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Accounting 2001Chapter 10 NotesLiabilities1. 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. Identify the types of bonds. 5. Prepare the entries for the issuance of bonds and interest expense.6. Describe the entries when bonds are redeemed.7. Identify the requirements for the financial statement presentation and analysis of liabilities.Current Liabilities1. 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 ascurrent 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 100,000 Notes Payable 100,000If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest.Interest Expense 4,000 Interest Payable 4,0001Accounting 2001Chapter 10 NotesLiabilitiesAt maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows.Notes Payable 100,000Interest Payable 4,000 Cash 104,000Sales 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:Cash 10,600 Sales Revenue 10,000 Sales Tax Payable 600Sales Tax PayableCashCooley 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 10600 Sales Revenue 10000 Sales Tax payable 60002Accounting 2001Chapter 10 NotesLiabilitiesUnearned RevenueRevenues 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 $500,000 Unearned Revenue $500,000As each game is completed, Superior records the earning of revenue. Unearned Revenue $100,000 Service Revenue $100,000Current 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= $25,0001. What amount should be reported as a current liability? $5,0002. What amount should be reported as a long-term liability? $20,0003Accounting 2001Chapter 10 NotesLiabilitiesPayroll and Payroll Taxes PayableThe 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 Home4Accounting 2001Chapter 10 NotesLiabilitieso 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)5Accounting 2001Chapter 10 NotesLiabilitiesLong-term Liabilities Long-term Notes Payable, Leases, Pensions, Bonds Bondso 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, generallysemiannually.- ex. 1/1 7/1The Market Value of BondsBonds are issued at their Present Value.Market value is a function of the three factors: 1. the dollar amounts to be received 6Accounting 2001Chapter 10 NotesLiabilities2. the length of time until the amounts are received 3. 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 97If 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 1027Accounting 2001Chapter 10 NotesLiabilitieso 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

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LSU ACCT 2001 - Chapter 10

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