Accounting … Chapter 11

 Current liabilities and payroll accounting 

Liabilities: -

 is probable payment of assets or services that the company is presently

obligated to make as a result of past transaction or event

D efining liabilities

the com pany

Because of a has for future
past event obligation sacrifices

Past present future

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Uncertainty in liabilities:-

A) Uncertainty in whom to pay.

B) Uncertainty In when to pay.
C) Uncertainty in how much to pay.

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Accounting … Chapter 11
Types of current liabilities

Known liabilities estimated liabilities contingent liabilities

a) Known (determinable ) liabilities :-

There is no certainty
1. Account payable
2. Sales taxes payable
3. Unearned revenue
4. Short term notes payable
5. Payroll payable

1. Account payable

 Example :-
Matrix Company purchase land for $ 200,000 on credit to record
this transaction

Land 200,000
Account payable 200,000

2. Sales tax payable

The seller collects sales tax from the customer and then returns
these collections to tax agency

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Accounting … Chapter 11
 Example :-
On July 17, 2008 matrix company sold materials for $ 10,000, sales
tax rate are 6 %
 To record this transaction:

Cash 10,600
sales 10,000
(6% x 10000) sales tax payable 600

3. Unearned revenue
Cash receive in advance of providing products and services and
record as liabilities before revenue is earned

 Example :-
Assume that M university sells 10,000 season football tickets at $
50 each for five-games as total
 To record this transaction

Cash ( 10,000 x 50) 500,000

Unearned revenue 500,000

 On the first game the entry would be :

Unearned revenue 100,000

1 100,000
( 5 x 500,000) football ticket revenue

 Example :-
On October 11 Hillary Company received $ 5,000 in advance for
Auditing business
 The entry on October 11 would be:

Cash 5,000
unearned revenue 5,000

 On October 20 after providing the service would be :

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Accounting … Chapter 11
unearned revenue 5,000
service revenue 5,000

4. Short- term notes payable

Notes payable  a written promise to pay a specified amount on
a definite future date within one year

 Example :-
On March 1, 2007 Cole Williams Company borrowed $ 100,000
from first national bank and signs a ($ 100,000, 12 %, 4 –month note)
 The entry on March 1 would be:

Cash 100,000
notes payable 100,000

 The entry to record the interest :

4
(The interest = (100,000 x 12 % x 12 ) = $ 4,000)

Interest expense 4,000

interest payable 4,000

 The entry on June 30 would be:

(Payment of the note and interest)

Notes payable 100,000

interest payable 4,000
$ 104,000
cash

 Payment of the note alone :

Notes payable 100,000

Cash 100,000

 Payment of the interest alone :

Interest payable 4,000

Cash 4,000

 Example :-

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Accounting … Chapter 11
On April 1, 2007 Rodic Company borrowed $ 40,000 from Golden
bank at 10 % interest, the interest due in 90 days (June 30, 2007)
Prepare the appropriate entries on June 30, 2007 and April 1, 2007
 April 1 entry

Cash 40,000
Notes payable 40,000

 June 30 entry
90
The interest would be (40,000 x 10 % x 360 ) = $ 1,000

Notes payable 40,000

Interest expense 1,000
41,000
Cash
Example:
Andy clayton borrowed $ 16,000 on Dec.16, 2008 by signing a 12
% , 60 – Days note payable.
Prepare entries at Dec. 16, Dec, 31, Feb. 14, 2009
Entry at Dec. 16:

Cash 16,000
Notes payable 16,000

Dec.31 entry:

Interest expense 80
15
( 16,000 x 12 % x 360 ) 80
interest payable

Feb. 14,2009 entries :

Notes payable 16,000

interest payable 80
interest expense 240
45 16,320
( 16000 x 12 % x 360 )

cash

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Accounting … Chapter 11
Note Given to extend credit period:
Example: On August 1, 2007, matrix, Inc. asked carter, co to accept a 90-days,
12% notes to replace its existing $ 5,000 account payable to carter. Matrix
would make the following entry at Aug 1:

Account payable $ 5,000

notes payable $ 5,000

In October 30,2007 matrix,inc .pays the note plus interest to carter :

