1. Welcome Back 1Atef Abuelaish

2. Welcome Back Time for Any Question 2Atef Abuelaish

3. Homework assignment  Using Connect – 10 Questions for 60 Points For Chapter 8. Accounting for Current Liabilities Prepare chapters 9 “ Accounting for Current Liabilities.” Happiness is having all homework up to date Atef Abuelaish3

4. Chapter 09 Accounting for Current Liabilities

5. Defining Liabilities 5

6. 11 - 6 Defining Liabilities C 1 6

7. 11 - 7 Classifying Liabilities Expected to be paid within one year or the company’s operating cycle, whichever is longer. Current Liabilities Not Not expected to be paid within one year or the company’s operating cycle, whichever is longer. Long-Term Liabilities C 1 7

8. 11 - 8 Current and Long-Term Liabilities Current Liabilities as a Percent of Total Liabilities C 1 8

9. 11 - 9 Uncertainty of Liabilities When Uncertainty in When to Pay C 1 Whom Uncertainty in Whom to Pay How Much Uncertainty in How Much to Pay 9

10. Known Liabilities 10

11. 11 - 11 Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable Known Liabilities Payroll Liabilities Multi-Period Known Liabilities C 2 11

12. 11 - 12 On August 31, Home Depot sold materials for $6,000 that are subject to a 5% sales tax. Sales Tax Payable C 2 $6,000 × 5% = $300 12

13. 11 - 13 On June 30, Rihanna sells $5,000,000 in tickets for eight concerts. Unearned Revenues C 2 On Oct. 31, Rihanna performs a concert. $5,000,000 / 8 = $625,000 13

14. 11 - 14 Multi-Period Known Liabilities Includes Unearned Revenues and Notes Payable Unearned Revenues Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced. Notes Payable Notes Payable often extend over more than one accounting period. A three-year note would be classified as a current liability for one year and a long-term liability for two years. C 2 14

15. Short-Term Notes Payable 15

16. 11 - 16 A written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer. Short-Term Notes Payable P 1 16

17. 11 - 17 On August 23, Brady Company asks McGraw to accept $100 cash and a 60-day, 12% $500 note to replace its existing $600 Account Payable. Note Given to Extend Credit Period P 1 17

18. 11 - 18 On October 22, Brady pays the note plus interest to McGraw. Note Given to Extend Credit Period P 1 Interest expense = $500 × 12% × (60 ÷ 360) = $10 18

19. 11 - 19 Note Given To Borrow From Bank P 1 19

20. 11 - 20 Note Given To Borrow From Bank On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days. P 1 On Nov. 29, the company repays the principal of the note plus interest. Interest expense = $2,000 × 12% × (60 ÷ 360) = $40 20

21. 11 - 21 Note Date End of Period Maturity Date An adjusting entry is required to record Interest Expense incurred to date. End-of-Period Adjustment to Notes P 1 21

22. 11 - 22 End-of-Period Adjustment to Notes P 1 On Dec. 16, 2015, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31. On Feb. 14, 2014, the company repays this principal and interest on the note. 22

23. Recording End-of-Period Interest Adjustments 23 On December 16, TechCom accepts a $3,000, 60-day, 12% note from a customer in granting an extension on a past-due account. When TechCom’s accounting period ends on December 31, $15 of interest has accrued on the note. P3 $3,000 x 12% x 15/360 = $15

24. Recording End-of-Period Interest Adjustments 24 Recording collection on note at maturity. P3 $3,000 x 12% x 60/360 = $60

25. NEED-TO-KNOW DebitCredit Jun. 30Cash535 Sales500 Sales taxes payable($500 x.07)35 Jun. 30Cost of goods sold300 Merchandise inventory300 Jul. 15Sales taxes payable35 Cash35 General Journal Part 1. A retailer sells merchandise for $500 cash on June 30 (cost of merchandise is $300). The sales tax law requires the retailer to collect 7% sales tax on every dollar of merchandise sold. Record the entry for the $500 sale and its applicable sales tax. Also record the entry that shows the remittance of the 7% tax on this sale to the state government on July 15. P 1 25

