Professional Documents
Culture Documents
Chap 013
Chap 013
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Characteristics of Liabilities
Probable
Probable Arise
Arise from
from Result
Result from
from
future
future present
present past
past
sacrifices
sacrifices of
of obligations
obligations transactions
transactions
economic
economic to
to other
other or
or events.
events.
benefits.
benefits. entities.
entities.
13 - 2
What is a Current Liability?
LIABILITIES
LIABILITIES
Current
Current Liabilities
Liabilities Long-term
Long-term Liabilities
Liabilities
Obligations
Obligations payable
payable within
within
one
one year
year or
or one
one operating
operating
cycle,
cycle, whichever
whichever is
is longer.
longer.
Expected
Expected to to be
be satisfied
satisfied
with
with current
current assets
assets oror by
by
the
the creation
creation ofof other
other current
current
liabilities.
liabilities.
13 - 3
Current Liabilities
Unearned Short-term
revenues notes payable
13 - 4
Open Accounts and Notes
•• Accounts
Accounts Payable
Payable
Obligations
Obligations to
to suppliers
suppliers for
for goods
goods
purchased
purchased onon open
open account.
account.
•• Trade
Trade Notes
Notes Payable
Payable
Similar
Similar to
to accounts
accounts payable,
payable, but
but
recognized
recognized by by aa written
written promissory
promissory note.
note.
•• Short-term
Short-term Notes
Notes Payable
Payable
Cash
Cash borrowed
borrowed from
from the
the bank
bank and
and
recognized
recognized by
by aa promissory
promissory note.
note.
•• Credit
Credit lines
lines
Prearranged
Prearranged agreements
agreements withwith aa bank
bank that
that
allow
allow aa company
company to to borrow
borrow cash
cash without
without
following
following normal
normal loan
loan procedures
procedures andand
paperwork.
paperwork.
13 - 5
Interest
Interest on notes is calculated as follows:
Amount
Amount Interest
Interest rate
rate is
is Interest
Interest owed
owed is is
borrowed
borrowed always
always stated
stated adjusted
adjusted for for the
the
as
as an
an annual
annual portion
portion of of the
the year
year
rate.
rate. that
that the
the face
face
amount
amount is is
outstanding.
outstanding.
13 - 6
Interest-bearing Notes
On
On September
September 1, 1, Eagle
Eagle Boats
Boats borrows
borrows $80,000
$80,000 from
from
Cooke
Cooke Bank.
Bank. The
The note
note is
is due
due in
in 66 months
months andand has
has aa
stated
stated interest
interest rate
rate of
of 9%.
9%. Record
Record thethe journal
journal entry.
entry.
September 1:
Cash .................................................... 80,000
Notes payable ....................... 80,000
To record short-term note payable to Cooke Bank.
How
How much
much interest
interest is
is owed
owed to
to Cooke
Cooke Bank
Bank at
at year-end,
year-end,
on
on December
December 31?
31?
Record
Record the
the journal
journal entry
entry for
for the
the loan
loan repayment
repayment
when
when the
the note
note matures
matures on on February
February 28.
28.
February 28:
Interest payable ................................... 2,400
Interest expense ................................... 1,200
Note payable ……………………………. 80,000
Cash …………………………… 83,600
To pay off note and interest.
13 - 8
Noninterest-bearing Notes
Notes
Notes without
without aa stated
stated
interest
interest rate
rate carry
carry an
an
implicit,
implicit, or
or effective
effective
rate.
rate.
The
The face
face of
of the
the note
note
includes
includes the
the amount
amount
borrowed
borrowed and and the
the
interest.
interest.
13 - 9
Noninterest-bearing Notes
On
On May
May 1,
1, Batter-Up,
Batter-Up, Inc.
Inc. issued
issued aa one-year,
one-year,
noninterest-bearing
noninterest-bearing note
note with
with aa face
face amount
amount
of
of $10,600
$10,600 inin exchange
exchange for for equipment
equipment
valued
valued atat $10,000.
$10,000.
How
How much
much interest
interest will
will Batter-Up
Batter-Up pay
pay onon the
the note?
note?
Interest
Interest == Face
Face Amount
Amount -- Amount
Amount Borrowed
Borrowed
== $10,600
$10,600 -- $10,000
$10,000
== $600
$600
13 - 10
Noninterest-bearing Notes
On
On May
May 1, 1, Batter-Up,
Batter-Up, Inc.
Inc. issued
issued aa one-year,
one-year,
noninterest-bearing
noninterest-bearing note note with
with aa face
face amount
amount
of
of $10,600
$10,600 in in exchange
exchange for for equipment
equipment
valued
valued at
at $10,000.
