BACC 512 CHAPTER 12 Current Liabilities

On January 1, 2024, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% 0.62741 Present value of 1 for 8 periods at 8% 0.54027 Present value of 1 for 16 periods at 3% 0.62317 Present value of 1 for 16 periods at 4% 0.53391 Present value of annuity for 8 periods at 6% 6.20979 Present value of annuity for 8 periods at 8% 5.74664 Present value of annuity for 16 periods at 3% 12.56110 Present value of annuity for 16 periods at 4% 11.65230 The present value of the interest is

$2,097,414. ($6,000,000 × .03) × 11.65230 = $2,097,414.

current liability examples *hint 3

(1) Payables (accounts payable, notes payable, short-term debt, salaries payable) (2) unearned revenues (e.g. unearned rental revenue) (3) current portion of long-term debt (e.g. current portion of serial bond. A $500K serial bond may ask the issuer to pay $100K on Jan 1 of each of the next 5 years)

BE12.17 (LO 4) At December 31, 2025, Burr Corporation owes $500,000 on a note payable due February 15, 2026. (a) If Burr had restructured the note on December 15, 2025, such that Burr has the contractual right to defer payment of $250,000 of the note until February 15, 2027, how much of the $500,000 should be reported as a current liability at December 31, 2025? (b) If Burr pays off the note on February 15, 2026, and then borrows $1,000,000 on a long-term basis on March 1, how much of the $500,000 should be reported as a current liability at December 31, 2025, the end of the fiscal year?

(a) cur liability = $500 - 250 = $250k (b) current liabilities are intended to be paid off within a year. The entire $500k is current liability.

1) Income tax payable-e.g. $200 mil of income at 15% income tax 2) withholding taxes (assume 20%), social security (Federal Insurance Contribution Act, FICA, 7.65%) taxes, union dues (200), insurance premium (assume $600), etc. deducted from employee paychecks on behalf of government, union, etc. Pay $6435 to employee.

1) Dr Income tax expense 30 Cr Income tax payable 30 2) Dr Salaries expenses 10000 Cr Withholding tax payable 2000 Cr FICA tax payable 765 Cr Union dues payable 200 Cr Insurance premium payable 600 Cr cash 6435

3 types of long term liabilities

1. long term notes: borrowing from a single lender (e.g. a bank) by issuing the notes 2. bonds payable: borrowing from multiple lenders who may invest in 1 or many units (typically $1000 each) of the bond 3. mortgage payable: borrowing with the property serving as collateral

BE12.16 (LO 3) Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50¢. The block sets cost Wynn $1.10 each to purchase and 60¢ each to mail to customers. During 2025, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2025, 120,000 UPC codes were redeemed. Prepare Wynn's December 31, 2025, adjusting entry.

2025 Dec 31 Dr Premium expense 144 Cr Premium liability 1200/3 * 30% * (1.1+0.6-0.5) 144 Dec 31 Dr Premium liability 48 Cr Cash 120/3*(1.1+0.6-0.5) 48

BE12.6 (LO 1) Kasten Inc. provides paid vacations to its employees. At December 31, 2025, 30 employees have each earned 2 weeks of vacation time. The employees' average salary is $500 per week. Prepare Kasten's December 31, 2025, adjusting entry.

2025 Dec 31 Dr Salaries exp $0.5*2*30 30 Cr Salaries payable 30

BE12.7 (LO 1) Mayaguez Corporation provides its officers with bonuses based on net income. For 2025, the bonuses total $350,000 and are paid on February 15, 2026. Prepare Mayaguez's December 31, 2025, adjusting entry and the February 15, 2026, entry.

2025 Dec 31 Dr Salaries exp 350 Cr Salaries payable 350 2026 Feb 1 Dr Salaries payable 350 Cr cash 350

BE12.14 (LO 3) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2025. Streep sold $1,000,000 of products subject to the warranty. Streep expects $125,000 of warranty costs over the next 2 years. In 2025, Streep spent $70,000 servicing warranty claims. Prepare Streep's journal entry to record the sales (ignore Cost of Goods Sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.

