ACA240 Chapter2 Liabilities

Associate Diploma in Accounting
Intermediate Accounting– ACA240
Chapter 2
Khalid M. Adam 2020-2021/S2

Chapter2- Liabilities
Defining of Liabilities
A liability is a
present
obligation for a
probable future
payment as a
result of past
transactions.
Common examples of liabilities

Accounts payable.
Short/long term notes payable.
Wages payable.
Warranty liabilities.
Lease liabilities.
Taxes payable.
Unearned revenues.
Accounting for liabilities

Accounting for liabilities involves three
important questions:
Whom How
When
to pay? much
to pay?
to pay?
Known liabilities
liabilities with a
little uncertainty
(or have a certain
answers for
whom, when and
how much to
pay)
Chapter2- Liabilities – Known Liabilities
1- Accounts Payable
Amounts owed to suppliers for
products or service.
2- Sales Tax Payable

Sales taxes are stated as a percent % of
selling prices, this tax collected from
customers and paid to the government.
Sales Taxes = Sales x Tax Percent %
Debit Credit
Date Account
$ $
Cash xxx
Sales xxx
Sales tax payable xxx
2- Sales Tax Payable – Example (1)

On August 31 Home Co. sells materials for $6,000
cash that are subject to 5% sales tax. Calculate the
sales tax and show adjustment entry on August 31.
Answers:
Sales Taxes = $6,000 X 5% = $300

Debit Credit
Date Account
$ $
Cash 6,300
Aug. 31 Sales 6,000
Sales tax payable 300
3- Unearned Revenues (or deferred revenues)

Amounts received in advance from
customers for future products or services,
like annual subscription in magazine.
4- Short-Term notes payable

A written promise to pay specific amount on
specific future date within one year. Notes
payable can be transferred from someone to
another and the most notes payable paying
interests to the notes holders.
4- Short-Term notes payable

Debit Credit
Date Account
$ $
Cash xxx
Borrowing date
Notes Payable xxx
Interest = Notes payable x Interest rate % x Days/360
Debit Credit
Date Account
$ $
Notes Payable xxx
Repayment date Interest expenses xxx
Cash xxx
4- Short-Term notes payable – Example (2)

Assume that a company needs $2,000 for a
project and borrows this money from a bank, the
note includes the following statement: “I promise
to pay $2,000 plus annual interest at 12% within
60 days after September 30”.
Required: Journal Entries:
1. For borrowing note payable at Sept 30, and,
2. For repayment of notes and interest at Nov 30
(after 60 days).
4- Short-Term notes payable - example

Debit Credit
Date Account
$ $
Cash 2,000
Sept. 30
Notes Payable 2,000
Interest = $2,000 x 12% x 60/360 = 40

Debit Credit
Date Account
$ $
Notes Payable 2,000
Nov. 30 Interest expenses 40
Cash 2,040
Chapter 2 – Liabilities
Review Questions
1) What are the three important

questions concerning the known
liabilities?
2) What is the difference between a
current and long-term liability?
Chapter 2 – Liabilities – Review Questions
Review Questions
3) Samsung Co. sells product for $5,000 each on
September 30. The sales tax law requires
Samsung to collect 4% sales tax on every
dollar of product sold.
Required: journal entries to record:
A. The $5,000 sale and its applicable sales tax.
B. The payment of 4% tax on this sale to the
government.
3) Samsung Co. computing sells product for $5,000 each on September 30. The sales tax
law requires Samsung to collect 4% sales tax on every dollar of product sold.
A. The $5,000 sale and its applicable sales tax.
B. The payment of 4% tax on this sale to the government on October 15.
Debit Credit
Date Account
$ $
Sept 30
Debit Credit
Date Account
$ $
Oct. 15
Review Questions
4) Perfect systems borrow $94,000 cash on

