1. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Chapter 13 Current Liabilities

2. In this chapter… Balance Sheet Current Assets Cash10000 Current Liabilities Accounts Payable Chapter 135000 Accounts Receivable20000 Wages Payable125000 Notes Receivable15000 Utilities Payable132000 Marketable Securities25000Long-Term Debt Inventory120000 Notes Payable20000 Capital Assets Bonds Payable600000 Equipment250000Owner’s Equity Buildings500000 Common Stock300000 Goodwill60000 Retained Earnings48000 Total Assets1000000Total Liabilities + OE1000000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

3. Liabilities Liability – a future payment of assets or services that a company is presently obligated to make as a result of a past transaction or event. Current Liabilities – aka short-term liabilities, are obligations expected to be settled within one year of the balance sheet date or within the company’s next operating cycle, which ever is longer –Examples: Accounts payable, wages payable, unearned revenues, current portion of long-term debt Long-term Liabilities – obligations expected to be paid in over one year or longer than one operating cycle Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

4. Current Portion of Long-term Debt The current portion of long-term debt is the part of long- term debt that is due within the longer of one year of the balance sheet date or the next operating cycle. –It is reported as a current liability –The rest of the debt is reported as Long-term Liability –Note that the amounts shown as both current and long-term liabilities are principal amounts only –Interest is recorded as interest payable for any interest that has accrued to the point when statements are drawn up. Demand loans are loans that could be called by the creditor at any time –They are shown as Current Liabilities on the Balance Sheet Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

5. Determinable Liabilities To account for a liability, the accountant needs to know –Who to pay –When to pay –How much to pay Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

6. Types of Current Liabilities Trade Accounts Payable or Accounts Payable –These are amounts owed to suppliers from whom the company purchased raw materials or operating supplies –Example, our company purchases lumber from Beaver Lumber on net 30 terms –Since the payment is due in 30 days, it is a current liability DateAccount Titles and explanationPRDebitCredit Jan 31Lumber (asset)5000 Accounts Payable5000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

7. Types of Current Liabilities Payroll Liabilities –As we saw in Chapter 11, payroll liabilities are amounts owing to employees for services already performed. –These may include (or will be broken out as) income taxes Payable, CPP Payable, EI Payable Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

8. Types of Current Liabilities Provincial Sales Tax (PST) and Goods and Services Tax (GST) Payable –PST is collected on a sale to a final customer. If a business is a middle part of the distribution channel, no PST is collected –Ex (p 659): Best Furniture of Maidstone, SK sells a couch (with cost of 12000) for 16000, with 7% PST DateAccount Titles and explanationPRDebitCredit Aug 1Cash17120 Sales Revenue16000 PST Payable1120 COGS12000 Inventory12000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

9. Types of Current Liabilities When Best Furniture remits the PST it collected, the following entry is made: –If there is any balance in the PST Payable account at the time the Balance Sheet is prepared, then it is showed as a current liability DateAccount Titles and explanationPRDebitCredit Jan 31PST Payable1120 Cash1120 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

10. Types of Current Liabilities GST – GST must be collected and paid on almost every transaction –GST collected from sales goes into a GST Payable account. GST paid on purchases goes into a GST Receivable account –When the business submits its GST report, these two accounts are netted out to determine if the business must pay or can receive a GST refund. –Example, for Inventory purchase DateAccount Titles and explanationPRDebitCredit Jul 11Inventory1000 GST Receivable50 Cash1050 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

11. Types of Current Liabilities For the sale of assets The GST T-account looks like: DateAccount Titles and explanationPRDebitCredit Aug 1Cash1575 Sales Revenue1500 GST Payable75 COGS1000 Inventory1000 GST Rec/Payable Jul 1150 Aug 175 Bal.25 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

12. Types of Current Liabilities So the GST balance is such that there is an amount due to the Receiver General. The journal entry is then: DateAccount Titles and explanationPRDebitCredit Sep 1GST Payable75 GST Receivable50 Cash25 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

