Chapter+9
Chapter Overview Learning changes everything (Copyright 2022 McGraw Hill LLC).
Chapter 9 Learning Objectives
Conceptual Objectives:
Describe current and long-term liabilities and their characteristics.
Identify and describe known current liabilities.
Explain how to account for contingent liabilities.
Analytical Objective:
Compute and analyze the times interest earned ratio.
Procedural Objectives:
Prepare entries for short-term notes payable.
Compute and record employee payroll deductions and liabilities.
Compute and record employer payroll expenses.
Account for estimated liabilities (warranties/bonuses).
Identify payroll reports and procedures.
Account for corporate income taxes.
Current and Long-Term Liabilities (Learning Objective C1)
Definitions:
Current Liabilities: Due within one year or the company’s operating cycle, whichever is longer.
Long-Term Liabilities: Due beyond one year or the company’s operating cycle, whichever is longer.
Known Current Liabilities (Learning Objective C2)
Types include:
Accounts Payable
Sales Taxes Payable
Unearned Revenues
Notes Payable
Payroll Obligations
Multi-Period Known Liabilities
Example of Sales Taxes Payable:
Home Depot sold materials for $6,000 with a 5% sales tax:
Calculation: $6,000 * 5% = $300.
Example of Unearned Revenues:
Selena Gomez sells tickets worth $900,000 for concerts:
Revenue to recognize per concert = $900,000 * (1/3) = $300,000 upon performance.
Short-Term Notes Payable (Learning Objective P1)
Definition:
Written promise to pay a specific amount within one year, often bearing interest.Sources:
Can arise from overdue account payables or bank borrowings.
Example Journal Entries for Short-Term Notes Payable:
Note Given to Extend Credit Period:
Brady Company replaces $600 Account Payable with a 60-day note:
Journal Entry:
Debit Accounts Payable $600
Credit Notes Payable $600
Note to Borrow from Bank:
A company borrows $2,000 at 12% for 60 days:
Interest Calculation:
$2,000 * 12% * (60/360) = $40.
Journal Entry for Loan:
Debit Cash $2,000
Credit Notes Payable $2,000
Journal Entry for Interest Accrual at Maturity:
Debit Interest Expense $40
Credit Cash $40
Payroll Deductions and Liabilities (Learning Objective P2)
Components:
Include salaries, wages, employer obligations.Employee Payroll Deductions:
FICA Taxes: Social Security and Medicare.
Federal and State Income Taxes: Withheld based on earnings and allowances.
Voluntary Deductions: Charitable donations, insurance premiums, etc.
Employer Payroll Expenses (Learning Objective P3)
Employer Taxes:
FICA taxes equal to employee contributions.
Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) based on employee wages.
Recording Payroll Taxes Example entry for employer payroll taxes includes:
SUTA: $2,000 * 5.4% = $108
FUTA: $2,000 * 0.6% = $12.
Estimated Liabilities (Learning Objective P4)
Definition:
Known obligations for uncertain amounts.Examples include:
Pensions, health care, vacation pay, warranties.
Warranty Liabilities:**
Recognized in the period revenue is earned, reflecting obligations for product defects.
Contingent Liabilities (Learning Objective C3)
Definition:
Potential obligations depending on future events.Accounting Treatment:
Depends on whether the likelihood and amount of future payment can be estimated.
Types include: Reasonably possible, known claims that must be disclosed.
Uncertainties not arising from past transactions are not considered contingencies.
Times Interest Earned Ratio (Learning Objective A1)
Purpose:
Measures the impact of income before interest and taxes on the ability to pay interest.Calculation Example:
Diego’s ratio computed as: $150 / $60 = 2.5 times.
Payroll Reports, Records, and Procedures (Learning Objective P5)
Details surrounding payroll management for tracking, reporting, and compliance with tax obligations.
Corporate Income Taxes (Learning Objective P6)
Corporations must account for income by recognizing current liabilities:Example:
$25,000 income taxes expense, with $21,000 due and $4,000 deferred.