Elc - Acc113 - CH 11 - SM - 2nd Sem

ACC113 11
Current Liabilities and Payroll Accounting
Sayed Mujtaba
+973 37723238
2nd Semester 2023 / 2024
Chapter 11
S. Mujtaba Hashem → Tel: 37723238
Liability: is a probable future payment of assets or services that a company is presently obligated to make as
a result of past transactions.
It includes three factors:
1. Past Transaction.
2. Present Transaction.
3. Future Transaction.
Classify liabilities:
1. Long-term liabilities: obligated to be paid after or more than one year.

2. Current liabilities: obligated to be paid within one year.
Uncertainty in Liabilities:
• Uncertainty in Whom to Pay.

• Uncertainty in When to Pay.
• Uncertainty in How Much to Pay.
Known Liabilities:
Are measurable obligations arising from agreements, concerts, or laws. Know liabilities include:
• Accounts Payable. • Short-Term Notes Payable.

• Sales Taxes Payable. • Payroll Liabilities.
• Unearned Revenues. • Multi-Period Known Liabilities.
1
Chapter 11
Exercise 11-1
The following items appear on the balance sheet of a company with a two-month operating cycle. Identify
the proper classification of each item as follows: if it is a Current liability, if it is a Long-term liability, or if it is
Not a liability.
Classification
(1) Sales taxes payable.
(2) FUTA taxes payable.
(3) Accounts receivable.
(4) Wages payable.
(5) Salaries payable.

(6) Notes payable (due in 6 to 12 months).
(7) Notes payable (due in 120 days).
(8) Current portion of long-term debt.
(9) Notes payable (mature in five years).

(10) Notes payable (due in 13 to 24 months).
2
Chapter 11
Unearned Revenues
- Are amounts received in advance from customers for future products or services.
- Also called deferred revenues.
Example
On June 30, Beyonce sells $5,000,000 in tickets for eight concerts.
Report a current liability as a Unearned Ticket Revenue.
Date Debit Credit

Cash 5,000,000
June 30
Unearned Ticket Revenue 5,000,000
- On October 31, Beyonce performs a concert.
$5,000,000
Revenue for one concert: = $625,000
8
Date Debit Credit

Unearned Ticket Revenue 625,000
Oct. 31
Ticket Revenue 625,000
3
Chapter 11
Notes Payable
a written promissory a borrower obtains a specific amount of money from a lender and promises to pay it
back with interest over a time period.
Journal Entries:
1. Issuance notes:
Cash XXX
Notes Payable XXX
2. Payment at maturity:
Notes Payable XXX

Interest Expense XXX
Cash XXX
How to calculate interest?

Interest expense= Notes × percentage × period (days) / 360
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
• If there any accrual:

Interest Payable XXX
• Payment at maturity (with accrued):
Notes Payable XXX

Interest Payable XXX
Cash XXX
4
Chapter 11
Example 1
On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days. (Issuance notes)
Date Debit Credit

Cash 2,000
Sept. 30
Notes Payable 2,000
- Repays the notes after the period end (60 days) + interest. (Maturity date)
Interest expense = $2,000 × 12% × (60 ÷ 360) = $40
Date Debit Credit

Notes Payable 2,000
Nov. 29th Interest Expense 40
Cash 2,040
Example 2
On Dec. 16, 2011, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry
is needed on December 31.
Date Debit Credit

2011 Interest Expense 10
Dec. 31st Interest Payable 10
- Repays the notes after the period end (60 days) + interest. (Maturity date)
Date Debit Credit

Notes Payable 2,000
2012 Interest Expense 30

Feb.14th Interest Payable 10
Cash 2,040
5
Chapter 11
Note Given to Extend Credit Period
A company can replace an account payable with a note payable.
▪ A common example is a creditor that requires an interest-bearing note for an overdue account payable.
▪ Accounts Payable: accounts payable, or trade accounts payable, are amounts owed to suppliers for
products or services purchased on credit.
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Example
Assume that on August 23, Brady asks to extend its past-due $600 account payable to McGraw. After
negotiations, McGraw agrees to accept a 60-day, 12%, $600 note payable to replace the account payable.
- Brady records the following.
Date Debit Credit