Notes payable $ 5,000

interest expense 150
90
(5,000 x 12 % x 360 ) $ 5,150
Cash
Example :On December 1,2009 Henry company borrowed $ 9,000 cash from
El-Ahly Bank on a 90-days , 10 % note payable.
1- Prepare Henry’s general journal entry to record the issuance of the note
payable.
2- Prepare Henry’s general journal entry to record accrued interest due at
Dec.31,2009
3- Prepare Henry’s general journal entry to record the payment of the note
on march 1,2010

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Accounting … Chapter 11
Solve:
1- Dec 1, 2009

Cash 9,000
notes payable 9,000

2- Dec. 31,2009

Interest expense 75
30 75
(9,000 x 10 % x 360 ) interest payable

3- Mar.1,2010 :

Notes payable 9,000

interest payable 75
60 150
interest expense (90,000 x 10 % x 360 9,225
)
cash

 Estimated Liabilities
 An estimated liability is a known obligation of an uncertain amount but
one that can be reasonably estimated.
Examples of estimated liabilities:
a) Warranty liabilities
b) Health and pension benefits
c) Vacation benefits
d) Bonus plans

A) Warranty liabilities :
Seller’s obligation to replace or correct a product (or service) that fails to
perform as expected within a specified period. To conform with the

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Accounting … Chapter 11
matching principle, the seller reports expected warranty expense in the
period when revenue from the sale is reported

Example:

A dealer sells a car for $ 32,000 on December 1, 2007 with a warranty

for parts and labor for 12 months, or 12,000 miles. The dealership experience
an average warranty cost of 3 % of the selling price of each car.

Dec. 1 entry :

Warranty expense 960

On
( 32,000 x 3 % )
960
Estimated warranty liability
February 15, 2008, parts of $200 and labor of $250 covered under Warranty
were incurred

February 15 entry:

Estimated warranty liability 450

Auto parts inventory 200
salaries payable 250
Example:

1- Suppose that the dealer sells cars for $ 20,000 on Jan. 1,2008 with a
maximum of one year or 1,200 miles warranty covering parts , the
dealers experience show that warranty expense estimated to be 5 %
of sales .
2- A customer return the car for warranty repairs on June 15,2008 the
dealer performed this repairs by replacing parts costing $ 400
prepare Journal entries .

Solve:

1- . warranty expense 1,000

( 5 % x 20,000 )
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1,000
Estimated
Accounting … Chapter 11

2.
Estimated liability warranty 400
Parts inventory 400

 The balance of estimated warranty liability is :

= 1000 – 400 = $ 600

Example:

Beta Company sells personal laptops for $ 4,000 each. The price includes

a two years warranty. During the current year, the company sells 500

laptops. On the basis of past experience, the warranty costs are

estimated to be $ 300 per laptop. The actual warranty costs (paid in

cash) by the company during the current year were $ 80,000.

Prepare general journal entries to record

a) Estimated warranty expense

b) Warranty repairs costs during current year

Solve:

a)

warranty expense ( 500 x 300 ) 150,000

Estimated warranty liability 150,000

b) .

Estimated warranty liabilities 80,000

cash 80,000

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Accounting … Chapter 11

Example:

Fady company sells mobile phones with 9-month warranty. In March the
company sold 100,000 mobile at $ 2,000 each, and 3% of mobiles were turned
in for repairs during March. The total repairs amount to $ 170,000 costs from
mobile parts inventory. It is estimated that 3% of all units sold will need repairs
under warranty at an estimated cost of $ 300 per units.

Prepare the journal entries to record:

a) Estimated warranty expense for march
b) Warranty repair cost for March.

Solve:

March 31 entries:

a) .

warranty expense 900,000

( 100,000 x 3 % x 300 )
900,000
Estimated warranty liability
b) .

Estimated warranty liability 170,000

mobile parts inventory 170,000
3)

If the estimated warranty liabilities account had a credit balance of $ 70,000 on

March 1, what is the account balance at March 31?

Solve:

70,000 + 900,000 – 170,000 = $ 800,000

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Accounting … Chapter 11

B) Health and pension benefits :-

Employer expenses for pensions or medical, dental, life and disability
insurance.

