Payroll Tax, Federal Tax, State Tax, City Tax, Gift Tax, Estate Tax, Sales Tax, Gas Tax, Unemployment Tax, Property Tax, Excise Tax... What’s next? A Thumb Tax? REPORTING LIABILITIES

10-2 The Classified Balance Sheet These are just the Assets. The Liabilities and Owner’s Equity are on the next slide.

10-3 Illustration 2-2 The Classified Balance Sheet These are just the Liabilities and Owner’s Equity. Assets are on the previous slide.

10-4 Two key features: 1.Company will pay the debt within 1 year (or the operating cycle, whichever is longer). 2.Company expects to pay the debt from existing current assets or through the creation of an other current liability (borrowing from Peter to pay Paul). Current Liabilities Current liabilities may include short-term notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. Liabilities are classified as either current or long-term. What is a Current Liability?

10-5 Notes Payable  A written promissory note (the exact opposite of Notes Receivable covered in Chapter 8).  Requires the borrower to pay interest on the debt.  Those due within 1 year of the B/S date are classified as current liabilities. For example, on a 30 year note (a mortgage), the amount due within the upcoming year is considered a current liability, the remaining balance is still a long term liability! Current Liabilities

10-6 National Bank agrees to lend $100,000 on August 1, 2015, to Papa Ron’s. if Papa signs a $100,000, 12%, 4 month note maturing on December 1, The J/E on August 1, 2015 to record the issuance and proceeds (the cash) for Papa is: Notes Payable100,000 Cash100,000 Current Liabilities – N/P Sept. 1 At maturity, Dec. 1, 2015, Papa Honors the face value of the note plus interest … $100,000 x 12% x 4/12 = 4,0. Notes payable100,000 Dec. 1 Interest expense4,000 Cash 104,000

10-7 Sales Tax Payable  Sales taxes are expressed as a stated percentage of the sales price (a $100 purchase with a 5% sales tax means you pay $100 plus $5 sales tax or $105).  The retailer collects the tax from the customer then periodically remits the tax collections to the state’s department of revenue.  If the sale and tax together equals $105 and the tax rate is 5%, simply divide the $105 by 1.05 and you’ll find out how much the actual sale is: $105 / 1.05 = $100!  Example: The sale and tax collected together = $4,240, the tax rate is 6% (or.06). How much was the sale? What is the tax? The sale is $4,000 ($4,240 / 1.06), the tax is $240 Current Liabilities

10-8 The March 25 cash register readings for Papa Ron’s Pizza shows sales of $10,000 and sales taxes of $600 (the sales tax rate is 6%), the journal entry is: Current Liabilities Mar. 25 Sales revenue10,000 Cash10,600 Sales tax payable600 When the taxes are eventually sent to the state’s department of revenue (usually monthly), Papa will debit Sales Tax Payable and credit Cash for the total Sales Tax collected over that period. R R Whose your daddy?

10-9 Unearned Revenues (remember from Ch 4?) Revenue (cash) that is received before the company delivers the goods or provides the service. Current Liabilities 1.The company debits Cash, and credits a current liability account called Unearned Revenue. 2.Then, when the company earns the revenue, it debits the Unearned Revenue account, and credits a Revenue account (see next slide).

10-10 Appstate sells 10,000 pre-season football tickets (before the season starts). Tickets are $50 each and cover five home games. The entry for the total sales of the pre-season tickets is: Unearned Ticket Revenue 500,000 Cash 500,000Aug. 6 Ticket Revenue – Game 1 100,000 Unearned Ticket Revenue 100,000 Sept. 7 Current Liabilities As each game is completed, ASU records the earned revenue.

10-11 Papa Ron’s Pizza issues a 5-year, $25,000 note on January 1, This note specifies that each year, starting January 1, 2015, Papa should pay $5,000 of the note. On December 31, 2014: 1.What amount should be reported as a current liability? $5,000 2.What amount should be reported as a long-term liability? $20,000 Current Maturities of Long-Term Debt  The portion of long-term debt that comes due in the current year is considered a current liability.  No adjusting entry required! Just a reclassification on the Balance Sheet. Total liabilities has not changed! Current Liabilities

10-12 The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (a yearly rate or a base $ with commissions). Wages - store clerks, factory employees, and manual laborers (a per hour rate). Determining payroll involves 3 amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay. Payroll Expense (payment to employees) Current Liabilities Payroll Expense and Payroll Tax Expense

10-13 Appstate records its payroll expense for the week of March 7: Salaries and wages expense100,000 Federal tax payable (IRS)21,864 FICA tax payable (Soc. Sec.)7,650 State tax payable (NC)2,922 Salaries and wages payable (employees) 67,564 SO 3 Cash (the net pay!) 67,564 Salaries and wages payable 67,564 Mar. 9 Record the payment of this payroll on March 9. Mar. 7 Payroll Expense Note there could be other voluntary deductions from your wages for medical insurance, retirement, charity donations, etc.