26. NEED-TO-KNOW DebitCredit Apr. 30Cash40,000 Unearned ticket revenue40,000 May 15Unearned ticket revenue$40,000 / 4 concerts10,000 Earned ticket revenue10,000 General Journal Part 2. A ticket agency receives $40,000 cash in advance ticket sales for a four-date tour of Haim. Record the advance ticket sales on April 30. Record the revenue earned for the first concert date of May 15, assuming it represents one-fourth of the advance ticket sales. P 1 26

27. NEED-TO-KNOW DebitCredit Nov. 25Cash8,000 Notes payable8,000 Dec. 31Interest expense($8,000 x.05 x 36/360)40 Interest payable40 Feb. 23Interest expense($8,000 x.05 x 54/360)60 Interest payable($8,000 x.05 x 36/360)40 Notes payable8,000 Cash8,100 Part 3. On November 25 of the current year, a company borrows $8,000 cash by signing a 90-day, 5% note payable with a face value of $8,000. (a) Compute the accrued interest payable on December 31 of the current year, (b) prepare the journal entry to record the accrued interest expense at December 31 of the current year, and (c) prepare the journal entry to record payment of the note at maturity. General Journal 36 days 54 days P 1 27

28. Payroll Liabilities 28

29. 11 - 29 Payroll Liabilities Employers incur expenses and liabilities from having employees. P 2 29

30. 11 - 30 Employee Payroll Deductions P 2 30

31. 11 - 31 Employers must pay withheld taxes to the Internal Revenue Service (IRS). FICA Taxes — Soc. Sec. 6.2% 2015: 6.2% of the first $118,000 earned in the year. Employee FICA Taxes Federal Insurance Contributions Act (FICA) FICA Taxes — Medicare 1.45% 2015: 1.45% of all wages earned in the year. P 2 31

32. 11 - 32 Amounts withheld depend on the employee’s earnings, tax rates, and number of withholding allowances. Employers must pay the taxes withheld from employees’ gross pay to the appropriate government agency. Federal Income Tax Employee Income Tax State and Local Income Taxes P 2 32

33. 11 - 33 Amounts withheld depend on the employee’s request. Employers owe voluntary amounts withheld from employees’ gross pay to the designated agency. Examples include union dues, savings accounts, pension contributions, insurance premiums, and charities. Employee Voluntary Deductions P 2 33

34. 11 - 34 An entry to record payroll expenses and deductions for an employee might look like this. Recording Employee Payroll Deductions P 2 *Amounts taken from employee’s employment records 34

35. Payroll Expenses 35

36. 11 - 36 Employers pay amounts equal to that withheld from the employee’s gross pay. Employer Payroll Taxes FICA Taxes Federal and State Unemployment Taxes Medicare Taxes P 3 36

37. 11 - 37 2015: 6.2% on the first $7,000 of wages paid to each employee. A credit up to 5.4% is given for SUTA paid, therefore the net rate is 0.8%. Federal Unemployment Tax (FUTA) 2015: Basic rate of 5.4% on the first $7,000 of wages paid to each employee. Merit ratings may lower SUTA rates. State Unemployment Tax (SUTA) Federal and State Unemployment Taxes P 3 37

38. 11 - 38 An entry to record the employer payroll taxes for January might look like this. FICA amounts are the same as that withheld from the employee’s gross pay. Recording Employer Payroll Taxes P 3 SUTA: $2,000 x 5.4% = $108 FUTA: $2,000 x (0.6) = 12 38