2025 Dr Cash 1000 Dr CGS xxx Cr Sales 1000 Cr inventory xxx during 2025 Dr Warranty expense 70 Cr Cash/ inventory 70 Dec 31 Dr Warranty expense (125-70) 55 Cr Warranty liability 55

BE12.2 (LO 1) Upland Company borrowed $40,000 on November 1, 2025, by signing a $40,000, 9%, 3-month note. Prepare Upland's November 1, 2025, entry; the December 31, 2025, annual adjusting entry; and the February 1, 2026, entry.

2025 Nov 1 Dr Cash 40 Cr NP 40 Dec 31 Dr Interest exp 40*9%*2/12= 0.6 Cr Interest payable= 0.6 2026 feb 1 Dr Interest exp 0.3 Dr Interest payable 0.6 Cr Cash 40*9%*3/12 0.9 Dr NP 40 Cr cash 40

1. Notes Payable interest bearing: e.g. borrowing on 20x20901 $100 at coupon rate 12% to mature in 4 months.

20x2 0901 Dr Cash 100 cr NP 100 1231 Dr NP 100 Dr Interest exp 4 Cr Cash (100*12%*4/12 + 100)= 104

2. non-interest bearing. e.g. borrowing on 20x20901 $90 and repaying $100 in 4 months. Coupon is unspecified.

20x2 0901 Dr Cash 90 Dr Disc on NP 10 Cr NP 100 1231 Dr Interest exp 10 Cr Disc on NP 10 1231 Dr NP 100 Cr cash 100 20x20901 balance sheet presentation Current liabilities: NP 100 Disc on NP 10 Net NP (100-10)=90

Platteville Corporation has the following account balances at 12/31/26: Amortization expense-$ 20,000 Goodwill-280,000 Patent, net of $60,000 amortization- 160,000 What amount should Platteville report for intangible assets on its 12/31/26 balance sheet?

280K+160K=$440,000

Goodwill

Arising from good reputation, skilled management team, talented employees, loyal customers, etc. Fair value of payment 600K Goodwill (unidentifiable) 100K Fair value of all identifiable net assets 500K Net assets = all assets - all liabilities

BE12.9 (LO 2) Rio Grande Taco Palace sells 200 gift cards at $50 per gift card and 100 of the gift cards are redeemed by year-end. Prepare the journal entries. (Ignore Cost of Goods Sold and possible breakage.) BE12.10 (LO 2) Refer to the facts BE12.9. Rio Grande estimates that it will have 10% breakage (expired unredeemed) on its gift cards. Prepare the entry for the gift card redemption and the expected breakage for the gift cards in the current year. (Ignore Cost of Goods Sold.)

BE12.9) Dr Cash $50*200 10 Cr Unearned gift card revenue 10 Dec 31 Dr Unearned gift card rev 5 Cr Sales 100*$50 5 BE12.10) Recognize breakage income in proportion to redemptions. 20 cards in total are expected to be unredeemed. 180 cards are expected to be redeemed. Cards estimated to be expired = 20*100/180=11.11 Dec 31 Dr Unearned gift card rev 5 Cr sales 5 Dec 31 Dr Unearned gift card rev .5555 Cr Breakage income $50*11.11 .5555

Bond covenants vs bond indenture

Bond covenants specify restrictions (e.g. restricting dividends/ new debts; call provisions) to protect lender or borrower. Bond indenture specifies terms: (1) face amount, (2) interest rate or coupon, (3) due date + bond covenant

Junk bond of $1000, 20% coupon, 15 years. Market demands interest rate 30%. Thus, investors are dissatisfied.

Bond sold as discount.

Microsoft bond of $1000, 12% coupon, 10 years. Market demands interest rate 12%. Thus, investors just satisfied.

Bond sold as par.