May 15, 2011, by signing a 90-day, 10%
notes.
A. Issuance of the note.
B. Payment of the note at maturity
4) Perfect systems borrow $94,000 cash on May 15, 2011, by signing a 90-
day, 10% notes.
A. Issuance of the note.
B. Payment of the note at maturity
Date Account Debit Credit
May 15
Aug. 15
Estimated liabilities
An estimated liability is a known

obligation that is of an uncertain
amount (how much to pay?) but
that can be reasonably estimated.
Estimated liabilities
Common examples
of estimated
liabilities:
Employee benefits Vacation pay Warranties

Estimated liabilities – Employee Benefit

Many companies provide employee benefits
beyond salaries such as:
Pension plan: are agreements by employers
to provide benefits (Payments) to employees
after retirement.
Health care: an employer often pays all or
part of medical, dental, life and disability
insurance.
Estimated liabilities – Employee Benefit

Example (1):
Assume that and employer agrees to pay:
An amount for medical insurance equal to $8,000 and
Contribute an additional 10% of the employees' $120,000 gross salary to
retirement program.
Required: The entry to record these accrued employee benefits:
Answer:
Employee Medical = $8,000
Employee retirement = 120,000 x 10% = $12,000

Employee Benefit Expense 20,000
Dec. 31 Employee Medical Insurance Payable 8,000
Employee Retirement Program Payable 12,000
Estimated liabilities – Vacation Pay
Also called paid

absences, many
employers offer
paid vacation
benefits.

Example (2): to illustrate, assume that
employee earn 2 weeks' vacation per year and
his annual salary is $20,800 Required:
1. Calculate cash paid weekly to employee.
2. Calculate the cost per week actually
worked.
3. Prepare weekly adjustment to record
vacation pay.


Example: to illustrate, assume that employees earn 2 weeks' vacation per year and his annual
salary is $20,800 (for 52 weeks). Required:
2. Calculate the cost per week actually worked.
3. Prepare weekly adjustment to record vacation pay.
a) Cash paid weekly to employee:

Important note: employees paid for 52 weeks but
work only for 50 weeks
Cash paid weekly = Annual salary
Total weeks in a year (52 weeks)
= $20,800/52 weeks = $400

Example (2): to illustrate, assume that employees earn 2 weeks' vacation per year and his
annual salary is $20,800 (for 52 weeks). Required:
b) Cost per week

Cost per week = Annual salary
weeks actually worked (50 weeks)
= $20,800/ 50 weeks = $416


Example: to illustrate, assume that employees earn 2 weeks' vacation per year and his annual
salary is $20,800 (for 52 weeks). Required:
c) Weekly adjustment to record vacation pay:

The $16 difference between these two amounts
($416-$400) is recorded weekly as follows:

Vacation Pay Expense 16
Jan. 07
Vacation Pay Payable 16
Review Questions
1) What is an estimated liability? known obligation
that is of an uncertain amount, but amount can be
reasonably estimated.
2) Chester Co.'s pays $192,000 in total employee
salaries for 52 weeks but its employees work only 48
weeks.
Required:
a) Calculate cash paid weekly to employee =
b) Calculate the cost per week actually worked.
c) Prepare weekly adjustment to record vacation pay.
Chapter2- Liabilities - Review Questions
2) Chester Co.'s pays $192,000 in total employee salaries for 52 weeks but
its employees work only 48 weeks.
Required:
3. Prepare weekly adjustment to record vacation benefits.
1) Cash paid weekly to employee:

= $192,000/52 weeks = $3,692
2) Calculate the cost per week actually worked.
= $192,000/48 weeks = $4,000
Diff 308

Vacation pay Expense 308
Vacation pay Payable 308
3– Warranty Liabilities
A warranty is a seller's obligation to
replace or correct a product (or service)
that fails to perform as expected within a
specified period.
Estimated liabilities – Warranty Liabilities
The seller records the expected warranty

expense in the period when sales
happened.
The seller reports this warranty
obligation as a liability.