Accounts Payable – McGraw 600
Aug. 23rd
Notes Payable – McGraw 600
- Repays the notes after the period end (60 days) + interest.
Interest expense = $600 × 12% × (60 ÷ 360) = $12
Date Debit Credit

Notes Payable 600
Oct. 22nd Interest Expense 12
Cash 612
6
Chapter 11
Ex1: A company borrowed $60,000 on November 1, 2020 by signing a 180-day, 10% note payable from its
bank.
1- How much interest expense result from note in 2020? (assume a 360 day year).
2- How much interest expense results from note in 2021? (assume a 360 day year).
3- Prepare journal entries to record (a) issuance of note, (b) accrual of interest end of 2020, and (c)
payment of note at maturity.
Date Debit Credit
7
Chapter 11
Ex2: On September 15, SportsWorld borrowed $75,000 cash from FirstBank by signing a 12%, 60-day note
payable.
a. Prepare SportsWorld's journal entry to record the issuance of the note payable.
b. Prepare SportsWorld's journal entry to record the payment of the note at maturity.
Date Debit Credit
Ex3: On December 1, Gates Company borrowed $45,000 cash from FirstBank by signing a 90-day, 9%
note payable.
a) Prepare Gate's journal entry to record the issuance of the note payable.
b) Prepare Gate's journal entry to record the accrued interest due at December 31.
c) Prepare Gate's journal entry to record the payment of the note on March 1 of the next year.
Date Debit Credit
8
Chapter 11
Exercise 11-4
Keesha Co. borrows $200,000 cash on November 1 of the current year by signing a 90-day, 9%, $200,000
note.
1. On what date does this note mature? (Assume that February of 2011 has 28 days.)
2. How much interest expense is recorded in the current year? (Assume a 360-day year.) Check (2)
3,000
3. How much interest expense is recorded in the following year? (Assume a 360-day year.) (3) 1,500
4. Prepare journal entries to record

a) issuance of the note
b) accrual of interest on December 31.
c) payment of the note at maturity.
Date Debit Credit
9
Chapter 11
Estimated Liability
An Estimated liability: is a known obligation of an uncertain amount that can be reasonably estimated.
- Common examples are employee benefits such as pensions, health care, and vacation pay, and
warranties offered by a seller.
Warranty liabilities: is a sellers obligation to replace or correct a product within a specified period.
Journal Entries:
1. Date of transaction:
Warranty Expense XXX

Estimated Warranty Liabilities XXX
2. When repairs are required:
Estimated Warranty Liabilities XXX

Parts of Inventory / Cash XXX
How to compute?
Warranty expense= Selling price × Estimated percent by seller based on his experience.
Or
Estimated Cost per Unit × Unit Sold × Estimated percent by seller based on his experience.
10
Chapter 11
Example
On Dec. 1, 2022, a dealer sells a car for $16,000 with a maximum one-year or 12,000-mile warranty
covering parts. Past experience indicates warranty expenses average 4% of a car’s selling price.
Warranty expense: 16,000 × 4% = 640
Date Debit Credit

2022 Warranty Expense 640
Dec. 1st Estimated Warranty Liability 640
- On Jan. 9, 2023, the customer returns the car for repairs. The dealer replaces parts costing $200.
Cost of part replace = 200
Date Debit Credit