39. NEED-TO-KNOW DebitCredit Jan. 8Sales salaries expense30,000 Office salaries expense20,000 FICA - Social security taxes payable($50,000 x.062)3,100 FICA - Medicare taxes payable($50,000 x.0145)725 Employee federal income taxes payable9,000 Employee medical insurance payable2,000 Employee pensions payable1,000 Salaries payable34,175 Part 1) Compute FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record the company’s January 8 (employee) payroll expenses and liabilities. General Journal A company’s first weekly pay period of the year ends on January 8. On that date, the column totals in its payroll register show that sales employees earned $30,000, and office employees earned $20,000 in salaries. The employees are to have withheld from their salaries FICA Social Security taxes at the rate of 6.2%, FICA Medicare taxes at the rate of 1.45%, $9,000 of federal income taxes, $2,000 of medical insurance deductions, and $1,000 of pension contributions. No employee earned more than $7,000 in the first pay period. P2/P 3 39

40. NEED-TO-KNOW DebitCredit Jan. 8Sales salaries expense30,000 Office salaries expense20,000 FICA - Social security taxes payable($50,000 x.062)3,100 FICA - Medicare taxes payable($50,000 x.0145)725 Employee federal income taxes payable9,000 Employee medical insurance payable2,000 Employee pensions payable1,000 Salaries payable34,175 Jan. 8Payroll taxes expense5,825 FICA - Social security taxes payable($50,000 x.062)3,100 FICA - Medicare taxes payable($50,000 x.0145)725 SUTA - State unemployment taxes payable($50,000 x.034)1,700 FUTA - Federal unemployment taxes payable($50,000 x.006)300 General Journal Part 2) Prepare the journal entry to record the company’s (employer) payroll taxes resulting from the January 8 payroll. Its merit rating reduces its state unemployment tax rate to 3.4% of the first $7,000 paid to each employee. The federal unemployment tax rate is 0.6%. 40 P2/P3

41. Estimated Liabilities 41

42. 11 - 42 Estimated Liabilities An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. P 4 42

43. 11 - 43 Employer expenses for pensions or medical, dental, life, and disability insurance Health and Pension Benefits Assume an 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 a retirement program. P 4 43

44. 11 - 44 Vacation Benefits Assume an employee earns $20,800 per year and earns two weeks of paid vacation each year. $20,800 ÷ 50 weeks = $416 $20,800 ÷ 52 weeks = $400 Weekly vacation benefit $ 16 P 4 44

45. 11 - 45 Bonus Plans P 4 B =.05 ($210,000 - B) B = $10,500 - 0.05B 1.05B = $10,500 B = $10,500 / 1.05 *B = $10,000 B =.05 ($210,000 - B) B = $10,500 - 0.05B 1.05B = $10,500 B = $10,500 / 1.05 *B = $10,000 Assume that a bonus will be paid to employees equal to 5% of the company’s annual net income of $210,000. 45

46. 11 - 46 Warranty Liabilities Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To comply with the full disclosure and matching principles, the seller reports expected warranty expense in the period when revenue from the sale is reported. P 4 46

47. 11 - 47 Warranty Liabilities P 4 On Dec. 1, 2015, 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. On Jan. 9, 2016, the customer returns the car for repairs. The dealer replaces parts costing $200. 47

48. Contingent Liabilities 48

49. 11 - 49 Accounting for Contingent Liabilities C 3 49

50. 11 - 50 Reasonably Possible Contingent Liabilities Potential Legal Claims – A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable. Debt Guarantees – The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability. C 3 50

51. NEED-TO-KNOW DebitCredit WeeklyVacation benefits expense($4,160 - $4,000)160 Vacation benefits payable160 A company’s salaried employees earn two weeks vacation per year. It pays $208,000 in total employee salaries for 52 weeks but its employees work only 50 weeks. This means its total weekly expense is $4,160 ($208,000 / 50 weeks) instead of the $4,000 cash paid weekly to the employees ($208,000 / 52 weeks). Record the company’s regular weekly vacation benefits expense. General Journal P4/C3 51

