ACCT1201 FALL 2013
Reporting and Interpreting 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 • 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
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.
Medicare Federal State and Voluntary
Social Local Income Deductions
Security Tax Income Tax Taxes
SOCIAL SEC FICA & Medicare (Both paid by employer and employee)
INCOME TAX Federal income tax (paid by employer) & State Income Tax (paid by
Net pay = gross pay – all deductions
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
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
Whether and where to disclose contingent liabilities
Probable Reasonably Possible
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
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.
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
1 − Issuing companies usually need to pay interest over the life of the bond (annually or
− 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.
Present Value (PV) of a Single Amount Single = n X single amount
i: interest rate
n: number of interest periods ACCT1201 FALL 2013
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
Present Value (PV) of an Annuity = 1+ i)n X periodic payment