Financial Accounting Chapter 10 - Liabilities

Additional Current Liabilities Ex Best Buy Sells a tv for $1,000 cash + 5% sales tax

$1,000 * 5% = $50 sales tax collected A L SE Cash 1050 Sales Tax 50 Sales 1000 Payable Revenue Cash 1050 Sales Tax Payable 50 Sales Revenue 1000

Accrued Payroll

- all employers must account for payroll -many companies have a staff devoted to preparing payroll -along with wages payable, companies record liabilities for other aspects of payroll -two important payroll liabilities relate to payroll deductions and employer payroll taxes

Bond's carrying Value

- the amount of bond liability after taking into account and premium or discount -to determinee if premium or discount we need to look at relationship between interest rate (what the bonds pay in cash) and market interest rate (the return that bond holders require)

Long-term Debt

-a loan classified if a company borrows money with the promise to repay it in two years, -the company reports only the accrued interest on the loan as current liability in that year's liability -after a year has passed the loan becomes a current lability and must be reported on the balance sheet -accountants remove the amount of the principal to be repaid in the upcoming year from the total long-term debt and report it as a current liability (Current Portion of Long-term Debt)

Payroll Deductions

-are either required by law or voluntarily requested by employees -considered current liabilities because they must be paid no more than one month after payroll date -Law requires that employers deduct federal income tax & possibly - State - county - city income tax from each employees gross earnings -FICA taxes: the law also requires through theFICA (Federal Insurance Contributions Act) each employee supports Medicare and Social Security through employee payroll deductions -Employees may choose to voluntarily have payroll deductions for -charitable donations - parking - union dues - retirement savings Employee's gross pay - Payroll deductions = net pay Gross Earnings --> Salaries & Wages Expense Payroll Deductions --> Current Liabilities Net Pay--> Cash Payment -employees are obligated to remit (cancel) deductions withheld from the employee's payroll check to another organization or gov't agency on the employee's behalf ??

Bonds

-financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now -bondholder's perspective it is a investment -company's perspective it is a long-term liability -after the bond is issued it can be traded on established exchanges (Ex: New York Bond Exchange)

Accured Liabilities

-liabilities that have been incurred but not yet paid 1. Accrued Advertising 2. Accrued Payroll 3. Accrued taxes 4. Accrued Interest 5. Other Accrued Liabilities

Non-current or long-term liabilities

-long-term obligations

Corporation Pay Taxes

-pay taxes on: -payroll - income they earn - Revenues - (Tax-allowed Expenses) = Taxable Income -Taxable Income * Tax Rate (Range from 15-35%) = -Corporate income taxes are due 2 (½) months after year-end

Notes Payable

-represents the amount the company owes to others as a result of issuing promissory notes -4 key events occur with any not payable: 1. establish the note 2. accruing interest incurred but not paid 3. recording interest paid 4. recording principal paid

Addition Current Liabilities

-retail charges are required to charge a sales tax in all but five states 1. Alaska 2. Delaware 3. Montana 4. New Hampshire 5. Oregon -retailers collect sales taxes from consumers an forward it to the state government -the tax is collected by the company as a current liability until forwarded to the gov't -sales tax is not an expense since it is collected and passed on

Reporting Bonds

-total face vale +premium or -discounts is reported in the liabilities section of the balance sheet

The amount reported for each liability is the result of three factors

1. Initial amount of liability --> Cash equivalent -the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability 2. Additional Liability Amounts --> increases liability -this happens whenever the additional obligations arise (by purchasing goods + services incurring interest charges over time) 3. Payments Made -->decrease liability -this happens whenever the company makes a payment or provides services to the creditor -@ cash equivalent amount, interest is excluded -interest only arises when time passes so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan

Liabilities are created when a company...

1. buys goods + services on credit 2.obtains short-term loans 3. Issues long-term debt - to help financial statement users know when liabilities must be repaid, companies prepare a classified balance sheet

Common Long-Term Liabilities

1. long-term notes payable 2. deferred income taxes - the amount of tax put off by taking larger tax deductions on the corporation's income tax return on its income statement 3. bonds payable

3 Key Elements of Bond

1. the maturity date 2. the amount payable on maturity date 3. the stated rate interest -face value of most bonds = $1,000 =stated interest is always an annual rate (some bonds require interest payments every 6 months) - interest payment = face value x stated interest rate x (?/12) -bonds may be priced above or below their face value

Additional Liabilities May 12, when the concert is held, Live Nation Entertainment can recognize ½ of the unearned revenue as they have fulfilled part of the liability

A L SE Unearned -4 Service +4 Revenue Revenue Unearned Revenue 4 Service Revenue 4

Additional Liabilities Example: Dec 9th 2013 Live Nation Entertainment received $8 million cash for advance ticket sales 2 Lady Gaga concerts to be held on May12 and 15, 2014

A L SE Cash +8 Unearned +8 Revenue Cash 8 Unearned Revenue 8

Pay the the principle amount when Due General Mills over $100,000 on October 31, 2016

A L SE Cash -100,000 Notes -100,00 Payable Notes Payable 100,000 Cash 100,000

Record interest paid on October 31 2016

A L SE Cash -6000 Interest -1000 Interest -5000 Payable Expense Interest Expense 5000 Interest Payable 1000 Cash 6000

Establish the note Example Nov 1, 2015, General Mills borrowed $100,000 cash on one-year not required. General Milld required to pay 6% interest and $100,000 both on October 31, 2016

A L SE Cash +100,000 Notes +100,000 Payable Cash 100,000 Note 100,000 Payable

Example of Employer Payroll Taxes

Check slide 11

Employer Payroll Taxes

Employers have other liabilities related to payroll 1. FICA tax "matching contribution" -100% of total employee contributions 2. Federal unemployment tax required by Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) -rates of these taxes vary by : -industry -state -employer history

2. Accrue interest owed but not paid on December 31, 2012

Interest = Principle x Interest Rate ® x Time I P R T 1,000 = 100,000 x 6% (2/12) A L SE Interest +1,000 Interest -1,000 Payable Expense Interest Expense 1,0000 Interest Payable 1,000

Payroll Deduction Example Adam earned $600 in current payroll period General Mills withheld -$60.90 in Federal Income Taxes -$45.90 for FICA -$10 for United Way net pay = $43.20

Look at Powerpoint Slide 10

Accounts Payable

increased (credited) -when a company receives goods or services on credit decreased (debited) when a company pays on account -generally interest free unless it becomes overdue

Current Liabilities

short-term obligations that will be paid with current assets within the company's current operating cycle or within one year of the balance sheet date (whichever is longer)

Bond Examples

slides 28-30