Example (3):
a dealer sells a new car for $16,000 on December 1, 2005,
with a maximum one year or 12,000-mile warranty
covering parts. This dealer's experience shows that
warranty expense average about 4% of a car's selling price.
Required:
1. Journal entry to record the warranty expense and
estimated warranty liability related to this sale.
2. Suppose the customer return the car for warranty
repairs on January 9, 2006 and the dealer performs this
work by replacing parts costing $200. Required journal
entry for repairing.

a) Journal entry at Dec 1, 2005 (warranty = $16,000 × 4% = $640)

Dec. 1, Warranty Expense 640
2005 Warranty t Payable 640
b) The entry to replacing parts:

Jan. 9, Warranty Payable 200
2006 Inventory 200
Note: Warranty payable balance after this entry= $640-$200 = $440

Review Questions
3) On September 11, 2010, Home store sells a
mower for $400 with a one-year warranty that
covers part. Warrant expense is estimated at 5% of
sales.
On July 24, 2011, the mower is brought on for
repairs covered under the warranty requiring $35
in materials taken from the repair parts inventory.
Required: Prepare journal entry to record warranty
expense and entry to record warranty repairs.
Review Questions
3) On September 11, 2010, Home store sells a mower for $400 with a one-year
warranty that covers part. Warrant expense is estimated at 5% of sales.
On July 24, 2011, the mower is brought on for repairs covered under the warranty
requiring $35 in materials taken from the repair parts inventory.
Required: Prepare journal entry to record warranty expense and entry to record
warranty repairs.
Journal entry at Sept. 11, 2011 (warranty = $400 × 5% = $20)

Sept. 11, Warranty Expense 20
2010 Warranty Payable 20
The entry to replacing parts:

Warranty Payable 20
July 24,
Warranty expense 15
2011
Inventory 35
Chapter2- Liabilities Review Questions
4) Chang Co. sold a copier for $5,500 cash with a two-year parts
warranty to a customer on August 1, 2011. Based on experience, Chang
expects to incur warranty costs equal to 4% from sales. It records
warranty expense with an adjusting entry at the end of each year. On
November 1, 2012, the copier requires on-site repairs. The repairs cost
$199 for spare parts taken from the inventory. These are the only
repairs required in 2012 for this copier.
Required:
a) Prepare journal entries to record:
1) Warranty expense on August 1, 2011.
2) The repairs that occur in November 2012.
b) How much a warranty expense for 2011?
c) How much is the estimated warranty payable as at Dec 2011?
d) How much a warranty expense for 2012?
e) How much is the estimated warranty payable as at Dec 2012?
4) Chang Co. sold a copier for $5,500 cash with a two-year parts warranty to a customer
on August 1, 2011. Based on experience, Chang expects to incur warranty costs equal to
4% from sales. It records warranty expense with an adjusting entry at the end of each
year. On November 1, 2012, the copier requires on-site repairs. The repairs cost $199 for
spare parts taken from the inventory. These are the only repairs required in 2012 for this
copier.
a) 1- Journal entry at Aug. 1, 2011 (warranty expense = $5,500 × 4% = $220)

Aug. 1, Warranty Expense 220
2011 Warranty Payable 220
a) 2-The entry of repairs in November 1, 2012:

Nov 1, Warranty Payable 199
2012 Inventory 199
4. How much a warranty expense for 2011?

(220)
5. How much is the estimated warranty
payable as at Dec 2011? (220)
6. How much a warranty expense for 2012?
(Zero)
7. How much is the estimated warranty
payable as at Dec 2012? 21 (220 - 199)
Contingent liabilities
Contingent liability is a
potential (or possible)
obligation that
depends on a future
event arising from a
past transaction, such
as a court cases (or
lawsuit).
Contingent liabilities
Examples of contingent liabilities
Potential legal claims
Debit guarantees
Environmental damages
Possible tax assessments
Insurance losses
Government investigations
Long-term liabilities
The main examples of the

long-term liabilities are:
•Bonds.
•Long term Notes (loan from bank)
Bond
A bond is its
issuer's written
promise to pay
an amount
identified as the
PAR value of the
bond with
interest.
Bond PAR value
What is PAR value?