2023 Estimated Warranty Liability 200
Jan. 9th Auto Parts Inventory 200
11
Chapter 11
Ex4: A company sells its product subject to a warranty that covers the cost of parts for repairs during the six
months after the date of sale. Warranty costs are estimated to be 6% of sales. During the month of June, the
company performed warranty work and used $12,000 of parts to perform the warranty work. Sales for June
were $450,000.
1. Record the warranty expense for the month of June.
2. Record the costs of the warranty work completed in June.
Date Debit Credit
Ex5: Extra Store offers a one-year warranty on parts of laptops. In 2021 the company sales were $125,000.
Based on past experience the Extra Store estimated that 6% of it sales of laptops would need warranty
service. During 2021 the company use $1,500 of parts inventory to perform warranty services.
Required:
(1) Prepare the adjusting entry to reflect the above warranty at December 31.
(2) How much is the amount of warranty liability at December 31, 2021.
Date Debit Credit
12
Chapter 11
Ex6: A company sells computers with a 6-month warranty. In January, the company sold 100,000 computers
at $1,750 each; and 1,500 computers were turned in for repairs during that same month. The total repairs
amounted to $185,000 costs from the computer parts inventory. It is estimated that 2% of all units sold will
need repairs under warranty at an estimated cost of $200 per unit. Prepare the journal entries to record:
(a) estimated warranty expense for January and
(b) warranty repair costs for January.
Date Debit Credit
Ex7: A company sold equipment with a 6-months warranty. On December 2020, the company sold 700
equipment for $100 each. It’s estimated that 9% of all units sold will need repairs under warranty at an
estimated cost of $20 per unit. During January 2021: 15 equipment were turned in for repairs and the total
repairs cost amounted $150 from the repair parts inventory.
Required:
1. Prepare the adjusting entry as on 31 December 2020 to recognize the warranty expense.
Date Debit Credit
2. What the remaining balance for warranty liability to be reported at the end of January 2021 after record
actual repairs done?
13
Chapter 11
Exercise 11-10
Hitzu Co. sold a copier (that cost $4,800) for $6,000 cash with a two-year parts warranty to a customer on
August 16 of Year 1. Hitzu expects warranty cost to be 4% of dollar sales. It records warranty expense with
an adjusting entry December 31. On January 5 of Year 2, the copier requires one-site repairs that are
completed same day. The repairs cost $209 for materials taken from the repair parts inventory. These are
the only repairs required in Year 2 for this copier.
1. How much warranty expense does the company report for this copier in Year 1?
Check (1) $240
2. How much is the estimated warranty liability for this copier as of December 31, Year 1?
3. How much is the estimated warranty liability for this copier as of December 31, Year 2?
(3) $31
4. Prepare journal entries to record:

a) The copier’s sale.
Date Debit Credit
b) The adjustment to recognize the warranty expense on December 31, of year 1.

c) The repairs that occur on January 5 Year 2.
Date Debit Credit
14
Chapter 11
Sales Tax & Value Added Tax (VAT)

There are two types of taxes. The main purpose is to generate revenue for the government.
- The one direct and other indirect; examples as
Direct tax
o Like: Income tax, Corporation tax, Property tax, etc.
Indirect tax
o Like: Sales tax, Value Added Tax (VAT), etc.
A sales tax: is a consumption tax imposed by the government on the sale of goods and services. It is a single
point tax.
Journal Entry:
Cash XXX
Sales Tax Payable XXX
Sales Revenue XXX
Value Added Tax (VAT): is the tax levied at every level of value addition done to the product. It is a multi-
point tax. Tax rate is different from country to another. In some countries it is 17.5%, while in others is 10%,
12.5%, or 15%. In Bahrain, it is 10%.
Journal Entry:
Cash XXX
Value Add Tax Payable XXX
Sales Revenue XXX
15
Chapter 11
Example 1
Lulu Supermarket sells loaves of bread to consumers on a given day for €2,400. Assuming a sales tax rate of
10 percent, Lulu Supermarket makes the following entry to record the sale.
Sales Tax = 2,400 x 10% = $240
Date Debit Credit

Cash 2,640
Sales Tax Payable 240
Sales Revenue 2,400
Example 2
Dasma Baking makes loaves of bread from this wheat and sells it to Lulu Supermarket for €2,000. Dasma
Baking makes the following entry to record the sale, assuming the VAT is 10 percent.
Value Added Tax (VAT) = 2,000 x 10% = $200
Date Debit Credit