10-14 In addition to Payroll Expense, most businesses have a payroll “tax” expense resulting from 3 taxes that Federal and State Govt. agencies levy on employers. Very Important: These 3 employer expenses, are not included in the employee’s net pay and are not part of Payroll Expense! These taxes are:  FICA tax (matching the employees’ FICA amount, covering Soc. Sec. & Medicare = 7.65%)  Federal unemployment tax (= 6.2%, can vary)  State unemployment tax (NC = 5.4%, can vary) Payroll Tax Expense

10-15 Assume these amounts for the state and federal unemployment taxes and the FICA from the $100,000 employees’ payroll, ASU records their payroll “tax” expense and the related liabilities as: Payroll tax expense13,850 State unemployment tax payable800 FICA tax payable (Soc. Sec. match) 7,650 Federal unemployment tax payable 5,400 Payroll Tax Expense When the taxes are eventually paid to each of these agencies (usually monthly), ASU will debit the 3 payables and credit cash for the total amount. FICA will be $7,650 x 2 = $15,300

10-16 Bonds are a form of long term interest-bearing notes payable issued by corporations, universities, and Govt. agencies. Usually sold in $1,000 units or in multiples of $1,000’s. Long-Term Liabilities: Bonds Types of Bonds  Secured (backed with assets/collateral)  Unsecured (no collateral, a junk bond)  Convertible (the bond holder can exchange the bond for stock at a set price)  Callable (the company can buy back the bond at a set price)  James (interest is always 007%)

10-17  The company issues a Bond to the investor. The investor gives $1,000 to the company in exchange for the bond.  The bond’s contract names the company issuing the bond, the face value, the maturity date, and the contractual interest rate (the rate stated on the bond).  Face value - principal due at the maturity (e.g., the $1,000).  Maturity date - date the final payment is due.  Contractual interest rate - the rate stated (actually printed) on the bond to determine how much interest will be paid and whether it’s paid annually or semi-annually. Long-Term Liabilities: Bonds Issuing Procedures

10-18 Bonds: Long-Term Liabilities

10-19 On Jan ASU issued one-hundred $1,000 bonds maturing in 5 years on Dec 31, 2018 and pay 10% interest. Interest is paid once each year on the last day of the year. The entry to record the initial proceeds (the initial receipt of the cash) from the issue is: Jan. 1, 2014 Cash 100,000 Issuing Bonds at Face Value Bonds payable 100,000 To record interest expense on the last day of the year: Dec. 31, 2014 Interest expense 10,000 Cash 10,000 At the end of 5 years the bonds mature and ASU records the last interest payment and redemption of its bonds Dec. 31, 2018 Bonds Payable 100,000 Interest Expense 10,000 Cash 110,000

% 10% 12% Premium Face Value Discount Assume a Bond Contractual Rate of 10%. (the amount pre-printed on the bond) Bonds Sold AtMarket Interest Accounting for Bond Issues The market rate is what investors demand!

10-21 Issuing Bonds at a Discount/Premium! If the Market offers a 10% interest rate then a $1,000 investment will provide $100 after 1 year. The total return will be $1,100. If your Bond only offers an 8% rate then a $1,000 Bond will only return $80 for a total return of only $1,080. So, if you Discount the selling price of the bond $20 to $980, and still give the 8% return on the $1,000 then the investor will get $1,000 + $80 + $20 (the amount saved from the discount) for a similar return on $1,100! If your Bond offers a 12% rate then a $1,000 Bond will return $120 for a total return of $1,120. So if we sell the Bond at a $20 Premium (the Bond costs $1,020) then the investor will still get a return of $1,100 ($1,000 + $120 - $20 (cost of the Premium)! So, a $1,000 that sells at 98 means that the price is discounted to 98% of the $1,000 or $980. If it sells at 102 it sells at a premium of 102% of $1,000 and costs $1,020. Great example: a $10,000 bond selling at 96 3/4 (.9675 or 96¾%) would sell for $9,675!

10-22 Assume that on January 1, 2014, ASU sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1 of each seceding year. The J/E at issuance is: Issuing Bonds at a Discount Jan. 1Cash (98% x $100,000)98,000 Discount on bonds payable2,000 Bonds payable100,000 The total cost of borrowing when bonds are issued at a discount A $10,000 bond selling at 96 3/4 (use.9675 or 96.75%) would sell for $9,675!

10-23 Assume the ASU bonds sell at 102 rather than at 98. The J/E would be: Jan. 1Cash (102% x 100,000) 102,000 Bonds payable100,000 Premium on bonds payable2,000 Issuing Bonds at a Premium The total cost of borrowing when bonds are issued at a premium

10-24 Off-Balance-Sheet Obligations & Financing  Obligations: Contingencies are events with uncertain outcomes that may result in potential liabilities (lawsuits, warranties, clean-up obligations, money back guarantees).  Financing: Leasing is an agreement where you’re either paying for the rental of an asset or whether it’s actually a financed purchase. The question is whether you own the asset when the lease is finished. This is important because: ► Operating leases are treated like expenses. No assets or liabilities show up on the balance sheet, just an operating expense on the income statement. ► Capital leases are treated like an asset purchase, increasing both assets and liabilities. Each year the asset will be depreciated and the liability will be reduced as payments are made. This affects ratios! Financial Statement Analysis and Presentation