Example:
Assume an employer agrees to pay an amount for medical insurance
equal to $ 8,000, and contribute an additional 10 % of the employees's
$ 120,000 gross salary to a retirement program. Record this transaction.

Employee benefits expense 20,000

Employee medical insurance payable 8,000
Employee retirement program payable 12,000
(120,000 x 10 %)

Example:
An employer has an employee benefits package that includes employer-
paid retirement program and employer-paid health insurance. During March,
the employer-paid health insurance equaled $ 9,000 and the amount the
employer agreed to contribute to the employee retirement program an
amount equal to 10 % of the employee's $ 200,000 gross salaries. Prepare the
general journal entry to record these employee benefits.

Solve:

Employee benefits expense 29,000

Employee health insurance payable 9,000
Employee retirement program payable 20,000
(200,000 x 10 %)

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Accounting … Chapter 11
C) Vacation benefits:-
Employer expenses for paid vacation by employees.

Example:
Assume an employee earns $ 62,400 per year and earns two weeks of
paid vacation each year. Prepare the general journal entry to record employee
weekly vacation.

$ 62,400 ÷ 52 weeks = $ 1,200

$ 62,400 ÷ 50 weeks = $ 1,248

 Weekly vacation benefits = $ 48

vacation benefits expense 48

vacation benefits payable 48

D) Bonus plans :-
Many bonus paid to employees are based on reported net income.

Example:
Assume the annual yearly bonus to the store manager is equal to 10 % of
the company's annual net income minus the bonus.The store earned $ 100,000
net incomes this year compute the amount of bonus and record it into journal
entry.

a) B = 10 % x ( $ 100,000 – B)

B = $ 10,000 – 0.1 B

1.1B = $ 10,000
$ 10,000
B= 1.1
= $ 9,091
Bonus = $ 9,091
b) .

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Accounting … Chapter 11
Employee bonus expense 9,091
bonus payable 9,091
Example:
ABC Company offers to its employees a bonus equal to 3 % of company's
net income after deducting the bonus. The estimated net income for the year
is expected to be $ 900,000.prepare the general journal entry to record the
employee bonus plan expense.

Solve:
B = 3 % x ($ 900,000 – B)

B = $ 27,000 – 0.03 B

1. 03B = $ 27,000
27,000
B = 1.03 = $ 26,213.6
So, Bonus = $ 26,213.6
 The entry would be:

Employee bonus expense 26,213.6

bonus payable 26,213.6

Contingent liabilities
Potential obligation that depend on a future event arising out of a past
transaction or event.

Estimated Record liability

Probable Non estimated
Contingent
Reasonably possible Disclose liability in
liabilities
notes
Remote No disclosure

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Accounting … Chapter 11
Reasonable possible contingent liabilities

Potential legal claims Debt guarantees

Example:
The following legal claims exist for Mortada Corporation; identify the
accounting treatment for each claim.
A) Mortada estimates that pending law suit could result in damage of
$ 500,000 and it is reasonably possible to lose the case.
B) Mortada faces a probable loss on a pending law suit the amount is not
reasonably estimated.
C) Mortada estimated damage in case at $ 300,000 with high probability of
losing the case.

Solve:
A) .

No entry

B) .

No entry

C) .

Loss from legal damage 300,000

Liability of legal damage 300,000

Example:
Bakry Company has two cases:

1. Case (A) legal case against company (M) that is waiting for judgment In
the court, this loss is probable but is not estimated.

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Accounting … Chapter 11
2. Case (B) probability of losing a case is 70 % and reasonably estimated
amount of $ 60,000 to company (H)
Record these transactions.

Solve:
1. .

No entry

2. .

Loss from damage 60,000

Liability due to company (H) 60,000

Times interest earned

The ratio that show the ability of the company to pay interest expense.

income before interest ∧income tax

Times interest earned = interest expense

Note that:-
If income before interest and taxes varies greatly from year to year, fixed
interest charges can increase the risk that an owner will not earn a positive
return and be unable to pay interest charges.

Example:
Assume that income before interest and tax is $ 180,000 and interest
expense is $ 60,000 compute time's interest earned.

Solve:
$ 18,0000
Times interest earned = $ 60,000 = 3 times

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