Class Notes (839,574)
United States (326,034)
Accounting (82)
ACCT 1201 (41)

Chapter 9 - Outline

12 Pages

Course Code
ACCT 1201
Osborne Jackson

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ACCT1201 FALL 2013 Chapter 9 Reporting and Interpreting Liabilities Liabilities: 1 - Creditors’ claim on total assets; 1 - Must be settled in the future by transfer of assets or services (unearned revenues) 1 - Are classified as current and long-term liabilities A. Accounting for Current Liabilities: Current Liabilities: short-term obligations that will be paid within the current operating cycle or one year, whichever is longer. a. Accounts Payable (A/P) 0 • Accounts payable is the obligation to pay suppliers in the normal course of business for 1 the purchase of goods and services. (no interest because paid within a year) 2 2 • Interest does not normally accrue on A/P if paid within the credit period. Accounts Payable Turnover Ratio: Cost of Goods Sold÷ Average Accounts Payable Average Age of Payables: 365 ÷ Accounts Payable Turnover Ratio Example: Apple Computer 2006 data: Cost of goods sold: 13717 m; Beginning A/P: 6471m, Ending A/P: 3484m. Compute Apple’ A/P turnover ratio and average age of payables: 13717/4977.5 = 2.76 365/2.76 = 132.25 (need to compare) b. Payroll and Payroll taxes payable 1 i. Wages and salaries owed to employees; ii. Employee income taxes withheld from employees’ gross wages, to be remitted to the government at a specified time iii. Social security taxes and Medicare taxes (FICA) withheld from employees’ gross wages based on a percentage, to be remitted to the government at a specified time ACCT1201 FALL 2013 iv. FICA taxes paid by employer for having employees: match the amount withheld from employees’ gross wages. 9-8 Payroll Taxes Gross Pay Net Pay Less Deductions: Medicare Federal State and Voluntary Social Local Income Deductions Security Tax Income Tax Taxes Tax SOCIAL SEC  FICA & Medicare (Both paid by employer and employee) INCOME TAX  Federal income tax (paid by employer) & State Income Tax (paid by employee) Net pay = gross pay – all deductions Example: Davis L. Company completed the salary and wage payroll for March 2012. The payroll provided the following details: Gross Pay: $230,000 Employee income taxes withheld 46,000 Social Security 14,260 Medical 1,840 Payroll taxes (*Social Security, 17,595 Medical and Unemployment) What is the company’s total payroll and payroll tax expense? What is the net pay received by the employees? JOURNAL ENTRY (RECORD FOR GROSS PAY): Wages Expense 230,000 Income Tax Withheld 46,000 FICA Tax Payable (social security) 14,260 Cash (NET PAY-amount of cash to deposit) 169,740 ACCT1201 FALL 2013 ACCT1201 FALL 2013 c. Current Maturities of Long term debt: when the payoff of long-term debt is due in the next accounting period, the maturing amount is reclassified as a current liability. Example: Carly Corporation signed a note payable of $120,000 on January 1, 2012. The note is due on November 1, 2014. Show how this note payable should be reported on Ellen’s balance sheet on December 31, 2012 and on December 31, 2013. d. Contingent Liabilities: Some recorded liabilities are based on estimates because the exact amount will not be known until a future date. 0 1) Warranties on products sold 1 a. Warranties create future service and/or replacement obligations. b. The amount of the recorded liability is the estimated repair cost or replacement cost of goods under warranty. c. The expense and corresponding liability should be reported in the accounting period when the products under warranty are sold (the matching principle). 2 2) Environmental obligations 3) Litigation Whether and where to disclose contingent liabilities Probable Reasonably Possible Estimate Not estimable Example: Acme Corporation estimates that product warranties offered on products sold in 2012 are approximately $100,000. The company has two lawsuits in the year. They have lost the first lawsuit and they are in the final stages of negotiation. The estimated payment to the plaintiff is $450,000. The second lawsuit is pending, the chance of losing this lawsuit is high but the cost of the lawsuit is not estimable at the point. e. Unearned Revenues Katie B. Skin Care received $1200 from a client on May 20 for 10 facial services to be provided every other week. Give the journal entry on May 20. ACCT1201 FALL 2013 Liquidity Analysis: 1 - Working Capital: 1 - Current Ratio: 1 - Quick Ratio (Acid-test Ratio): B. Long-term Liabilities: 1. Long-term Notes Payable: Companies may borrow long-term debt from financial organizations such as banks, insurance companies. 1 - Obligations in the form of written notes; - Often requires payment of interest. Example 1: 1. On January 1, 2012, John Co. borrowed $2,000 from the bank by signing a 2-year note with a 5% interest. On December 31, 2013, John Co. paid the face value (the principal) and the interest. Record related journal entries. 2. Bonds Payable: Companies may also borrow money from the public by issuing bonds. After bonds are issued, they may be traded in established markets. Bonds are also evidenced by written payment promises. 1 − Issuing companies usually need to pay interest over the life of the bond (annually or 2 semiannually). − Issuing companies need to pay the face value of the bond when the bond matures. C. Present Value Concepts Present Value: If you know that you will receive a certain amount of money on a certain date in the future, what is its equivalent value right now? 1. Present Value of a Single Amount: The worth to you today of receiving a certain amount at some time in the future. It is a future amount discounted for compound interest. 1 Present Value (PV) of a Single Amount Single = n X single amount (1+ i) i: interest rate n: number of interest periods ACCT1201 FALL 2013 Examples: Let’s say you want to buy a house next year, and you need $10,000 for a down payment. How much do you need to put into a savings account right now so that you will have $10,000 in one year? Assume that the savings account will pay 8% interest, compounded annually. You bought a computer from Circuit City on January 1, 2012. The sales price of the computer is $1800. Circuit City had a promotion at the time “buy now and no payment until January 2014”! Assuming the interest rate at the time is 5%, what is the actual cost of this computer to you? You want to start your own business after you graduate and you would like to have 15,000 in your savings account 3 years from now. If the savings account pays 6% annual interest, compounding semiannually, how much do you need to put into the savings account now? 2. Present Value of an Annuity An annuity is a series of equal dollar amounts to be paid or received periodically. An annuity is characterized by: 1 1. An equal payment (in amount) each interest period. 2. Interest periods are of equal length 1− 1 Present Value (PV) of an Annuity = 1+ i)n X periodic payment
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