PAR value or face value of a bond is :
1) written on the bond.
2) PAR value used when calculates
bond interest and
3) Repayment on maturity date.
Bond advantages & dis-advantages
Advantages Disadvantages
of Bonds: of Bonds:
Not affect
owner Payment of
control. Interest and
PAR value
Interest is
tax
deductible.
Bond issuance
Bonds can issue:

1. At PAR value.
2. Above PAR value
(Premium).
3. Below PAR value
(discount).
1- Issuing Bonds at PAR

Example (1):
ABC Company receives authorization to issue $800,000
of 9%, 20-year bonds dated January 1, 2005, that
mature on December 31, 2024, and paid interest
semiannually (every 6 months) on each June 30 and
December 31. If all bonds are sold at PAR value,
Required:
a) The journal of issuing bonds.
b) The journal of payment interests every 6 months.
c) The journal entry on maturity date

Example (1): ABC Company receives authorization to issue $800,000 of 9%, 20-year
bonds dated January 1, 2005, that mature on December 31, 2024, and paid interest
semiannually (every 6 months) on each June 30 and December 31. If all bonds are
sold at PAR value,
a) The issuance of Bond

Jan. 1, Cash 800,000
2005 Bonds payable 800,000
b) first semiannually interest 800,000 x 9% x (6/12)=$36,000

June 30, Bonds interest expense 36,000
2005 Cash 36,000
And the issuer repeats the previous entry every 6 months until December 31, 2024

Example (1) ABC Company receives authorization to issue $800,000 of 9%, 20-year
bonds dated January 1, 2005, that mature on December 31, 2024, and paid interest
semiannually (every 6 months) on each June 30 and December 31. If all bonds are
sold at PAR value,
c) The journal in maturity (payment) date:

Dec. 31, Bonds payable 800,000
2024 Cash 800,000
2- Issuing Bonds above PAR value (with premium)

Example (2):
A corporation issued bonds with $100,000 PAR value,
a 12% annual interest rate, semi-annual interest
payments, and a five-year life, the exact cash issue
price for these bonds is $107,720 (or 107.72% of PAR
value).
Required:

Example (2): A corporation issued bonds with $100,000 PAR value, a 12% annual
interest rate, semi-annual interest payments, and a five-year life, the exact cash issue
price for these bonds is $107,720 (or 107.72% of PAR value).
a) The issuance of Bond:

Cash 107,720
Jan. 1,
Bonds payable 100,000
2006
Premium on Bonds Payable 7,720
b) First semiannually interest 100,000 x 12% x (6/12)=$6,000

2006 Cash 6,000

Example (2): A corporation issued bonds with $100,000 PAR value, a 12% annual
interest rate, semi-annual interest payments, and a five-year life, the exact cash issue
price for these bonds is $107,720 (or 107.72% of PAR value).

2010 Cash 100,000
3- Issuing Bonds below PAR value (with discount)

Example (3):
On Dec 31, 2005, a corporation issued bonds with
$100,000 PAR value, an 8% annual interest rate, semi-
annual interest payments, and a five-year life, these
bonds will sell at a discount, the exact issue price for
these bonds is $92,277 (or 92.77% of PAR value).
Required:

Example (3): On Dec 31, 2005, a corporation issued bonds with $100,000 PAR value, an 8%
annual interest rate, semi-annual interest payments, and a five-year life, these bonds will
sell at a discount, the exact issue price for these bonds is $92,277 (or 92.77% of PAR value).
a) The issuance of Bond:

Cash 92,277
Jan. 1,
2006
Discount on Bond 7,723
b) First semiannually interest 100,000 x 8% x (6/12)=$4,000

2006 Cash 4,000

Example (3): On Dec 31, 2005, a corporation issued bonds with $100,000 PAR value,
an 8% annual interest rate, semi-annual interest payments, and a five-year life, these
bonds will sell at a discount, the exact issue price for these bonds is $92,277 (or
92.77% of PAR value).

