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ADM1340 (150)
Chapter 10

ADM1340 Chapter 10: Analyzing Payables and Liabilities
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Department
Administration
Course
ADM1340
Professor
Darlene Himik
Semester
Winter

Description
ADM 1340 ― Chapter 10: Reporting and Analyzing Liabilities Current Liabilities Operating Line of Credit ● Also known as credit facility. Helps manage temporary shortfalls ● A floating interest rate is charged on whatever us used ○ Floating interest rate changes as market interest rates change and is usually based on the prime borrowing rate ● Security/Collateral is often required by banks as protection against a possible default on the loan by the borrower ○ Includes some or all of the company’s current assets, maybe even non-current assets ● LoC are normally short-term, and are repayable immediately upon bank’s request ● Line of Credits can result in bank indebtedness Sales Taxes ● Retailers collect taxes from customers and periodically (usually monthly) sends it to a federal or provincial collecting authority ● Ex) Mar 25 Cash 11 300 Sales 10 000 Sales Tax Payable 1 300 ● Sales tax payable is debited and cash is credited when sales taxes are remitted ● Tax is not expensed Property Taxes ● Charged by municipal and provincial governments ● There’s a specified rate for every $100 of the assessed value of the property ● Property taxes are for a calendar year, but the bills are issued during spring ● Ex) Receiving a $6000 bill on March 1, payable May 31: Mar 1 Property Tax Expense ($6000x(2/12)) 1 000 Property Tax Payable 1 000 ● Ex2) Payment of property taxes: May 31 Property Tax Payable 1 000 Property Tax Expense ($6000x(3/12)) 1 500 Prepaid Property Tax ($6000x(7/12)) 3 500 Cash 6 000 ● Ex3) Prepaid adjustment Dec 31 Property Tax Expense 3 500 Prepaid Property Tax 3 500 ADM 1340 ― Chapter 10: Reporting and Analyzing Liabilities ● Some companies might debit the full bill as soon as they receive the bill and do the rest of the entries at the end of the year, there are many ways to record property tax Payroll ● Employer incurs three liabilities related to employees’ salaries or wages: 1. Net pay owed to employees ■ Amount of salary or wages owed to employees ■ Salaries are paid to management personnel; expressed as a specific amount per week, biweekly, monthly, or annually ■ Wages are paid to part-time employees or employees paid on an hourly basis ■ Gross Pay → total amount of salaries or wages earned by the employee ■ Payroll only applies for a company’s employees 2. Employee payroll deductions ■ Required by law to be deducted from employees’ gross pay ■ Some deductions are optional, while others are mandatory ● Mandatory → taxes, CPP, EI ● Voluntary → health and pension plans, union dues, charitable contributions ● Net Pay → Gross pay minus employee payroll deductions 3. Employer payroll obligations ■ Employer is expected to pay several payroll costs that are charged on certain payroll deductions ● Ex) Employer’s share of CPP and EI, workers’ compensation plan ■ These deductions are known as Employee Benefits ● The employer’s share of these costs is recorded as employee benefits expense ● Payroll deductions generally occur because of the government and other parties ● Until the payroll deductions and costs are remitted to the third parties that they are collected for, they are reported as a current liability in the SFP ● Ex) The accrual of a $100 000 weekly payroll for Pepitone: Mar 7 Salaries Expense 100 000 CPP Payable 4 950 EI Payable 1 780 Income Tax Payable 20 427 United Way Payable 2 395 Unions Due Payable 1 037 Salaries Payable 69 411 ○ Gross pay is $100 000, but net pay is $69 411 ○ Employee payroll deductions are part of salaries expense, not employer payroll costs: Mar 7 Employee Benefits Expense 11 947 CPP Payable 4 950 EI Payable 2 492 Workers’ Compensation Payable 1 575 Health Insurance Benefits Payable 2 930 ADM 1340 ― Chapter 10: Reporting and Analyzing Liabilities ○ Here we assume that healthcare benefits are paid by the employer only, not shared between employer and employee ○ Pepitone must also pay its employees eventually, or on the same day: Mar 7 Salaries Payable 69 411 Cash 69 411 Short-term Notes Payable ● A promissory note that promises to repay a specified amount of money, either at a fixed date or on demand ● Often used instead of Accounts Payable because it gives the lender a written documentation of the obligation, which is useful when legal action is required ● Also issued to meet short-term financing needs ● Can be interest bearing, with the interest being due monthly or at maturity ● Can use a floating interest rate, but it’s better to use a fixed interest rate ● AP vs NP: Accounts Payable Notes Payable Informal promise to pay Written promise to pay; has a stronger legal claim Arises only from credit purchases Can be used FOR credit purchases; which extends the amounts due date Usually due in 30 Days Can extend for longer periods (A few months or a few years) Incurs interest only when the amount is overdue Incurs interest for its entire duration ● Ex)HSBC Lends $100 000 to Williams Ltd. Due in 4 months on July 1 with 6% interest. Payable at maturity Mar 1 Cash 100 000 Bank Loan Payable 100 000 Mar 31 Interest Expense 500 Interest Payable 500 Maturity: July 1 Interest Expense 1 500 Interest Payable 1 500 July 1 Bank Loan Payable 100 000 Interest Payable 2 000 Cash 102 000 Current Maturities of Non-Current Debt ADM 1340 ― Chapter 10: Reporting and Analyzing Liabilities ● Recall: The partial mortgage payable thing we did earlier this year ● “Current Portion of Long-term Debt” ● Not necessary to do adjusting entries to recognize it, same for having a separate account for the current portion due ● Just recognize the current portion when the the SFP is prepared Provisions and Contingent Liabilities ● Liabilities can be said to be certain (definitely determinable) or uncertain ● Certain Liabilities → Those with a known payee, due date, and amount payable ○ Ex) Accounts Payable, Sales tax Payable, Property Tax Payable, Salaries Payable, Notes Payable, and more ●
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