$10,000.
What
What is
is the
the effective
effective interest
interest rate
rate on
on the
the note?
note?
Amount Interest
Interest ÷ =
Borrowed Rate
$ 600 ÷ $ 10,000 = 6.00%
13 - 11
Commercial Paper
Commercial paper is a term used for
unsecured notes issued in minimum
denominations of $25,000 with maturities
ranging from 30 days to 270 days.
Recorded in the
same manner as notes
payable.
13 - 12
Salaries, Commissions, and Bonuses
Compensation expenses such as
salaries, commissions, and bonuses
are liabilities at the balance sheet
date if earned but unpaid.
These accrued
expenses/accrued liabilities
are recorded with an
adjusting entry prior to
preparing financial
statements.
13 - 13
Vacations, Sick Days, and Other
Paid Future Absences
An employer should accrue an expense and the related liability
for employees’ compensation for future absences (such as
vacation pay) if the obligation meets all four of these conditions:
1. The obligation is for services already performed.
2. The paid absence can be taken in a later year—the benefit
vests or the benefit can be accumulated over time.
3. Payment is probable.
4. The amount can be reasonably estimated.
Sick pay quite often meets the conditions for accrual, but
accrual is not mandatory because future absence depends on
future illness, which usually is not a certainty.
13 - 14
Liabilities from Advance Collections
Refundable
Refundable deposits
deposits
Advances
Advances from
from customers
customers
Gift
Gift cards
cards
Collections
Collections for
for third
third parties
parties
13 - 15
Gift Cards
During their December 2010 Christmas promotion, MegloMart
sold 20,000 gift cards at $25 each. All gift card sales were for
cash. On December 31, 2010, only 1,000 gift cards had been
redeemed. Unused gift cards expire on December 31, 2011, if
not used to purchase MegloMart merchandise.
On December 31, 2011, the 500 remaining cards had not been
redeemed. Prepare the journal entry on December 31 to
record the gift card expirations.
December 31, 2011:
Unearned revenue (500 × $25) …..................... 12,500
Gift card breakage revenue ………..….. 12,500
To record revenue from gift card expirations.
13 - 17
A Closer Look at the Current and
Noncurrent Classification
ItIt has
has the
the intent
intent to
to
ItIt has
has demonstrated
demonstrated
refinance
refinance on on aa and the
the ability
ability to
refinance.
to
long-term
long-term basis.
basis. refinance.
The
The ability
ability to
to refinance
refinance on
on aa long-term
long-term basis
basis
can
can be
be demonstrated
demonstrated by by an:
an:
existing
existing refinancing
refinancing agreement,
agreement, or or
actual
actual financing
financing prior
prior to
to issuance
issuance of
of the
the
financial
financial statements.
statements.
13 - 19
U.S. GAAP vs. IFRS
Classification of Liabilities to be Refinanced
13 - 20
Loss Contingencies
AA loss
loss contingency
contingency isis an
an existing
existing uncertain
uncertain
situation
situation involving
involving potential
potential loss
loss depending
depending
on
on whether
whether some
some future
future event
event occurs.
occurs.
Two
Two factors
factors affect
affect whether
whether aa loss
loss
contingency
contingency mustmust be be accrued
accrued and
and reported
reported
as
as aa liability:
liability:
1.
1. the
the likelihood
likelihood that
that the
the confirming
confirming
event
event will
will occur.
occur.
2.
2. whether
whether thethe loss
loss amount
amount can can be
be
reasonably
reasonably estimated.
estimated.
13 - 21
Loss Contingencies
Likelihood
Likelihood of
of occurrence:
occurrence:
Probable
Probable
AAconfirming
confirming event
event is
is likely
likely to
to occur.
occur.
Reasonably
Reasonably Possible
Possible
The
The chance
chance the
the confirming
confirming event
event will
will occur
occur
is
is more
more than
than remote,
remote, but
but less
less than
than likely.
likely.
Remote
Remote
The
The chance
chance the
the confirming
confirming
event
event will
will occur
occur is
is slight.
slight.
13 - 22
Loss Contingencies
AA loss
loss contingency
contingency is
is accrued
accrued only
only ifif aa loss
loss is
is probable
probable
and
and the
the amount
amount can
can reasonably
reasonably be be estimated.
estimated.
13 - 23
Product Warranties and Guarantees
Product
Product warranties
warranties inevitably
inevitably entail
entail costs.
costs.
The
The amount
amount of
of those
those costs
costs can
can be
be reasonably
reasonably
estimated
estimated using
using commonly
commonly available
available estimation
estimation
techniques.
techniques.