2010 Cash 100,000
Review Questions
1) Alberto Co. issued 8%, 10-year bonds with a
PAR value of $350,000 received in cash and
semi-annually interest payments (June and
December till maturity date),
Required: Journal entries to record:
a) Issuance of bonds.
b) First interest paid.
c) Payment principal at maturity date.
Answer of Exercise 1
a) Issuance bond

Cash 350,000
b) First interest payment 350,000 x 8% x (6/12)=$14,000

Bonds interest expense 14,000
Cash 14,000
And the issuer repeats the previous entry every 6 months until maturity date
c) Payment maturity on maturity date

Cash 350,000
2) On January 1, 2005, Kidman Enterprises issued bonds that have a
$1,700,000 PAR value, mature in 20-years, and pay 9% interest
quarterly (every 3 months) on March 31, June 30, September 30 and
December 31. The bonds are sold at PAR.
Required:
1. How much interests will Kidman pay (in cash) to the bondholders
every three months?
2. Prepare journal entries to record:
a) The issuance of bonds on January 1, 2005 at PAR value
b) The first interest payment on March 31, 2005.
3. Prepare the journal entry on the Issuance date and Maturity date
assuming the bonds are issued by the following values:
a) At 98% of PAR value.
b) At 102% of PAR value.
Chapter2- Liabilities Answer of Exercise 2
1) How much interests will Kidman pay (in cash) to the

bondholders every three months?
Interest paid quarterly ( every 3 months) =
$1,700,000 x 9% x (3/12) = 38,250
2-a) The issuance of bonds on January 1, 2005

Jan 1, Cash 1,700,000
2005 Bonds payable 1,700,000
2-b) First interest payment 1,700,000 x 9% x (3/12)=$38,250

Mar. 31, Bonds interest expense 38,250
2005 Cash 38,250
3) The journal entry on the Issuance date and Maturity date
3-a) Issuance bonds at 98% of PAR value

Cash 1,666,000
Jan 1,
Bonds payable 1,700,000
2005
Discount on bond 34,000
3-a) Repayment of bonds on Maturity

Dec. 31, Bonds interest expense 1,700,000
2024 Cash 1,700,000
3) The journal entry on the Issuance date and Maturity date
3-b) Issuance bonds at 102% of PAR value

Cash 1,734,000
Jan 1,
Bonds payable 1,700,000
2005
Premium on bond 34,000
3-b) Repayment of bonds on Maturity

Dec. 31, Bonds interest expense 1,700,000
2024 Cash 1,700,000
Long-Term Notes Payable

Installment notes: is an obligation requiring a
series of payments to the lender.
Comparison between bonds and notes:
• Like bonds, notes are issued to obtain assets
such as cash.
• Unlike bonds, notes are typically transacted
with a single lender such as a bank.

Example (1):
On January 1, 2005 a corporation borrows $60,000
from a bank to purchase equipment. It signs an 8%
installment note requiring six annual payments of
principal plus interest.
Required:
a) Accounting entry on borrowing date.
b) Detail table showing balances and payments of
notes and interest for 6-years.
c) Accounting entries for the first and last payments.
Example (1):
On January 1, 2005 a corporation borrows $60,000 from a bank to purchase
equipment. It signs an 8% installment note requiring six annual payments of principal
plus interest.
1) Journal entry on borrowing date

Jan. 1, Cash 60,000
2005 Notes payable 60,000
2) Detailed Table
Payments
(A) (B) (C) (D) (E)
Period Beginning interest notes Cash Ending
ending Balance expense payable payments balance
date 8% × (A) (60,000/6) (B) + (C) (A)-(C)
31/12/2005 60,000 4,800 10,000 14,800 50,000
31/12/2006 50,000 4,000 10,000 14,000 40,000
31/12/2007 40,000 3,200 10,000 13,200 30,000
31/12/2008 30,000 2,400 10,000 12,400 20,000
31/12/2009 20,000 1,600 10,000 11,600 10,000
31/12/2010 10,000 800 10,000 10,800 zero
Total ------ 16,800 60,000 76,800 -----
3) Journal entry for the FIRST payment