52. NEED-TO-KNOW B =.05($840,000 - B) B =$42,000 -.05B 1.05 B =$42,000 B =$40,000 DebitCredit Dec. 31Employee bonus expense40,000 Bonus payable40,000 Jan. 20Bonus payable40,000 Cash40,000 For the current year ended December 31, a company has implemented an employee bonus program equal to 5% of its net income, which employees will share equally. Its net income (pre-bonus) is expected to be $840,000, and bonus expense is deducted in computing net income. (a) Compute the bonus payable to the employees at year-end using the method described in the chapter and round to the nearest dollar; then, prepare the journal entry at December 31 of the current year to record the bonus due. (b) Prepare the journal entry at January 20 of the following year to record payment of that bonus to employees. General Journal 52 P4/C3

53. NEED-TO-KNOW DebitCredit Jun. 11Cash400 Sales400 Jun. 11Warranty expense($400 x.05)20 Estimated warranty liability20 Mar. 24Estimated warranty liability15 Repair parts inventory15 On June 11 of the current year, a retailer sells a trimmer for $400 with a one-year warranty that covers parts. Warranty expense is estimated at 5% of sales. On March 24 of the next year, the trimmer is brought in for repairs covered under the warranty requiring $15 in materials taken from the Repair Parts Inventory. Prepare the (a) June 11 entry to record the trimmer sale, and (b) March 24 entry to record warranty repairs. General Journal 53 P4/C3

54. NEED-TO-KNOW (ii) Is reasonably estimated but not a probable loss. (ii) Probable loss but cannot be reasonably estimated. DebitCredit (i)Environmental contingent expense900,000 Environmental contingent liability900,000 General Journal The following legal claims exist for a company. Identify the accounting treatment for each claim as either (i) a liability that is recorded or (ii) an item described in notes to its financial statements. If an item is to be recorded, prepare the entry. a. The company (defendant) estimates that a pending lawsuit could result in damages of $500,000; it is reasonably possible that the plaintiff will win the case. b. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable. c. The company estimates environmental damages in a pending case at $900,000 with a high probability of losing the case. 54 P4/C3

55. 11 - 55 Global View Characteristics of Liabilities provision Accounting definitions and characteristics of current liabilities are similar for U.S. GAAP and IFRS. Sometimes IFRS will use the word “provision” to refer to a “liability.” Known (Determinable) Liabilities similar manner Both U.S. GAAP and IFRS require companies to treat known (or determinable) liabilities in a similar manner. Examples would be accounts payable, unearned revenues, and payroll liabilities. Estimated Liabilities similar treatment Regarding estimated liabilities, when a known current obligation that involves an uncertain amount, but one that can be reasonably estimated, both U.S. GAAP and IFRS require similar treatment. 55

56. Times Interest Earned Ratio 56

57. 11 - 57 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. 16) Times Interest Earned Times interest earned Income before interest and income taxes Interest expense = A 1 57

58. Homework assignment  Using Connect – 7 Questions for 60 Points For Chapter 9. Accounting for Long-Term Liabilities Prepare chapters 10 “ Accounting for Long-Term Liabilities.” Happiness is having all homework up to date Atef Abuelaish58

59. Payroll Reports, Records, and Procedures 59

60. 11 - 60 Appendix 9A: Payroll Reports, Records, and Procedures P 5 Payroll Reports IRS Form 941IRS Form 940 W-2 Payroll Records Payroll RegisterPayroll Checks Employee Earnings Report Payroll Procedures Withholding TablesW-4 60

61. 11 - 61 Appendix 9B: Corporate Income Taxes Corporations must pay taxes on income. Deferred Income Tax Liabilities 61

62. Homework assignment  Using Connect – 7 Questions for 60 Points For Chapter 9. Accounting for Long-Term Liabilities Prepare chapters 10 “ Accounting for Long-Term Liabilities.” Happiness is having all homework up to date Atef Abuelaish62

63. Thank you and See You on Next Week at the Same Time, Take Care Thank you and See You on Next Week at the Same Time, Take Care Atef Abuelaish63