Government bond of $1000, 8% coupon, 10 years. Market demands interest rate 6%. Thus, investors like the bond.

Bond sold as premium.

BE13.1 (LO 1) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

Discount bond face value at market rate = PV of bond face value = 500k * PVF 20, 5% = 500*0.37689 188.445 Semiannual interest payment = 500*9%*6/12 = 22.5 Discount bond coupon payment at market rate = PV of bond interest = 22.5* PVFOA 20, 5% = 22.5*12.46221 280.4 Total PV of bond = issue price 468.845

BE12.11 (LO 2) Brown University Student Housing Inc. requires all tenants to pay a $500 security deposit, which will be returned at the end of the lease, less any repair costs on the apartment. Brown rented 275 apartments in the current month. Prepare the entry to record the security deposits collected.

Dr Cash $0.5*275 137.5 Cr Refundable deposit payable 137.5

Sales tax payable-e.g. Walmart collecting 8% sales tax on $100 of sales behalf of the state

Dr Cash 108 Cr sales 100 Cr sales tax payable 8

BE12.13 (LO 3) Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damages to be paid by Buchanan is $300,000. In light of this case, Buchanan is considering establishing a $100,000 self-insurance allowance. What entry(ies), if any, should Buchanan record to recognize this loss contingency?

Dr Lawsuit loss 300 Cr Lawsuit liability 300 No entry for the 100K self-insurance

BE12.5 (LO 1) Lexington Corporation's weekly payroll of $24,000 included FICA taxes withheld of $1,836, federal taxes withheld of $2,990, state taxes withheld of $920, and insurance premiums withheld of $250. Prepare Lexington's journal entry to record the weekly payroll.

Dr Salaries expense 24 Cr FICA tax payable 1.836 Cr Fed Withhold tax pay 2.99 Cr State withhold tax pay 0.92 Cr Insurance premium payable 0.25 Cr cash 18.004

Characteristics of gain + loss contingencies

Gain contingencies involve possible gains or benefits. Gain contingencies are disclosed if highly probable but are not accrued. Loss contingencies are accrued if (1) the liability has probably been incurred AND (2) the loss can be reasonably estimated. If not both conditions are met, then only disclose loss contingencies in footnotes.

BE12.1 (LO 1) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased $60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of $1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

Jul 1 Dr Purchase 60 Dr Freight-in 1.2 Cr accounts payable 60 Cr cash 1.2 Jul 3 Dr Accounts payable 6 Cr Purchase return and allow 6 Jul 10 Dr Accounts payable (60-6) 54 Cr Purchase discount 54*0.02= 1.08 Cr cash 52.92

Unearned revenue e.g. rent paid in advance on 20x20101 for 3 months. $100 per month.

On receipt 20x2 0101 Dr Cash 300 Cr Unearned rental revenue 300 On 20x20131 (i.e. one month of revenue is earned) 20x2 0131 Dr Unearned rental revenue 100 Cr Rental revenue 100

BE12.3 (LO 1) Takemoto Corporation borrowed $60,000 on November 1, 2025, by signing a $61,350, 3-month, zero-interest-bearing note. Prepare Takemoto's November 1, 2025, entry; the December 31, 2025, annual adjusting entry; and the February 1, 2026, entry.

PV of NP = 60K = 61.35K *PVF r%, 3 PVF r%, 3 = 60/61.35 = 0.977995 2025 Nov 1 Dr Cash 60 Dr Disc on NP 1.35 Cr NP 61.35 2025 Dec 1 Dr Interest exp 1.35*2/3 0.9 Cr Disc on NP 0.9 2026 Feb 1 Dr Interest exp 1.35*1/3= 0.45 Cr Disc on NP 0.45 NP 61.35 cash 61.35

Research and development (R&D) costs

R&D costs are expensed. Determining the magnitude and timing of future benefits attributable to R&D is difficult. Additionally; Similar to R&D, start-up costs, initial operating losses, and advertising costs are expensed.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2024. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. What is interest expense for 2025 if the straight-line method of amortization is used?