Interest notes expense 4,800
Dec. 31,
Notes payable 10,000
2005
Cash 14,800
3) Journal entry for the LAST payment

Interest notes expense 800
Dec. 31,
2010
Cash 10,800
Chapter2- Liabilities – Review Question
(1) Water Sports Company needs to raise of financing to

expand its ability to produce and market a new product.
On January 1, 2004, the company obtained the money from
installment note by signed a $400,000, 10% installment note
to be repaid with 5 equal annual installments to be made on
December 31 of 2004 through 2008.
Required:
1. Prepare the journal entry on the borrowing date.
2. Prepare detail table to show the beginning and ending
balance and payments (Interest + Note principle) during
the note period.
3. Prepare the journal entries for the first and last payment.
Chapter2- Liabilities – Review Questions
1) Journal entry on borrowing date
2) Detailed Table
Payments
(A) (B) (C) (D) (E)
Period Beginning interest notes Cash Ending
ending Balance expense payable payments balance
date 10% × (A) (400,000/5) (B) + (C) (A)-(C)
3) Entry for the FIRST payment

Dec. 31,
2004
Cash 120,000
3) Entry for the LAST payment

Dec. 31,
2008
Cash 88,000
End of Chapter 2

ACA240 Chapter2 Liabilities

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ACA240 Chapter2 Liabilities

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Associate Diploma in Accounting

Intermediate Accounting– ACA240

Khalid M. Adam 2020-2021/S2

Common examples of liabilities

Short/long term notes payable.

Accounting for liabilities

2- Sales Tax Payable

2- Sales Tax Payable – Example (1)

Sales Taxes = $6,000 X 5% = $300

3- Unearned Revenues (or deferred revenues)

4- Short-Term notes payable

4- Short-Term notes payable

Interest = Notes payable x Interest rate % x Days/360

4- Short-Term notes payable – Example (2)

4- Short-Term notes payable - example

Interest = $2,000 x 12% x 60/360 = 40

1) What are the three important

4) Perfect systems borrow $94,000 cash on

Date Account Debit Credit

Date Account Debit Credit

An estimated liability is a known

Employee benefits Vacation pay Warranties

Estimated liabilities – Employee Benefit

Estimated liabilities – Employee Benefit

Date Account Debit Credit

Estimated liabilities – Vacation Pay

Also called paid

Estimated liabilities – Vacation Pay

Estimated liabilities – Vacation Pay

Estimated liabilities – Vacation Pay

a) Cash paid weekly to employee:

Estimated liabilities – Vacation Pay

b) Cost per week

= $20,800/ 50 weeks = $416

Estimated liabilities – Vacation Pay

c) Weekly adjustment to record vacation pay:

Date Account Debit Credit

1) Cash paid weekly to employee:

Date Account Debit Credit

Estimated liabilities – Warranty Liabilities

The seller records the expected warranty

Estimated liabilities – Warranty Liabilities

Estimated liabilities – Warranty Liabilities

Date Account Debit Credit

b) The entry to replacing parts:

Date Account Debit Credit

Note: Warranty payable balance after this entry= $640-$200 = $440

Journal entry at Sept. 11, 2011 (warranty = $400 × 5% = $20)

Date Account Debit Credit

a) 1- Journal entry at Aug. 1, 2011 (warranty expense = $5,500 × 4% = $220)

Date Account Debit Credit

a) 2-The entry of repairs in November 1, 2012:

Date Account Debit Credit

4. How much a warranty expense for 2011?

Potential legal claims

Possible tax assessments

The main examples of the

Bond PAR value

What is PAR value?

Bond advantages & dis-advantages

Bonds can issue:

1- Issuing Bonds at PAR

1- Issuing Bonds at PAR