LO8–4 Explain the accounting for other current liabilities.

What is deferred revenue?

Cash collected before goods or services are provided; recorded as a liability.

Why is deferred revenue a liability?

Because the company owes the customer goods or services in the future.

When is deferred revenue recognized as revenue?

When the company provides the goods or services.

Example: Amazon sells a $100 gift card — what is the journal entry?

Debit: Cash 100

Credit: Deferred Revenue 100

When a customer uses $15 of a gift card, what is the journal entry?

Debit: Deferred Revenue 15

Credit: Sales Revenue 15

After a $15 purchase from a $100 gift card, what remains in deferred revenue?

$85 liability for future purchases.

What is gift card breakage?

Revenue recognized when gift cards expire or are unlikely to be redeemed.

When does a company recognize breakage revenue?

When redemption becomes remote or the card expires.

Key point about deferred revenue

Cash received in advance → record Deferred Revenue; when goods/services provided → record Sales Revenue.

What is sales tax payable?

Sales tax collected from customers that must be remitted to the government.

Why is sales tax NOT an expense for the company?

Because the customer pays it; the company only collects and passes it on.

Example: Customer pays $15 + 10% sales tax. What is the journal entry?

Debit: Cash 16.50

Credit: Sales Revenue 15.00

Credit: Sales Tax Payable 1.50

How do you compute sales tax from total cash received?

Sales tax = total cash paid - total cash paid / (1+sales tax rate)

Key point about sales tax

Sales tax collected is a liability, not revenue or expense.

What is the current portion of long‑term debt?

The amount of long‑term debt due within the next 12 months.

Why do companies separate current and long‑term debt?

To show upcoming cash obligations and assess bankruptcy risk.

What does reclassification mean?

Moving the portion of long‑term debt due within a year into current liabilities.

Example: $1,000,000 long‑term note; $200,000 due next year — what is the reclassification entry?

Debit: Notes Payable (long‑term) 200,000

Credit: Notes Payable (current) 200,000

Does reclassification change total liabilities?

No — it only changes how liabilities are categorized.

After reclassification, how is the debt reported?

$800,000 long‑term; $200,000 current.

Example: Southwest Airlines borrowings

$566 million due within a year (current); $2,821 million due later (long‑term).