13. Types of Current Liabilities Unearned Revenues –As we have seen before, Unearned Revenues are amounts that have been received from customers for future goods or services –Until the goods or services are provided, the amount is shown as a current liability –A good example are airplane tickets and entertainment tickets. They are purchased in advance of the company providing the service DateAccount Titles and explanationPRDebitCredit Jan 3Cash2000 Advanced Ticket Sales2000 Jan 31Advanced Ticket Sales2000 Sales Revenue2000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

14. Mid-Chapter Demonstration Problem Try the Mid-Chapter Demo problem Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

15. Short-term Notes Payable A short-term note payable is a promise to pay a specified amount on a date within one year of the balance sheet date. –Sometimes a company will replace an account payable amount due (which does not require interest paid) with a note payable, which does require interest paid. –Interest owed = Principal x Annual Interest Rate x No. days/365 –If a balance sheet is prepared some time after the note payable is agreed to, but before paid, then the balance sheet will show the Notes Payable as well as a separate line for Interest Payable (Exh 13.9) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

16. Short-term Notes Payable Lets say we take a 1 yr loan from the bank, as a Note Payable Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued –Assuming 5% annual interest, Interest = 20000 x.05 x 180/365 DateAccount Titles and explanationPRDebitCredit Jul 1, 08Cash20000 Notes Payable20000 DateAccount Titles and explanationPRDebitCredit Dec 31, 08Interest Expense500 Interest Payable500 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

17. Short-term Notes Payable When the Note is finally paid off, interest is calculated again and paid –Interest for the remaining ½ year = 20000 x.05 x ½ = 500 –To pay off the Note: DateAccount Titles and explanationPRDebitCredit Jul 1, 09Interest Expense500 Interest Payable500 DateAccount Titles and explanationPRDebitCredit Jul 1, 09Interest Payable1000 Note Payable20000 Cash21000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

18. Another Example This time, we get a $15000 Note Payable at 4% due July 1 Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued –Interest = 15000 x.04 x (29+31)/365 = 98.63 DateAccount Titles and explanationPRDebitCredit Nov 1, 08Cash15000 Notes Payable15000 DateAccount Titles and explanationPRDebitCredit Dec 31, 08Interest Expense98.63 Interest Payable98.63 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

19. Short-term Notes Payable When the Note is finally paid off, interest is calculated for the portion after the year end and paid –Interest for the remaining = 15000 x.04 x (31+28+31+30+31+30+1)/365 –To pay off the Note, we pay all the interest (98.63+299.18) = 397.81 DateAccount Titles and explanationPRDebitCredit Jul 1, 09Interest Expense299.18 Interest Payable299.18 DateAccount Titles and explanationPRDebitCredit Jul 1, 09Interest Payable397.81 Note Payable15000 Cash15397.81 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

20. Estimated Liabilities Estimated Liability - a liability that is known, but the exact amount and time of when it is paid may not be known –Examples are Warrantees and Taxes Warranty – an obligation of a seller to pay for replacing or repairing the product if and when it fails –To comply with the matching principle, the seller must allocate some warranty expense in the period of the product’s sale –When calculating warranty, use the costs that the company must bear to set aside warranty A company doesn’t charge itself selling price in warranty claims DateAccount Titles and explanationPRDebitCredit Jul 7, 06Warranty Expense200 Warranty Payable200 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

21. Estimated Liabilities The exact amount to record as a warranty expense and warranty liability must be estimated, usually based on past experience. –It might be a percentage of the product’s sale price When the customer returns for repair, the liability is used to cover some of the cash outlay required to honour the warranty. –Lets say the product is on warranty for parts only and labour is to be paid by the customer DateAccount Titles and explanationPRDebitCredit Oct 7Warranty Payable100 Cash200 Inventory100 Wages Payable200 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

22. Estimated Liabilities Income Tax Liabilities – Income taxes are a liability until paid to the government The liability is created when the income is earned When the tax installment is actually paid DateAccount Titles and explanationPRDebitCredit Jul 7, 06Income Tax Expense20000 Income Tax Payable20000 DateAccount Titles and explanationPRDebitCredit Jul 7, 06Income Tax Payable20000 Cash20000 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD