 This note specifies that each January 1 starting January 1 2014 Wendy should pay 5 000 of the note When the company prepares financial statements on December 31 2013 Total Owed 25 000 1 What amount should be reported as a current liability 5 000 2 What amount should be reported as a long term liability 20 000 3 Accounting 2001 Chapter 10 Notes Liabilities Payroll and Payroll Taxes Payable The term payroll pertains to both 1 Salaries managerial administrative and sales personnel monthly or yearly rate 2 Wages store clerks factory employees and manual laborers rate per hour Determining the payroll involves computing three amounts 1 gross earnings Total Earned 2 payroll deductions Taxes federal income tax state income tax Fica ss medicare 401K insurance 3 net pay Take Home 4 Accounting 2001 Chapter 10 Notes Liabilities o Payroll tax expense results from three taxes that governmental agencies levy on employers These taxes are FICA tax match of employee FICA Federal unemployment tax FUTA State unemployment tax SUTA 5 Accounting 2001 Chapter 10 Notes Liabilities Long term Liabilities Bonds Long term Notes Payable Leases Pensions Bonds o Bonds are a form of interest bearing notes payable issued by corporations universities and governmental agencies o Sold in small denominations usually 1 000 or multiples of 1 000 Issuing Procedures Bond certificate Issued to the investor Provides name of the company issuing bonds face value maturity date and contractual stated interest rate Face value principal due at the maturity Maturity date date final payment is due Contractual interest rate rate to determine cash interest paid generally semiannually ex 1 1 7 1 The Market Value of Bonds Bonds are issued at their Present Value Market value is a function of the three factors 1 the dollar amounts to be received 6 Accounting 2001 Chapter 10 Notes Liabilities 2 3 the length of time until the amounts are received the market rate of interest o The process of finding the present value is referred to as discounting the future amounts Use Interest Tables or Financial calculator Illustration Assume that Acropolis Company on January 1 2014 issues 100 000 of 9 bonds due in five years with interest payable annually at year end If the market rate for this bond is also 9 the market price for this bond would be 100 000 This example is a bond selling at face value also called at par or at 100 If the market rate for this bond would be higher than the contractual rate of 9 the market price of the this bond would be lower than 100 000 This is issuing at a discount Ex 97 000 selling at 97 If the market rate for this bond would be lower than the contractual rate of 9 the market price of the this bond would be higher than 100 000 This is issuing at a premium Ex 102 000 selling at 102 7 Accounting 2001 Chapter 10 Notes Liabilities o Bond prices are quoted as a percentage of face value Examples 500 000 of bonds issued at 100 would sell for 500 000 100 000 of bonds issued at 99 would sell for 99 000 200 000 of bonds issued at 101 would sell for 202 000 Bond journal entries Issuing Bonds at Par Illustration Devor Corporation issues 100 five year 10 1 000 bonds dated January 1 2014 at 100 100 of face value Interest is to paid each January 1st Devor Corp The entry to