The
The estimate
estimate requires
requires the
the following
following entry:
entry:
13 - 24
Extended Warranty Contracts
Extended
Extended warranties
warranties are
are sold
sold
separately
separately from
from the
the product.
product.
The
The related
related revenue
revenue is
is not
not earned
earned
until:
until:
Claims
Claims are
are made
made against
against the
the
extended
extended warranty,
warranty, or
or
The
The extended
extended warranty
warranty period
period expires.
expires.
13 - 25
Premiums
Premiums
Premiums included
included with
with the
the
product
product are
are expensed
expensed in in the
the
period
period of
of sale.
sale.
Premiums
Premiums thatthat are
are contingent
contingent
on
on action
action byby the
the customer
customer
require
require accounting
accounting similar
similar toto
warranties.
warranties.
13 - 26
Litigation Claims
The
The majority
majority ofof medium
medium
and
and large-size
large-size corporations
corporations
annually
annually report
report loss
loss
contingencies
contingencies due due to
to
litigation.
litigation.
The
The most
most common
common
disclosure
disclosure is is aa note
note to
to the
the
financial
financial statements.
statements.
13 - 27
Subsequent Events
Events
Events occurring
occurring between
between the
the fiscal
fiscal year-
year-
end
end date
date and
and report
report date
date can
can affect
affect the
the
appearance
appearance of of disclosures
disclosures onon the
the
financial
financial statements.
statements.
Cause of Loss Contingency Clarification
13 - 28
Subsequent Events
Events
Events occurring
occurring after
after the
the year-end
year-end date
date
and
and report
report date
date can
can also
also affect
affect the
the
appearance
appearance ofof disclosures
disclosures onon the
the
financial
financial statements.
statements.
Cause of Loss Contingency Clarification
13 - 29
Unasserted Claims and Assessments
Unasserted
Unasserted
claim
claim
No
No Is
Is aa claim
claim
disclosure
disclosure No or
or assessment
assessment
needed
needed probable?
probable?
Yes
Evaluate
Evaluate (a)
(a) the
the likelihood
likelihood ofof an
an unfavorable
unfavorable outcome
outcome and
and
(b)
(b) whether
whether the the dollar
dollar amount
amount can
can be
be estimated.
estimated.
An
An estimated
estimated lossloss and
and contingent
contingent liability
liability would
would be
be
accrued
accrued ifif an
an unfavorable
unfavorable outcome
outcome isis probable
probable and
and the
the
amount
amount can can be
be reasonably
reasonably estimated.
estimated.
13 - 30
U.S. GAAP vs. IFRS
Contingencies
13 - 31
Gain Contingencies
As a general rule, we
never record GAIN
contingencies.
13 - 32
Appendix 13
Payroll-Related Liabilities
Employers incur
several expenses
and liabilities
from having
employees.
13 - 33
Payroll-Related Liabilities
Gross Pay
Net Pay
13 - 34
Employees’ Withholding Taxes
Employers
Employers must
must pay
pay the
the taxes
taxes withheld
withheld
from
from employees’
employees’ gross
gross pay
pay to
to the
the
appropriate
appropriate government
government agency.
agency.
13 - 35
Employees’ Withholding Taxes
Employers
Employers must
must pay
pay withheld
withheld taxes
taxes
to
to the
the Internal
Internal Revenue
Revenue Service
Service (IRS).
(IRS).
13 - 36
Voluntary Deductions
Amounts withheld
depend on the
employee’s
request.
Examples
Examples include
include union
union dues,
dues, savings
savings accounts,
accounts,
pension
pension contributions,
contributions, insurance
insurance premiums,
premiums, charities.
charities.
Employers
Employers owe
owe voluntary
voluntary amounts
amounts withheld
withheld from
from
employees’
employees’ gross
gross pay
pay to
to the
the designated
designated agency.
agency.
13 - 37
Employers’ Payroll Taxes
Employers
Employers pay
pay amounts
amounts equal
equal to
to that
that
withheld
withheld from
from the
the employee’s
employee’s gross
gross pay.
pay.
13 - 38
Federal and State
Unemployment Taxes
6.2% on the first
Federal $7,000 of wages paid
Unemployment Tax to each employee (A
Act (FUTA) credit up to 5.4% is
given for SUTA paid.)
Health
Health Life
Life Retirement
Retirement
insurance
insurance insurance
insurance plan
plan
premiums
premiums premiums
premiums contributions
contributions
Employers
Employers must
must pay
pay the
the amounts
amounts promised
promised to
to fund
fund
employee
employee fringe
fringe benefits
benefits to
to the
the designated
designated agency.
agency.
13 - 40
End of Chapter 13