Cash 2,200
Value Add Tax Payable 200
Sales Revenue 2,000
16
Chapter 11
Ex8: Starling Company sells merchandise for $84,000 cash on March 31 (cost of merchandise is $43,500).
The sales tax law requires Starling to collect 10% sales tax on every dollar of merchandise sold. Record the
entry for the sale and its applicable sales tax.
Date Debit Credit
Ex9: Al-Sater-Market sells merchandise for $29,000 cash On July 21, 2019. The Tax law requires Al-Sater to
collect 10% value-added tax (VAT) on every dollar of merchandise sold.
Required:
Record the entry for the $29,000 sale and its applicable VAT.
Date Debit Credit
17
Chapter 11
Contingent liability: is a potential obligation that depends on future event curising from a past transaction.
We have three parts:
1. Probable (more than 70%):
• Estimate → Record liability

• Cannot estimate → Disclose in financial statement notes.
2. Possible (50% and 50%)
• Disclose in financial statement notes.
3. Remote (no action):
• No disclose in financial statement notes.
- Examples of contingent liability:
1) Potential Legal Claims. (Lawsuit).

2) Debt Guarantees.
3) Other Contingencies. (Environmental damages, possible tax assessment, insurance losses, and
government investigations).
- Uncertainties That Are Not Contingencies:
All organizations face uncertainties from future events such as natural disasters and new technologies. These
uncertainties are not contingent liabilities because they are future events not arising from past transactions.
➔ Not Disclose them.
18

Elc - Acc113 - CH 11 - SM - 2nd Sem

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ACC113 11

Current Liabilities and Payroll Accounting

It includes three factors:

1. Long-term liabilities: obligated to be paid after or more than one year.

• Uncertainty in Whom to Pay.

• Accounts Payable. • Short-Term Notes Payable.

(2) FUTA taxes payable.

(3) Accounts receivable.

(4) Wages payable.

(5) Salaries payable.

(8) Current portion of long-term debt.

(9) Notes payable (mature in five years).

- Also called deferred revenues.

Report a current liability as a Unearned Ticket Revenue.

Date Debit Credit

- On October 31, Beyonce performs a concert.

Date Debit Credit

Notes Payable XXX

How to calculate interest?

• If there any accrual:

Interest Expense XXX

• Payment at maturity (with accrued):

Notes Payable XXX

Date Debit Credit

Interest expense = $2,000 × 12% × (60 ÷ 360) = $40

Date Debit Credit

Interest expense = $2,000 × 12% × (15 ÷ 360) = $10

Date Debit Credit

Interest expense = $2,000 × 12% × (45 ÷ 360) = $30

Date Debit Credit

2012 Interest Expense 30

Note Given to Extend Credit Period

A company can replace an account payable with a note payable.

- Brady records the following.

Date Debit Credit

Interest expense = $600 × 12% × (60 ÷ 360) = $12

Date Debit Credit

Date Debit Credit

Date Debit Credit

Date Debit Credit

4. Prepare journal entries to record

Date Debit Credit

Warranty Expense XXX

2. When repairs are required:

Estimated Warranty Liabilities XXX

Warranty expense: 16,000 × 4% = 640

Date Debit Credit

Date Debit Credit

Date Debit Credit

Date Debit Credit

Date Debit Credit

Date Debit Credit

4. Prepare journal entries to record:

Date Debit Credit

b) The adjustment to recognize the warranty expense on December 31, of year 1.

Date Debit Credit

Sales Tax & Value Added Tax (VAT)

- The one direct and other indirect; examples as

o Like: Income tax, Corporation tax, Property tax, etc.

o Like: Sales tax, Value Added Tax (VAT), etc.

Sales Tax = 2,400 x 10% = $240

Date Debit Credit