Solution: ($15,000,000 × .078) + (*$296,892 ÷ 20) = $1,184,845 *=15000000-14703108

BE12.4 (LO 1) Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) Prepare the entry to record Dillons' credit sales. (b) Prepare the entry to record Dillons' cash sales.

a) Dr AR 31.8 Cr sales 30 Cr Sales tax payable 30*6%= 1.8 b) Dr Cash 20.67 Cr Sales 20.67/1.06 19.5 Cr Sales tax payable 1.17

BE12.15 (LO 3) Leppard Corporation sells smart home systems. The corporation also offers its customers a 4-year warranty contract. During 2025, Leppard sold 20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing warranties during 2025. Prepare Leppard's journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.

a) Dr Cash $99*20k 1980 Cr Unearned warranty revenue 1980 b) Dr Warranty expense 180 Cr Cash/ inventory 180 c) Dr Unearned warranty rev 495 Cr Warranty revenue 1980/4 yrs 495

On January 1, 2024, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% 0.62741 Present value of 1 for 8 periods at 8% 0.54027 Present value of 1 for 16 periods at 3% 0.62317 Present value of 1 for 16 periods at 4% 0.53391 Present value of annuity for 8 periods at 6% 6.20979 Present value of annuity for 8 periods at 8% 5.74664 Present value of annuity for 16 periods at 3% 12.56110 Present value of annuity for 16 periods at 4% 11.65230 The present value of the principal is

a. $3,203,460. 6,000,000 × .53391 = $3,203,460

Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2025, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the effective interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%. On July 1, 2025, Celine Dion should debit a. premium on bonds payable of $102b. interest expense of $29,898c. discount on bonds payable of $29,700d. cash of $29,898

a. premium on bonds payable of $102 b. interest expense of $29,898 With the effective interest method, interest expense is given by bond carrying value * effective interest rate * time. Jul 1 Dr Int exp 612*9.7705%*6/12 29.898 Dr Premium on BP .102 Cr Cash 600*10%*6/12 30 Bond carrying value = 600 + 12 = 612k Int exp = 612*9.7705%*6/12 = 29.898k Premium = 30 - 29.898 = 102

Contingencies-

are uncertainties with outcomes dependent on future events (e.g. legal cases, tax disputes)

Premium on bonds payable is an adjunct account that add to

bonds payable. Premium and discount accounts are amortized (straight-line or effective interest method). They both converge to zero at maturity.

Of the following items, the only one that should not be classified as a current liability is a. current maturities of long-term debt. b. sales taxes payable. c. short-term obligations expected to be refinanced on a long-term basis. d. unearned revenues.

c. short-term obligations expected to be refinanced on a long-term basis.

Discount on bonds payable is a

contra account that deducts from bonds payable. Premium and discount accounts are amortized (straight-line or effective interest method). They both converge to zero at maturity.

Current portion of LT debt e.g. current portion of serial bond. A borrower issues $500K serial bond on Jan 1, 20x2. The bond requires the issuer to pay $100K on Jan 1 of each of the next 5 years since Jan 1, 20x3.On Jan 1, 20x2, 100K is reported as

current liabilities.

Which of the following is the proper way to report some gain contingencies? a. As an accrued amount b. As deferred revenue c. As an account receivable with additional disclosure explaining the nature of the contingency d. As a disclosure only

d. As a disclosure only

Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, anda. the Darren Company admits guilt.b. the court will decide the case within one year.c. the damages appear to be material.d. the cause for action occurred during the accounting period covered by the financial statements.

d. the cause for action occurred during the accounting period covered by the financial statements.

The cost of intangible assets (trademark, patent, copyright, etc.)

excludes R&D.

Current assets are expected to be converted to cash or consumed within

one year or one operating cycle, whichever is longer.

Accounts payable recognized when

title to goods passes to the buyer. The amount is affected by cash discount e.g. 2/10,n/30